Nabors Industries Ltd. (NBR) Q2 2022 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Nabors Industries Second Quarter 2022 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 Investor Relations and Corporate Development. Please go ahead.

Good afternoon everyone. Thank you for joining Nabors second quarter 2022 earnings conference call. Today, we will follow our customary format with Tony Petrello, our Chairman, President and Chief Executive Officer; and William Restrepo, our Chief Financial Officer, providing their perspectives on the quarter's results along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks a slide deck is available, both as a download within the webcast and in the Investor Relations section of nabors.com. Instructions for the replay of this call are posted on the website as well. 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. 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. With that, I will turn the call over to Tony to begin.

Good afternoon. Thank you for joining us as we present our results for the second quarter of 2022. We will follow our usual format. I'll begin with some overview comments, then I will detail the progress we have made on our five keys to excellence and follow with a discussion of the markets. William will comment on our financial results, I will make some concluding remarks and we will open up for your questions. In the second quarter all operating segments performed well, exceeding the expectations we laid out on last quarter. This performance reinforces our strategy. Adjusted EBITDA in the second quarter totaled $158 million, a 21% increase over the first quarter. Our operational execution remains strong across our global markets. Our average rig count for the second quarter increased by eight rigs, this rig count growth was primarily driven by increases in our US and Middle East markets. Adjusted EBITDA in our Drilling Solutions segment increased by nearly 14% sequentially. Looking at drilling solutions together with Rig Technologies, adjusted EBITDA from these two innovation engines totaled more than $26 million. This amount comprises over 60% of our consolidated EBITDA. In the second quarter we made additional progress to reduce net debt. Our net debt declined to less than $2.2 billion, a $33 million improvement. Adjusted free cash flow was $57 million. This free cash flow was before strategic investments supporting the energy transition. These investments totaled $17 million in the quarter. Next, I will highlight our progress on the five keys to excellence that we believe support the investment thesis on Nabors. These include our leading performance in technology in the US market, expanding and enhancing our international business, advancing technology and innovation with demonstrated results, improving our capital structure and reducing leverage and our commitment to sustainability and the energy transition. Let me update each of these, starting with our performance in the US. We finished the quarter with 92 rigs running. Daily rig margins in the lower 48 continue their upward trend. Average daily margins there increased by more than $1,000 in the second quarter and exceeded $8,700. We have been progressively repricing the fleet towards the current leading edge. With our pricing and contract duration strategies, we have been very successful in recovering cost increases and expanding our margins. The results demonstrate progress on both fronts. The rig market remains highly focused on premium rigs and performance. We also have an unmatched portfolio of technologies in our Drilling Solutions business. This portfolio is one of the keys to our drilling performance and an important differentiator. I will discuss this in more detail in a few moments. Next, let's discuss our international business. Daily margins in this segment improved significantly. This measure increased by nearly $1,200 to $14,331. Our performance was strong across our markets. Financial results of this segment comfortably exceeded our prior outlook, Saudi Arabia and Latin America were particularly strong. In Saudi Arabia, SANAD, our joint venture with Saudi Aramco deployed an enhance M1200 series rig. This is our most advanced rig in the country. It includes our proprietary operating system, full AC capability, as well as an upgraded massive substructure. We expect this rig performance will showcase in the region the full potential of Nabors advanced technology portfolio, especially in unconventional development. SANAD’s first In-Kingdom new build rig was commissioned during the second quarter. The rig spudded its first well in early July. This is an important milestone for the joint venture. We expect to add new builds at approximately one per quarter going forward. Each new build should contribute annual adjusted EBITDA of approximately $10 million during their initial six-year contracts. With these economics and the deployment of the first rig we are now firmly on the growth trajectory that initially attracted us to this venture. Now let's discuss our technology and innovation. There is no question that our advanced technology is one of the cornerstones of Nabors future success. Our focus areas include, automation, digitalization and robotization. Once again in the second quarter the performance of Drilling Solutions improved. Quarterly adjusted EBITDA increased sequentially by 14% reaching nearly $23 million. The combined average daily margin in the lower 48 from our drilling and drilling solutions businesses reached nearly $11,000. Of that NDS contributed more than $2,200 per day. The typical Nabors rig in the Lower 48 runs six NDS services. This metric has increased steadily and reflects the strong value proposition of the portfolio. Among automation and digital services we saw a significant step up in the penetration of smart drill. We also saw a strong growth in SmartSLIDE and SmartNAV, as well as re-cloud analytics. In the second quarter, we continued to make progress targeting the third-party rig market. Drilling Solutions Lower 48 revenue from this client base grew sequentially by 7%. I'll wrap up my comments on our technology with a brief update on our robotics offering. As mentioned previously, we are rolling out new robotic modules to retrofit existing rigs. This builds on our experience with robotic rig. We plan to make them available on third-party rigs. This strategy enables us to deploy these technologies at a small fraction of the cost for new build. It also significantly increases the addressable market for these innovations. Next, let's discuss our progress to improve our capital structure. In the second quarter, we again reduced net debt, driven primarily by excellent free cash flow we drove net debt below the $2.2 billion mark. We remain focused on generating free cash flow as we continue to delever the capital structure and improve the balance sheet. I'll finish this part of the discussion with remarks on ESG and the energy transition. We remain committed to our strong environmental stewardship. In line with this strategy, we continue to progress along our three focus areas. These are: reduce our environmental footprint; capitalized on adjacent opportunities and to invest strategically in leading edge companies and accelerate their achievement of scale. Since the beginning of the second quarter, we completed investments in three high potential companies. The first focuses on monitoring and measuring GHG and other emissions. The second focuses on a sodium based battery technology and the third is developing ultra-capacitor solutions. We believe these companies will have significant synergies with our existing platform and create offerings in our own sector as well as in other verticals. In our Lower 48 field operations in 2022 we are targeting another improvement in greenhouse gas emissions intensity. We have also made advances in our carbon capture and hydrogen injection technologies, commercial products should be available this year. Now I'll spend a few minutes on the macro environment. The second quarter began with WTI just above 100. By early June and reached 122. The quarter closed with WTI above 105. Since then the price has retreated into the low to mid '90s. The futures price of WTI 24 months out stands at the 77 level. This is 20% higher than its price 24 months out from December of last year. This pricing outlook provides returns that would incentivize operators to increase their drilling activity. Accordingly, we saw the quarterly average industry rig count increase by 13% in the second quarter. Once again we surveyed the largest Lower 48 clients at the end of the second quarter. This group accounts for 30% of the working rig count. Our survey indicates a planned increase in activity of more than 11% for this group by the end of the year. More than 75% of these operators plan to increase activity, none anticipated dropping rigs during the remainder of the year. We expect these rig additions to be weighted more heavily to the fourth quarter. The pricing environment for rigs remains bullish. Our average daily revenue increased by more than $2,500 sequentially. This was an 11% increase and took our average daily revenue to nearly $25,600 per day. Our own leading edge day rates are now approaching the mid '30s. With the potential demand indicated by our survey we see pricing continuing to increase as industry utilization claims through the end of the year. As utilization increases and margins widened the cost to activate incremental high-spec rigs will also grow. This puts additional upward pressure on dayrates and margins. For our idle high-spec rigs we see reactivation CapEx and spending ranging from an average of $2 million for the next 12 and up to $6 million for the last five. Beyond these rigs we have over 40 M550s which could be upgraded to super spec. We upgraded seven of these a few years ago. Today, the cost to upgrade one of these rigs would likely total $30 million. At that level we would require a term contract with day rates into the high '30s. As for new builds, we estimate the capital cost of rig we build today exceeds $30 million. Such a rig would incorporate our full suite of advanced technology, that investment would require term and day rates in the mid '40s. We are focused on maintaining well defined metrics and discipline regarding high spec capacity additions. As you can see, it would be a difficult if not financially irrational decision for the industry to build new rigs into the current market. As such, we expect the market will remain capacity constrained for some time to come. In our international markets the strong commodity prices and expected production increases are driving oilfield activity higher. We expect to add rigs in several markets. In particular we have visibility to additional SANAD new builds in Saudi Arabia. Tendering activity has also picked up across markets in the Middle East, notably for Nabors in the Gulf countries. This potential growth will likely require higher capability rigs, which should be favorable for pricing and present a significant opportunity for 10 rigs. We also remain optimistic for rig additions in Latin America, clients in these markets have plenty of increases in activity and we have the rigs and relationships to support those plans. We have seen increased interest by international clients to add our NDS services. As an example, automation software and managed pressure drilling are gaining traction. Looking forward, there are few issues that could impact our industry. Recent events in the credit markets, heightened fears of a recession and a contraction in global oil demand are all potential risks to industry fundamentals. We have not seen any changes in our customers' behavior following recent moves by the Fed. We remain however vigilant to the impact these factors could have on the forward outlook. The labor market in the US remains tight. Timely crewing for additional rigs remains an area of focus. We have taken a number of steps to attract employees and increase retention. We continue to see some upward pressure on costs across our supply chain, as well as extended lead times for certain materials. Our internal manufacturing operation continues to pay dividends. We can lever its global sourcing network to help ensure operational continuity both for Nabors rigs and for our third party customers. To sum up signals in our markets point to increased drilling activity globally. The higher oil price environment and limited spare capacity for oil production are incentivizing clients to increase activity. Operators appear to remain confident in a constructive commodity price outlook with the disruption from the conflict in Ukraine, we see a reorientation of international natural gas markets. This could spur additional activity as well. Now let me turn the call over to William who will discuss our financial results and guidance.

Thank you, Tony. The second quarter results were significantly better than we expected across all our segments. Increased pricing, higher activity levels and strong operational performance, more than offset cost pressure in certain markets. In the second quarter, the net loss from continuing operations was $83 million, an improvement of $101 million as compared to the prior quarter. Both periods had non-cash charges related to the mark-to-market accounting treatment of Nabors warrants. The second quarter results included $22 million, as compared to $72 million in the first quarter. Adjusted operating income for the second quarter of negative $4 million improved by $30 million sequentially. We expect this operational profitability metric to turn positive in the third quarter. Revenue from operations for the second quarter was $631 million compared to $569 million in the first, an 11% improvement. All of our segments contributed to the growth. US drilling revenue increased by 16% to $253 million, Lower 48 revenue grew by more than 20% on higher rig count and an increase of over $2,500 in average daily revenue, an 11% increase from the first quarter. Coming to the second quarter, almost all of our fleet in the Lower 48 was working on short-term contracts. Virtually all of our fleet has already repriced or will reprice before the end of the year. Higher activity also drove revenue increases for our International segment. Revenue of $296 million improved by $17 million or 6%, reflecting an increase in rig count of 2.3 rigs in Saudi Arabia and Latin America. Drilling Solutions and Rig Tech moved up sequentially as well with the latter segment delivering 23% growth. For the company in total, we expect the upward revenue trend to continue in the third quarter at a rate close to what we experienced in the second quarter. Total adjusted EBITDA for the quarter was $158 million compared to $131 million in the first quarter, an increase of almost $28 million or 21%. All our segments delivered strong sequential growth, which resulted in EBITDA margins of 25%, an improvement of over 200 basis points. US drilling EBITDA of $87.4 million was up $13.1 million or 18% compared to the prior quarter. This increase primarily reflected higher margins and expanding activity in our Lower 48 drilling business. The Lower 48 drilling EBITDA rose by $12.7 million to $64.4 million, a 25% improvement sequentially. Our average rig count in the Lower 48 increased to 89.3 rigs, up approximately six rigs from the first quarter. Daily margin came in at $8,706 up more than $1,000. Rig count continues to move up on the strong commodity price environment. While our day rates increase with a higher utilization for higher-spec rigs now at 81%. Our most recent contracts averaged approximately $33,000 per day for a rig segment alone before layering on the contribution of our drilling solutions offerings. For the third quarter we project our Lower 48 margin at $10,400 to $10,600 per day as we continue to roll our rigs under contract with higher pricing. We anticipate an increase of three to four rigs in the third quarter versus the second quarter average. Our International Drilling segment delivered EBITDA of $82.4 million, an improvement of $11.2 million or 16% over the first quarter results. International average rig count increased by 2.3 rigs, while daily margin improved to $14,331, up $12,000 or 9.1%. This margin improvement reflects the strong operational performance in Saudi Arabia and Latin America. As well as favorable currency movements in certain markets. We expect rig count in the third quarter to remain approximately in line as rig additions in Saudi Arabia and Colombia should be offset by the end of the contract for one of our CapEx spend rigs. The first SANAD new builds commenced operations in early July, and we anticipate a second new build to start late in the third quarter. We project daily margin for the third quarter roughly in line with the second quarter. Drilling Solutions EBITDA continued on its upward trajectory delivering $22.8 million, up 13.8% from the first quarter. Gross margin for NDS was nearly 52% for the quarter, up from 49%. This is an all-time high for this segment. We continue to see increased penetration particularly in third-party rigs, with the largest contributions coming from performance software in the US. Overall drilling activity in the Lower 48 improved, taking our combined drilling rig and drilling solutions daily gross margin to $10,935. This includes a $2,228 contribution from our solutions segment, which is another high. We expect third quarter EBITDA for the Drilling Solutions segment to increase by approximately 12% over the second quarter level. Rig Technologies returned to a positive EBITDA contribution, generating $3.4 million in the second quarter. The $4.4 million sequential improvement reflected primarily increased rentals and aftermarket sales. For the third quarter this segment should deliver additional EBITDA growth of approximately $2 million on growing capital equipment sales. Cash generation exceeded our expectations in the second quarter adjusted free cash flow reached $57 million, a $96 million improvement compared to the first quarter. Our cash generation was driven by increased EBITDA from operations, lower quarterly interest payments and a reduction in working capital, despite higher activity levels. DSO improvement drove the working capital decrease. Capital expenditures in the second quarter were $98.9 million. This amount included the investments supporting the SANAD new builds of $27.4 million. For the full year, we are still targeting capital spending of $380 million, of which, $150 million to support the SANAD new build rigs. Our planned investment projects and required sustaining activity remain unchanged. Nonetheless, as a result of some inflationary pressures on rig spares and component, we may have to cut back on some existing projects to meet our annual CapEx target. We expect breakeven free cash flow for the third quarter as higher EBITDA will likely be offset by increased CapEx and interest payments, as well as by headwinds in working capital related to the expected growth in our business. For the full year, we are targeting free cash flow comfortably above the $100 million mark. We remain focused on addressing our leverage and expect to continue reducing our net debt during the second half of 2022. The strong acceleration of the global drilling market has exceeded even our most optimistic assumptions. For 2022 and 2023 projections we provided investors last December looks significantly short of what we now expect through two year period. Our expected Lower 48 and International third quarter daily margins are already at the levels we only anticipate seeing mid-year 2023. Drilling solutions and Rig Technologies are also well ahead of our projections. Before the end of 2022 once our budget process is complete, we would expect to provide updated projections for 2023 more in line with the current reality. With that I will turn the call back to Tony for his concluding remarks.

Thank you, William. I will now conclude my remarks this afternoon with the following. The benefits of our strategic initiatives are increasingly apparent. With the growth we expect this quarter annualized EBITDA in our Nabors drilling solutions should reach the $100 million mark. We see significant expansion potential from increased penetration on Nabors rigs, growth in the third party business and further additions to the MBS portfolio. In our international segment SANAD’s deployment of the first In-Kingdom new build rig marks a key achievement. The scale of this 50 rig new build program has no equal and towards other capital deployment opportunities in the global land drilling business. As additional rigs are added to SANAD’s centers fleet, the joint ventures free cash flow should improve. That will draw us closer to the expected commencement of significant regular distributions from SANAD to the partners. Our Lower 48 drilling metrics continue to improve with focus and technology we are approaching daily margin levels last seen in early 2020 with a path to further increases. As for the capital structure, we have successfully navigated difficult markets and significantly improved our leverage. Since the peak in 2014 we have reduced net debt by more than $1.6 billion. We have established a track record of progress to restore our financial flexibility. Our sights are set on more advancement, the goal is to reach leverage metrics consistent with investment grade debt ratings. With the continued dedication of the entire Nabors workforce, I am convinced the best is yet to come. I look forward to reporting on our progress. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Derek Podhaizer of Barclays. Please go ahead.

Hey, good afternoon guys. I was hoping you could spend some time talking about your view of the overall supply side of the market. Specifically how many idle super specs are out there and the related costs to bring those off the fence? Then beyond that how many upgradeable rigs are out there that will cost that 50% of new build or less. Just trying to get a better gauge of the supply side. I know you gave us great detail and ran down your fleet, but just curious from an overall market standpoint to help us on the supply side?

Well, our guess is, there's probably about one 150 rigs out there that are capable of being upgraded to super spec. And the cost will vary greatly in terms of which operators they are, what the sales is. So I can't give you a specific number, but those numbers could range from several million dollars up to almost $50 million dollars depending on operator and which category of rig. So -- but there is about 150 of those. So that's why we've said that I think new builds should be a very far distance away, because the cost of a new build we estimate plus $30 million with the metrics identified, which would require day rates in the mid-40s. So -- and a term contract and maybe some upfront money as well. So given all that, I don't see new builds happening and the depth of the market in terms of that potential marketing is pretty concentrated as well in a bunch of people. And therefore, I see a lot of discipline amongst everybody right now. I think our priority, as I said, is to roll out what we have today. And as I mentioned, we have -- in the pipeline, we have a path for a bunch of rigs that are relatively inexpensive to keep rolling out. We run 91 rigs today, I said three or four rigs next quarter and in the second half we will probably try to shoot for an exit number of around 100. And the cost has relatively minor around as I said, the first twelve rigs is roughly around $2 million and change, so relatively inexpensive. And for us on the back end, less five on March to adding 20 to our 91 would be about $6 million. So again, it does dip up but not substantially. And then for us, we do have 40 plus M rigs and we have another, maybe another dozen on top of that. And those could be substantial CapEx. But again, less than 50% of the cost of a new build. So that's why I think the market is pretty constructive right now. I think the focus on everybody is to focus on existing installed base and push pricing as much as you can.

Got it. That's helpful. I appreciate the color. Follow-up, the 40 plus M rig that you talked about, it sounds like if you exited at 100 rigs this year, you're going to reach 111 at some point next year. Can you talk about when you expect to reach that level? And then line of sight to when rig 112, that 112 being one of those 40 M rigs come out when we can see that. And is the supply chain in place where you can get that rig out if it's going to be a second half next year event. Just thinking about the timing and cadence of when we move from exhausting your super spec into reaching into one of those M rigs?

Okay. We exhaust our super spec at 111. And so that -- I'm hoping that we're expecting maybe toward the first half of 2023, second half of the -- end of the first half – end of the second quarter of 2023, we should hit that. That's the goal. And depending on -- while we are monitoring that and depending on what happens and where we are on pricing, etcetera, where the market is that will judge whether it makes any sense to even think about the M rigs or upgrading additional rigs, but as I said right now, our focus is on maximizing the existing capital and the -- existing investment capital and get the returns up as much as we can right now. That's where the focus is And we have -- because of our integration we can quickly pull the lever on adding upgrading rigs. That's one of the benefits of Nabors, given the fact that all the long lead outs, which is smart components [indiscernible] to bring the top five, the VFD, the drawer works, the wrench, all those things that Nabors build itself and therefore we have a lot of control over the supply chain. We do have a bunch of inventories and spare parts that we have in the normal course of things. This is to support our existing customer base. As you know in the top drive market, for example, Nabors today is 40% of world's top drives in the world. Okay? So we have a pretty robust supply chain and ability to lever our things up. So that would be a high class profit what I would say. But right now our focus is on maximizing the cash flow from the existing assets.

Great. Appreciate the thoughts. I'll turn it back.

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

Hi, good afternoon. Thanks for the time. You noticed that you're guiding to a pretty sizable increase in Lower 48 margin for 3Q. Could you discuss a little bit more about what -- you gave some drivers in the prepared remarks. Is there a large proportion of contracts resetting or is there something else underlying this big step change you're seeing there?

Well, as you know from our prior conference calls, we made a tactical decision last year to go very short on our contract length. So that put us in a position now that we have price reopeners on large portion of our fleet. I think 70% of our existing rigs we have building between now and the beginning of next year to reprice. And so we're going to take advantage of that given the fact that the market has moved quite a bit and that's the goal and that's the strategy to do that. So that's exactly where it comes from. You're absolutely right. And today, as I said in the prepared remarks, that number is about $8,000 above our second quarter average. So it's very substantial. So in the third quarter, we'll be focusing on trying to get as many of those as we can. As I said, 70% of the fleet by the first quarter next year can reprice and that's the strategy to take advantage of that window.

Those numbers are helpful. With regard to capital allocation, it sounds like we should continue to see debt reduction as a primary focus. I was wondering if you're open also to accelerating that debt reduction with equity linked transactions?

I think at this point, there are more attractive ways to handle our liquidity and our maturity profile. But nothing is off the table.

Thank you.

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

Hey, good morning, guys or afternoon. I just have two quick questions. On the 70% of the rigs that will have the ability to reprice. Is there any – I mean, I know the objective is to pricing closer to leading edge, but is there any reason that you wouldn't expect those 70% to be comfortably in the low 30s when they reprice?

No, that's exactly what -- the goal would be to do that. I mean, an 8% above -- as I said, its $8,000 above 25, we are already at the mid -- we already at the mid low 30s already. So -- and if the market keeps accelerating as those openers come up, we will try to take advantage of that as well. But yes, you hit the nail on the head, in the mid low 30s already.

Yes. I mean, it just seems to me, and I know you don't want to give forward guidance too far out, but there's -- it seems very -- nothing else changes from a macro perspective that you guys could comfortably be north of $15,000 day cash margins by second half next year.

You're trying to push us higher, but there's no question. [Multiple Speakers] I mean at $8,000 of 25, you're approaching 50% on just the base rig. And then just remember, for Nabors numbers, please bear in mind, we have additional margin from MDS on top of that, okay? So all those numbers go up to additional tranche on top of that as well. So that's where the extra juice is.

So I think one of the things that Tony pointed out, John, is that we have a lot of potential for repricing and we would even like to see prices above where they are right now, leading edge pricing. So the $8,000 is if we reprice everything at today's leading edge. But we think there's some potential for further increases in pricing during the remainder of the year. So $15,000, if we don't get that before the second half of next year, I'd be very disappointed.

Okay. I'll just do some dumb monkey matters. I'm driving here. It's very impressive. So thank you for letting me. Just make sure I'm not smoking anything funny.

Thanks John.

All right, guys. Take care.

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

Hey, good afternoon. Thank you for taking my question. I just wanted to follow-up to the first question on the call today. You mentioned 150 super spec upgrade candidates across the industry. If I understand correctly, that would probably include about 40 from you. Wanted to try to reframe that question to ask your view of how many super spec upgrade candidates you see out there that aren't owned by the big three US contractors?

I don't know, maybe I think the 150 was the remaining idle high specs and potentially upgradable. It's not upgrades to super spec to be clear.

Okay. I appreciate that. On the theoretical upgrade to super spec question, I understand your focus is putting all 111 of your high spec rigs to work, but for just step back theoretically, what kind of lead times could you be looking at? And maybe what is the basis of upgrades that can be realistically achievable if the operator demand was there?

I mean, for us to go from the 91 to 111 that's just day to day stuff for us. I mean, as I mentioned, the amount -- the cost of that is relatively inexpensive for us to do that. So as I said, we're thinking -- our target exiting the year around 100. So that's nine more from where we are today. And by the second half of 2023, that would be another roughly 10 or so. And so all that, we don't see any herculean efforts, we don't see any supply chain issues, nor do we see a big CapEx for us to do that. That's one of the advantages we have. So I don't really see that being a big deal. And as your prior question guys referenced, then during that process of the second half, we will monitor to see whether the market has a needed appetite for whether we're interested in supplying that additional layer, which then does move us to a higher cost number and also higher lead time, but we'll have visibility on that several months in advance to try to mitigate the lead issues with that.

Okay. I appreciate it.

Our next question today is going to come from Dan Kutz of Morgan Stanley. Please go ahead.

Thanks. Just wanted to ask -- sorry if I missed it, but just wondering if you guys could comment or explain on any comments you made in terms of pricing trends that you're seeing across international markets? Thanks.

Yes. We're seeing -- I mean, the prices have steadied up and continue to steady. I mean, in certain markets like in Latin American markets, we've seen increases in pricing versus prior and better conditions on the contracts with respect to exchange rate and such. We're hoping to see some increases in prices in the Middle East as well in our biggest market. And in general, the market is a little bit more dynamic, more tenders coming up and the market is tied internationally as well. So we are seeing some increase, but obviously not to the level of what we've seen in the US. The international markets we're seeing more like 5% to 10% as compared to the US where we're seeing basically over -- almost 80% increases in pricing at this point.

Got it. That's really helpful. And then, Tony, I think you kind of alluded to recession risk in the prepared remarks. That's definitely a big debate -- a big debate is the extent to which a recession, maybe call it a mild recession, but actually impact oil and gas development activity. So just wondering what you guys thoughts are, so we do go into a recession. What would be the implications for activity maybe in the US and in the international markets [indiscernible]

Well, I mean, given volatility, in general, we've been doing it for so long, we're constantly aware of that. So we do everything to prepare for the downside. So we're not getting over our skis on any commitments. We're trying to maintain our cost structure even though there's a lot of pressure on it right now, as activity goes up we will try to be vigilant about adding to our body count, etcetera, all because I'm keenly aware of the macro there and I want to make sure I'm not locked into something and I'll respond to it with the same speed and swiftness I did in the last downturn that you saw in the first quarter, we did cuts dramatic compared to most of our competitors as well where we took 20% out of the SG&A, etcetera, we responded really quickly. So we're doing everything to keep the culture of maintaining our whole infrastructure in a way that maintains our flexibility given the fact other things are going on in the world that we can't control.

Got it. Thanks very much guys. I'll turn it back.

Our next question today will come from Keith Mackey of RBC Capital Markets. Please go ahead.

Hi there. Thanks for taking my questions. I think we have a much better understanding of where you expect the top line on the U.S. daily rig revenue per day to trend through the end of this year and into next year. But I did want to get a little bit more color on how we should be thinking about OpEx per day. We've seen that sort of come up a little bit as well. Just what is the base level of OpEx we should be thinking about with the existing rigs running? And then any OpEx startup costs on these next rigs as you get up to the 111 would be helpful?

On the startup cost, the numbers I gave you include CapEx and startup cost in that $2 million numbers. I want to be real clear about that. That's why I'm saying, our rollout of those rigs, the next 12 is relatively painless. That's the point I'll make. On the operating expense itself, there's a few categories. There's obviously labor friction, we do have cost pass throughs with the contracts, but there is labor friction given that the fact that compensation adjustments have happened to be made past six months given the market and labor shortages and tightness on everything. And then we have -- we do have some R&M cost increases as well. Obviously, in the industry in general, given things like -- in the material side, things with high metal content, steel and copper, etcetera, all that stuff has subject to cost escalation, probably the R&M component is probably about 8% there of just that one component. And then of course in our cost numbers there is a bit of churn because as you press rates and you're not doing a good job unless you lose some as well. So there is some churn there as well. So we have those three things. But on top of that, I'll let William address the operating expense column again.

So about -- Tony highlighted the biggest one, which is compensation and the one that's gone off the most over the last six months or so. And compensation today is about 70% of our OpEx. So that has some components that are permanent like the salary increases. Those have cost us about $600 per day in this particular quarter. Others are more transitory that are more related to churn. When you push a client to increase prices, as Tony mentioned, most of the time we're going to get it -- we're going to be successful, but there's still a significant amount of churn where you have to move to another client. But of course, you keep the people who stays on and you may be a month down. So you have more people really than probably you need for a time and that -- we're going through that right now. So we're just south of $17,000 per day right now, including the reimbursables, which are about $15,000 per day. We think that number has some transitory elements that will take us to a low $17,000 next quarter. But again, we are going to be working on bringing back those costs to a more traditional level which we can hope in the $17,000 or slightly below range.

Got it. Thanks for the color. And just to follow-up, the survey that you did with some of the customers and their expected rig additions through the end of the year, certainly it does point to some incremental rigs going to work by the end of the year. Just curious what you're thinking as far as contract lengths and durations on rigs that will go to work in 2023. Do you think it'll still be shorter term or will we start to see some longer term contracts get signed?

I think as pricing goes up, typically you see operator interest -- operators get interested in longer term contracts. In my prepared remarks, I reference that fact and we will be looking at that as well. I think, as I said, 70% of the contracts have price reopeners in the next -- by the first quarter next year, that means we have room to move that remaining 30% up and we'll be focused on that opportunistically as we move forward. But I don't want to set a specific target number of term contracts, but we are looking at it. And depending on the customer and -- the term contract makes sense for us, particularly if a customer is focused on technology and he is committed to that, because that's a win-win for both of us because technology added to a rig requires a long term commitment. And if we could find rigs, place rigs with those kind of customers, that will be a win win for us. So that's kind of the priority for us. So term matters, but also the right term with the right kind of customer. That's more equally important to us.

Perfect. Thank you very much for the color. That's it for me.

[Operator Instructions] Our next question will come from Arun Jayaram of JP Morgan. Please go ahead.

Good morning. – Good afternoon. Pardon me. Tony, I wanted to get your thoughts. If the Nabors share of the US land rig count using a Baker Hughes as the denominator around 13%, 14%. If the US land demand increases by 100 incremental rigs over the next few months. What's your expectation around Nabors market share. Would you expect to grow your market share just based on your super spec and upgraded to super spec rigs? Just getting your thoughts on that.

Well, I'm not really a market share guy. I mean, I'm really a guy that look at returns. So I’m more interested in getting proper returns and growing that. Now if you look at the numbers I gave you, I said 10% for the market as a whole. And then I point to the fact that Nabors has 91 rigs. I said, we're going to be at 100, hopefully at 100 targeting for this year, that's kind of in line. And then second half of next year will be another 10%. So that could yield incremental market share improvement. But again, my priority is more make sure these rigs get placed with the right customers when I maximize my technology and I maximize my return on investment, that's one of my priority as opposed to market share. On NDS, I think there the growth just on Nabors rigs, it’s on third party rigs, and that we're still in the first and second inning in that ballgame. And I think that's one of the attractions of MDS because it does have potentially to grow beyond Nabors rig market share and the economics of that are such that it's a capital light model. So returns on capital are even more attractive. So that's an equal priority for us. Right now, our main priority in NDS is to grow penetration as opposed to pricing. Pricing actually stood up pretty well during the past COVID downturn. So right now, our goal is to garner penetration both on Nabors rigs and third party rigs. So there, the goal specifically is to grow market share because we think we have some really unique things to add value to.

Great. And I know it's early but I just wanted to get your preliminary thoughts as we sharpen our pencil around 2023 CapEx. Just trying to think if there's any things that you can maybe give us some color on maintenance CapEx per rig, SANAD newbuild CapEx, etcetera, just thinking about the market next year?

So you highlighted the two important pieces. One is SANAD and that's going to be somewhere in the one $150 million per day. One -- depending on the deployment [Multiple Speakers] I'm sorry for the year. $150 million. So that is sort of baked in and it all depends on pace that the local manufacturer can maintain. And so that is a little bit of a very digital number, it could go up by $30 million or $40 million or maybe down $30 million or $40 million. But that's the -- that's one piece. The other piece, our rig count is increasing. It is increasing from this year to next year. And probably the cost of maintenance CapEx per rig per year has gone up a little bit. So we do expect some increase in that piece of the business. Our maintenance CapEx should go up maybe towards the closer to the $1 million mark versus the $800 million that we've traditionally seen in the past. So it's a combination of both. But to give you a number, well, we expect to exceed $400 million next year and by how much, I'm not sure yet. And that does includes the land.

Great. Thanks a lot.

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

Thank you all for joining us this afternoon. If you have any additional questions or wish to follow-up, please contact us. Alison will end the call there. Thank you very much.

And thank you. The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.