Good day, and welcome to the Nabors Industries Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode today. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded today. I would now like to turn the conference over to the Vice President of Investor Relations and Corporate Development, William Conroy. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining Nabors third 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 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 third quarter of 2022. All of our operating segments once again performed very well. We have the right strategy, our execution is strong, and these results demonstrate the earnings power of our portfolio. Adjusted EBITDA in the third quarter totaled $191 million. A 21% increase over the second quarter. Strong revenue growth across all of our segments drove these results. Consolidated revenue increased 10.2% sequentially. Our global average rig count for the third quarter increased by 4 rigs. This growth was primarily driven by increases in our U.S. and Saudi Arabia markets. Drilling Solutions once again recorded double-digit EBITDA growth. In the third quarter, we continued to reduce our net debt. Our net debt improved to $2.16 billion. Adjusted free cash flow was $35 million, much better than we forecast. I am pleased to report we again made progress on our five keys to excellence. These critical objectives drive the investment thesis for Nabors. These include our leading performance and technology in the U.S. 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 U.S. We finished the quarter with 95 rigs running, up 3 rigs from the prior quarter end. Daily rig margins in the Lower 48 increased significantly. Average daily margin increased by nearly $2,500 in the third quarter. With that growth, our fleet average margin in the Lower 48 broke through the $11,000 mark. These results reflect our ability to re-price the fleet towards the leading edge, which continues to trend higher. Our strategy to remain short on contract duration and…

Thank you, Tony, and good afternoon, everyone. Third quarter results were significantly better than we anticipated. Across the company, we continue to experience strong pricing momentum coupled with higher activity levels, more than offsetting cost pressure in certain markets. Pricing and activity trends continue to improve across the globe. We expect fourth quarter results for all segments to increase materially over those of the third quarter. Revenue from operations for the third quarter was $694 million, compared to $631 million in the second quarter, a 10% improvement. U.S. Drilling revenue increased by 17% to $287 million, Lower 48 revenue grew by more than 19%, reflecting higher rig count and an increase in daily revenue of over $3,600 or 14%. Average daily revenue reached $29,200 and we expect it to continue increasing over the quarters to come. We have recently started signing contracts with revenue per day approaching $40,000. This is before layering on additional revenue for Drilling Solutions. Clearly, our decision to keep most of our fleet on short-term contracts has paid off. Although, we believe pricing will continue to trend upwards, we are now term onto our portfolio of contracts. At these leading-edge day rates, we believe it makes sense to contract a portion of our fleet on longer term. Revenue from our International segment also increased to $306 million or about 3% for the quarter on stable rig count. The improvement was driven by higher revenue in Saudi Arabia and Latin America. Revenue from Drilling Solutions and Rig Technologies moved up as well, each improving by more than 10%. Total EBITDA for the quarter was $191 million compared to $158 million in the second quarter, an increase of $33 million or 21%. All our segments delivered strong growth, which resulted in EBITDA margins of nearly 28%, an improvement…

Thank you, William. I will now conclude my remarks this afternoon. First, let me summarize our third quarter highlights. Quarterly adjusted EBITDA increased by 21%. We generated free cash flow while reducing net debt. Lower 48 margins topped $11,000 with an outlook for further significant increases and NDS has reached annualized EBITDA of $100 million. Strong execution of our strategic initiatives drove these results. In addition to growth from these initiatives and as we look ahead to the fourth quarter, we also expect our results to reflect the robust market conditions. In the Lower 48, we are seeing rig rates and daily margins more reflective of the enabling technology that we provide. This prospect is driven in part by additional activity. Operators in the Lower 48 continue to plan to add rigs through the end of 2022 and to ramp activity in 2023. In our International segment, additional new builds in SANAD together with the recent contract renewals should lead to increased financial performance. Momentum in NDS remains strong. We see potential for both increased penetration on Nabors rigs as well as growth in the third-party business. Since the onset of the pandemic, we have reduced our net debt by more than $700 million. Our accomplishments in this area are noteworthy, and we are absolutely committed to more progress. I’ve said for some time, the best is yet to come. All of our achievements and financial performance, technology and ESG notwithstanding that is still the case today. With the industry’s most talented and dedicated workforce, indeed, the best is yet to come. Before we open for questions, I’d like to recognize Jim Crane and our Board member and owner of Houston Astros for building an exceptional world-class organization for Houston. Thank you for your time and attention. With that, we will take your questions.

[Operator Instructions] And our first question here will come from Karl Blunden with Goldman Sachs. Please go ahead.

Hi, good afternoon. Thanks for the time. I was interested in the comments about getting some more term on some of the contracts that you’re signing now. Could you give us some idea of the type of term you’re targeting? And what proportion of the book you could ultimately shift to longer-term contracts?

So listen, I mean normally in the past and since I’ve been here, and we stayed around a 20% to 30% term proportion during COVID, we debated what we should do, and we decided to stay very short term, because we thought this was going to be a strong rebound and this was going to be a short downturn. So this has been exceptional for Nabors. We have never carried so little term in the past. And that has paid dividends. We did very well because of that much better than we even expected. We think at these kinds of prices, which are pretty close to giving us a very good return on capital. I still have folks or some more increases. But at these kinds of prices, we think we can go back to a normal range, which is 20% to 30%. And we’ll try to do that during the fourth quarter. We think our target to be at the end of the year around 20%, I think, is reasonable.

All right. That’s helpful. You had impressive guidance for net debt reduction next year of $400 million. Should we expect gross debt reduction to trend similarly to that maybe a bit of a lag. It’s just you don’t have a lot of securities that are very easily prepayable. I’d be interested in any thoughts around the mechanisms of also targeting gross debt reduction. Do you feel like you need any more than just using cash flow, if there’s any other levers that you’d look to use?

So, we do have about $210 million of convertible – I’m sorry, of notes that expire in 2025, the 9% notes. And those we can pay at par at any time. And we have in 2023, a couple of maturities coming as well that we can pay early as well. So, we do have a significant amount of debt that we can pay back and yes, the objective is to reduce our total gross debt in line with net debt.

Thanks very much.

Our next question will come from Dan Kutz with Morgan Stanley. Please go ahead.

Hey, thanks. Good afternoon.

Good afternoon.

So, I just wanted to ask and sorry, if I missed if you guys have made some comments and put some input out on this, but just wondering if you can talk about kind of the macro supply side of maybe the U.S. and international markets. Just wondering if you have any – I appreciate all the detailed color on the idle capacity that Nabors has no activation cost. But just wondering if you could share any general comments about the supply side in the markets in which you operate?

Well, I think in general, probably in terms of rigs that can come back into the market, you look at a number, potentially of about 150 rigs with the problem with that number, though, is as you get into it, towards the back end, more at the midway point, I think you ended up very substantial amount of CapEx. And I think the question is going to be presented for people in that position at a certain point, do you actually bring those rigs back? Or does it make more sense to try to do something different. And so – but that would be the order of magnitude of number, something like that.

Got it. Great. That’s really helpful. And then I just wanted to ask what you guys are – your latest thinking was about recession risk is just kind of how you think that would translate into activity and pricing implications if we did go into a recession? And maybe if you could parse out what your views might be in the U.S. versus global markets given that those cycles are kind of at different points or the recovery in those markets is at different points? Thanks.

So obviously, the big elephant in the room is the macro environment in terms of recession and interest rates don’t help as well. I think, obviously, being short on term in the U.S. is somewhat of a negative for us, but we’re pretty confident in the constructive environment today. I think OPEC Plus is going to do what it can to maintain a strong commodity environment. And I think when you look at our overall portfolio, in terms of neighbors our overall backlog, we’re well positioned to withstand anything. If you look through the last cycle, when everyone went to COVID, I think Nabors EBITDA was more than two large competitors combined. And so the resiliency and the deliberate construction of our portfolio, I think, is a real plus that has not really been appreciated. If you look at what we went through. So, I have every conference [ph] we can withstand anything that’s thrown out is given that we just did it, and we demonstrated to you all the past couple of years.

That’s really helpful. Thanks a lot guys.

Quick addition to that. We do think and I think Tony and I have discussed this multiple times within ourselves, and we’re trying to do plans for next year. But we do think that whether there’s a recession or not, the impact on energy consumption it’s not going to be as dramatic as we’ve seen in the past and certainly not the fact that supply is well behind demand at this point on a really medium and long-term basis. So, I think clients have realized that and they’re starting – we see signs of panicking a little bit all over the globe where clients are realizing they’re behind the bottom, behind the curve and they’re trying to catch up now. So, we do think that a recession is certainly there’s a probability for that, but we do think that the oil sector will be – the oil and gas sector will be a little bit benefited by the fact that it’s so far behind and so much on their investment in the past decade.

Great. Thanks again.

Our next question will come from Derek Podhaizer with Barclays. Please go ahead.

Hey good afternoon. So, I wanted to ask about pricing trajectory and different catalysts. So reaching 40,000 leading edge on market tightness then you talked about the required CapEx for your next date and the date [ph] after that. What brings the market up to the mid-40s and to the high 40s? Do we need to see all those rigs be reactive? Or do we need to start talking about your non high-spec rigs to be upgraded and that helped push the day rate higher than we talked about new builds. I think just some extra color around the pricing trajectory, what moves it would be helpful just to help frame the debate why adding capacity won’t lead to pricing degradation, because I think that’s a lot of the – what people are viewing the sector right now. So some help around that would be great.

Well, I think, first of all, the – when you look at the leading edge pricing, you got to look at it by region. And by region, the Northeast and East Texas are the strongest, I’d say, with North Dakota as well. West Texas, there’s a little bit of churn there. So it’s not as fast, but the gap between all of them is very narrow at this point, which is a very good sign. That’s point one. Point two, as William have just observed I mean we’re at 86% utilization right now. So there is no more capacity. And if you look at where operators have been talking right now, obviously, plans are kind of early right now for next year. But I think – and there’s a bit of a dance going on with many customers as well. But I think the party line would be flat to modest increases at a minimum and that would be another 50 rigs at a minimum, looking at it that way. And therefore, when that happens, that will add additional pressure on the rates as well. And you also have to note that we’re pretty far away from replacing cost pricing, which is what everyone would worry about. Replacement cost pricing, I assume rigs $30 million roughly, you’re looking at the mid-40s so we’re still far away from that. And until you get to replacement cost pricing, there will be – there’s still room for moving up the spot rate up toward that. So, I think there’s still a fair amount of runway in front of us. And I think the question is, what’s going to happen to room in the party. But the party, I think right now, if you talk about the move to focus on capital discipline. Virtually every customer we’ve talked to is moving that direction. So the status quo at this high utilization, I don’t see easily getting disrupted, and I only see upside in terms of the modest increases in front of us.

Got it. That’s helpful. I appreciate the comments. Just want to flip over to international, just talk about your national rig count. Just looking at the deck, it says it’s at 56% utilization. Obviously, Saudi Arabia, Latin America, very strong demand points. You’re reactivating rigs, you’re resigning up rates. Is there an opportunity to move some rigs around from underperforming regions into countries that have higher demand, Saudi Arabia, the Middle East and Latin America? Just what moves that 56% up and what are the levers you can pull? And then secondarily, what would be the capital required to do that?

Right. So unfortunately when you talk about internationally, it’s not a homogeneous market. So rigs in one country by type don’t necessarily easily translate to another country. So there’s some friction we’ll be stuff between countries, but we have done it. In fact, we’ve actually moved some rigs in the U.S. down to Latin America because the operators down there want to have world-class operations similar to the shale development up here and therefore, we sold on the concept of upgrading their technology. And so that’s in play. That actually will continue. As we look forward, we see some more opportunities along those lines. The opportunity set we think is pretty large right now. You mentioned away from Saudi Arabia, which as you know, the rig count will go up, as I mentioned in my remarks, and there’s a chance later in the year of an additional award to get back into a cadence of five per year for Saudi Aramco. In addition to that, I think we have – we see Mexico, Argentina, Kuwait, the UAE, Algeria and India. And you combine all that together with where we are and what you show us Saudi Arabia, we see right now visibility for least a 10% increase in the rig count for us next year.

And we can move about 10 rigs between countries. Obviously, we need the right opportunity, the right client, but about 10 rigs can easily be moved between 10 idle rigs can easily be more between countries. And we’re looking for opportunities to place those rigs, right now.

Yes, the other issue here is to bear in mind that the international market in some ways is about five years behind the U.S. market and existing rigs even, there’s opportunities with existing rigs for increased profitability by encouraging operators to think about upgrading them because if they move to related technology, we think it’s good cost benefit return for them. And we actually have developed some packages where we’ve come up with a weights of fairly cost effectively upgrading rigs to be more state-of-the art kinds of rigs with more of the AC technology you hear about in the U.S. to make them available internationally, which typically a large portion of the international market is not there yet. So there is that opportunity away from rig count by just upgrading rigs to increase profitability, which is another focus for us. And in addition to that, we’re also focusing on NDS. NDS has been very successful in the U.S., and we’ve made some inroads internationally, but we have a long way to go on international. And you see what the results are have been with us in the U.S. And therefore, we have a lot of expectation that we could do something similar internationally as well. So all that is additional upside, not necessarily from absolute change in rig count, but actually just better returns from what we’re doing, but they’re meaningful. And if you to reiterate on the results today, you got to add our NDS number and our drilling margin number to get to the number like 13, almost 13.6 a day margin per rig, which is really quite good in the U.S.

Got it. Very helpful. Appreciate all the color. I’ll turn it back.

Our next question will come from Arun Jayaram with JPMorgan. Please go ahead.

Good afternoon, Tony. I was wondering if you could give us some more insights on the SANAD contract renewals. You announced 24 rigs in four year terms at current market rates. Give us a sense of how does that – how do the new rates compare to kind of legacy rates? And what kind of impact, as we sharpen our pencils on 2023 and 2024 our models?

You’re always looking to pick away. So obviously, out of respect for – we can’t talk about a single operator, single customer’s rate. So I’m not going to go down that path here. What I’ll say is the following that the rates there combined with the new builds, combined with what I just mentioned in terms of activity, if you put that all through the process, at the end of the day, we think when you look at margin and internationally, we’re on a path of $16,000 to $17,000 all in the world. That is the whole – for 75 rigs today, plus what the incremental rigs will be. So I think that’s the way to think about it. So you look at a very good healthy increase in margin for international looking forward through 2023.

By the way, 75% of our rigs in Saudi Arabia have either been recently renewed or just signed the new deployed rigs that were just deploying and building kingdom, right? So over 75% of the fleet has been recently extended for four or six years.

Interesting. It seems like they’re planning to raise their productive capacity.

And if you remember on top of that, you have clear visibility for increasing margin per rig because the new builds come in at the rate of five per year, and those new builds are EBITDA per rig of $10 million. So if you do the math, you can see that there’s a good healthy planned increase over many years in front of us, which I think is an unparalleled opportunity set compared to what you see in the marketplace today. And which is now – goes down if the program is active now.

Great. And just my follow-up, kind of running through your free cash flow outlook for 2023 of, call it, $400 million. Is it fair to say CapEx could trend call it, 450 something in that range, would that be fair to support $1 billion plus in EBITDA next year?

Listen, we are finalizing our budget, and we’re not ready to share those numbers just yet. All I can say it’s going to be somewhat somewhere above where we were in 2023 because, number one, we have more rigs and number two, the expenditure in Saudi Arabia will be a little bit higher. That’s all I can say.

And maybe just a follow-up there. How do you think about your maintenance CapEx per operating rig in the Lower 48 today?

About a $1 million bucks.

$1 million. Okay. Great. Thanks a lot.

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

Hey, good afternoon. Thank you for taking my question. Most of them have been asked already. I did want to circle back to the commentary on your international rigs. I wanted to make sure I heard right. I think, I heard your international rig count could move up, 10%. I also think I heard you could add 10 idle rigs. So I just want to make sure if I’m understanding correctly, and I’m not asking for final guidance. But if I paraphrase, I think I heard we could see 10 idle international rigs deployed by year-end 2023 and then we’d have the SANAD newbuilds above that.

No. Tony just mentioned that a rig count, average rig count next year could go up by 10%. That’s what he said. And that’s a global number. And the 10 idle rigs that I mentioned is we have potential to move higher rigs between markets to accommodate some of that expansion. And up to 10 rigs could be easily moved than it would fit in any market, right? That’s all that we’re saying. And the SANAD increases are included in that 10%. But they’re not fully included. We expect an increase in Saudi Arabia average year-on-year roughly four rigs. That doesn’t include potential, more awards from Aramco that we expect to receive for another five years – five rigs, and some of those could be deployed in the second half of 2023. That’s not included, the number that we gave you.

That’s very clear. And a quick follow-up on sticking with the international fleet, that $16,000 to $17,000 a day margin outlook, I wanted to check, is that kind of a year-end target for 2030 or what about an average?

An average.

For the year.

For the year.

That’s great. Hey, congratulations on the quarter and the strong outlook. Thank you.

Thank you.

[Operator Instructions] Our next question here will come from Keith MacKey with RBC Capital Markets. Please go ahead.

Hey, good afternoon and thanks for taking my questions. I just wanted to ask; Hey, I just wanted to ask about the timeline – your potential time line for getting the remaining call it, around 17 rigs in the U.S. back into the fleet. So to get your full fleet of 111 high-spec rigs into the fleet, what is roughly the cadence you might expect based on the demand inquiries you’re seeing? And I know you mentioned it takes about three months or so to get a rig ready to go back into the field.

Yes. I think we’re thinking about three to four quarter is right now the rough number.

We think we’ll exit somewhere in the 99 to 100 range this year. So that just implies another 11 next year. And again, we are trying to increase our rig count measured pace. I mean we are prioritizing price over market share, and we will continue to do that. Price is number one right now. And obviously, if we try to rush in 11 rigs in the first half of next year, we could get into issues of increased costs and service quality, et cetera. So we would expect it to be smooth during next year, the additional rigs.

Got it. No, that’s helpful. Can you maybe just give us a bit more color on the level of inquiries you’re seeing and based on the rigs you’ve got left, what percentage of inquiries you may be able to – you may actually be able to satisfy given what you’re seeing from customers?

Travis, you want to comment?

Yes. I think right now, as William said, I mean again, prices is certainly going to be the catalyst for how and when we decide to deploy a rig. But I would say about half of the inquiries we could easily satisfy, but again, it’s going to be a function of the geography and the price.

Perfect. Thanks very much.

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

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

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