Good day, and welcome to the Nabors' Industry's First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. William Conroy, Vice President of Corporate Development and Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you for joining Nabors' first quarter 2023 earnings conference call. Today we will follow our customary format with Tony Petrello, our Chairman, President, And Chief Executive Officer; and William Restrepo, our Chief Financial Officer, providing their perspectives on the quarter 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 Neighbors 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 and outlook. Our segments continued to perform well in the face of a challenging environment in the Lower 48. Sequential growth in the drilling businesses drove the increase in EBITDA. For the first quarter, adjusted EBITDA totaled $240 million. This result was in line with our outlook for the segments on last quarter's call. Our global average rig count for the first quarter declined by 1 rig. Growth in the International segment was offset by a reduction in the U.S. Lower 48. EBITDA in Drilling Solutions once again grew sequentially, reaching $32 million, combined our Advanced Drilling Solutions and Rig Technologies segments accounted for 15% of total EBITDA. In the first quarter, we again generated free cash flow. We achieved this performance even with semiannual interest payments on most of our debt and seasonally high cash outflows as we start the year. Next, I will update the progress we made on our five keys to excellence. Our success executing these strategies drives value creation across our stakeholder base. The five elements include enhancing our leading performance and technology in the U.S., expanding our international business with innovative solutions, advancing technology and innovation with increasing financial results, improving our capital structure and our commitment to sustainability and the energy transition. Let me update each of these, starting with our performance in the U.S. Daily rig margins in our Lower 48 operation expanded in the first quarter. This measure reached $16,700, up from $14,600 in the previous quarter. This sequential growth, 14% reflects strong day rates in the quarter, which increased the fleet's average daily margin. This performance does not reflect the growing Lower 48 margin from NDS. Combined, that margin is significantly higher. I'll discuss this in more detail…

Thank you, Tony. The first quarter results were encouraging with strong performance in several markets, offsetting a reduction in Lower 48 drilling activity. As anticipated during prior earnings call, the current environment in the predominantly gas basins in the U.S. had a noticeable impact on our Lower 48 rig count during the first quarter as contracts in these areas started to expire, gas rig count dropped over the last several weeks, dragging down the overall rig count for the market. Although oil basins have remained supportive and have started to provide incremental activity, these increases have not been enough to accommodate the full redeployment of gas rigs with the current level of oil prices and the fundamental imbalance between supply and demand, we expect additional increases in active oil rigs through the remainder of the year and a rebound in utilization for the market as a whole. Despite the rig count decrease we've seen in the market, pricing has remained at high levels. Although day rates have decreased in the predominantly gas basis, they have remained fairly firm outside those areas. Consequently, we managed to continue increasing our revenue per day on our drilling margins during the quarter. Even with a sequential reduction in average rig count, we delivered significantly higher Lower 48 EBITDA than in the fourth quarter. Outside the Lower 48, drilling rig markets were strong as was Drilling Solutions, which also benefited from increased penetration and higher pricing in the U.S. Revenue from operations for the first quarter was $779 million compared to $760 million in the fourth quarter, a 2.5% improvement despite the shorter first quarter. Most segments, particularly U.S. Drilling and Drilling Solutions contributed to the growth. U.S. Drilling revenue increased by $17.8 million to $351 million, a 5.3% improvement. Lower 48 revenue grew by…

Thank you, William. I will now conclude my remarks this afternoon. First, let me summarize our first quarter highlights. Quarterly adjusted EBITDA reached $240 million. Free cash flow in the quarter was $37 million. Our Lower 48 daily margins reached a quarterly record of $16,690. And when combined with NDS, that measure is nearly $19,900. In the Lower 48, we remain disciplined in our approach to pricing. Current oil prices should eventually lead to higher oilfield activity, which in turn drives rig demand and supports rig pricing. In our International segment, the combination of growth in our major markets, coupled with pending new build deployments in Sanad should lead to improving performance. In NDS, we remain focused on increasing our service penetration on both Nabors rigs and on third-party units. The international markets are also realizing the efficiency benefits from the NDS portfolio. We remain optimistic for material future growth in the segment. For all of 2023, we expect a material contribution from Rig Technologies, and we have high expectations for the energy transition initiatives, where the early results are very encouraging. Driven in large part by our expected free cash flow and with the debt transactions already completed, we are optimistic for material progress to improve our leverage and capital structure in 2023. I'm looking forward to reporting on our performance in the coming quarters. That concludes my remarks on the first quarter. Thank you for your time and attention. With that, we will take your questions.

Thank you. [Operator Instructions] Today's first question comes from Kurt Hallead with Benchmark. Please go ahead.

Good afternoon, guys. That's a great summary. I really appreciate all the level of detail you've gone through. So I guess let's start off with the U.S. land business, Tony. So you indicated that there's going to be some softness in the natural gas basins. You're starting to see that here in the second quarter. As you go forward in the second half of the year, you talked about your survey of customers. And are you already getting indications from those customers that they want to start picking up some rigs. And maybe that's question number one. And question number two is how many rigs are you going to, if any, are you planning on moving out of gas basins into some of the oil basins?

Right. Well, let me first - let's start with the second question, and then we'll get back to the first. In terms of the gas markets, obviously, we have hit an air pocket here. And in terms of the weakest markets, I would say the Northeast was one of them. Now we East Texas, Northeast and see as large an increased activity when gas prices rose in the '21/'22 time frame because of the takeaway capacity and operators stayed within their core acreage and activity levels. With respect to East Texas, however, there was a lot of private operators that came in that drove the activity increase. And as we've remarked when the end of March came along, a lot of those guys just hit the hall button, and that's what's caused the star pocket. So that was, in part, ameliorated by people wanting to finish up pads and now you've seen some of that stuff roll off. But through all that, I think what we've tried to do is maintain our pricing discipline and leading-edge rates in the gas markets, I would say right now are all in, in the low 30s. And I think the good news, as you alluded to and picking up on William's comments is that we are moving rigs from both East Texas and South as to West Texas and in some cases -- in most of the cases, actually, the customers pay for all or a majority of the move costs into West Texas. So I think that process is underway, and we're actively managing that process right now. And longer term, I think, for the obvious reasons of LNG export capacity, I think we're constructive on still on the near term, and we're not going to be prepared to go in there and increase market share by buying down using our rates by now, but we will maintain our position in those markets because we believe the gas markets do have a long-term future here. So does that covered those questions for you...

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

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

Got you. Okay. Great. And then just one follow-up, if I may. You talked about the new build program finally kicking in for Senate. And you indicated that was $10 million of EBITDA per new build, and then you referenced something along the lines of $100 million of EBITDA. Can you just clarify that to or place...

Sure, sure. So every rig incrementally is $10 million of annual EBITDA. Every new build rig on an annualized basis is $10 million in EBITDA. And so we have two tranches awarded right now. And as they get - all get on stream, it will be 10 rigs and we create a $100 million EBITDA business. And as William outlined, the progression is to start up already. The remaining three end of the first tranche is going to be coming out later this year. And then we've been awarded the next five. And the first of those will deploy towards the end of the year at the beginning of next year. And so we should get back to a cadence of 5 a year. But once those first ten get on, you have a $100 million EBITDA business, all with long-term contracts in a lot of runway after that and with additional upside. So it's a pretty robust story.

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

Absolutely. Absolutely. I mean there'll be -- like I said, the second 5 -- the first 5 will be rolled out this year, the remainder of this year and then the next 5 start at the end of this year through 2024.

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

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

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

That's great.

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

Hey, good afternoon. 1So just continuing on those comments around the day rates, the gas going down to low 30s, you're seeing a little bit of pressure coming into the oil basins. How should we think about the daily margins as we work towards the back half of the year? You talked about bringing back some rigs. But then you'll have a mix of repricing rigs. You have a mix of softening rates in the gas markets, strength in the oil markets, and it looks like you have some elevated OpEx per day. Just a lot of moving pieces here. Should we see a downward inflection in your daily margins? Or would you expect continued strengthening as you work through the year, just given a lot of the crosscurrents that are going on?

Well, as you saw in our prepared remarks in the second quarter, we're actually going to maintain, in fact, go up a little bit. And obviously, we're at the mid-30s there, we're getting a little closer to our average day rate. So it's going to be a little more mention [ph] the second half, but we're really confident in that momentum on the -- and I'll let William expand on that. But with respect to the cost numbers, bear in mind, our costs -- those costs that you're referring to in the first quarter increased those costs actually because of content increasing content, not necessarily cost inflation. And in fact, inflation has actually become less of initial for us as well as labor has become less than an issue for us. But I'll give a little more comment about the direction of the pricing for the remainder of the year.

Yes. I think a lot of the rigs that are moving from the gas markets into stronger markets have been moving at very good dayrates. So we do expect the second half to see a continued gradual increase in oil activity. And -- and certainly, in that case, strength and firm prices for services. So we think in the second half, we'll continue to go upwards in terms of margins per day. Keep in mind again that when Tony says mid-30s, that revenue per day is actually about $39,000, $40,000 per day, right? And our costs have been between $18,000 and $19,000 per day. So we still have some running room to go in terms of pricing down the road and in terms of margins as well. And obviously, the pace that we've seen in the past 3 quarters -- we won't see that over the next 3 quarters because we've already brought our average per day to the $3.50 $36,500 per day level, which we were thinking we would peak around the $40,000 per day level, absent some large increase in utilization. So we're getting closer to the number that we think we were going to get to. So you won't -- probably won't see the rates that $3,000 per day increases that we saw in prior quarters.

And the only follow-up that Ed says, please don't lose sight of the fact that if I had said a year ago that our combined NDS drilling margin rate was going to be $199, almost $20,000 -- everyone on this call would have said we're smoking something. I mean that number is really actually very quite good. Quite good. Actually, it's amazing. And so -- that just gives you an idea of the power of the portfolio and the power of where we're positioned right now. So I think we're really satisfied with where -- what we have to offer the clients in the response.

I appreciate all the comments there are very helpful. Just last one, a quick one for me. Just the $1 billion EBITDA guide you guys put out, I think it was end of last year. Just -- do you want to readdress that you still feel good about it. Any updates that we should be thinking about that target out there?

We feel very good about it.

[Operator Instructions] Our next question today comes from Keith MacKey with RBC Capital Markets. Please go ahead.

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

Thanks. It's a great question. Yes, you're right on the $1 million per day in the U.S. Lower 48 million internationally, it may be a little bit higher than that. I mean the rigs tend to have more stuff in the international markets. So yes, there will be an automatic adjustment just because of the air pocket that we hit in the second quarter, as Tony mentioned. So on the average for the full year, we'll have less operating time unless, I would say, wear and tear cumulative on our rigs, right? So that's part of the answer. We were planning on spending incremental money and reactivation early on. However, we do think that by the end of the year, we'll be back on track. And some of that money will be spent in 2023, if not all, maybe some of that will be later in the year. So maybe the payments slip into 2024. But most of the cost is based on reduction in average working rigs during the year, which most of that will be in the first -- in the second quarter.

Got it. Okay. So just...

1 million per year is a $1 million per year per rig is the right

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

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

Okay. Okay. That's helpful. Second question would be just on -- not on the price levels, but I guess on the price mechanism. You've got the base rig, and then you've got all of the rentals and things, but you've also, of course, got NDS. And so how do you -- which is, of course, a high margin, low CapEx business that that you want to grow with more third parties. So how do you think about when you go to market to price a rig like if you're trying to sell more NDS services on these third-party rigs, specifically or on your own rigs as well, how do you think about like pricing the rig level? Has the desire to bundle some of that in kind of caused some churn on the rig price as well? Or is it a totally separate conversation that you like to have with customers as you price the rigs and get NDS services on there?

I think the whole reason why we've created NDS was to get away from this cutoff bundling, and we believe that what we offer is something a unique value. And therefore, the conversation is about the extra value the NDS package offers. And the fact that we're actually able to offer IDS to third parties, I think, further demonstrates the value of that portfolio on a stand-alone basis. So yes, purposely, we've constructed this in a way to give you all some visibility as to what those numbers are rather than putting them all together. There are some other people in our sector that claim to put them all together. And -- but I think one of the prose put things all together is they tend to first get given away and number two, not being appreciated what the real value proposition is. And so that's why we've deliberately done it this way because we think it's the best way to prove to ourselves that we're creating value and also show the customer, and it's incentive to make -- grow that even more because obviously, that segment is capital light. I personally believe it deserves a better valuation because of it and for the growth prospects on top of it. But you're absolutely right. When it comes to third parties, we try to price value on a value basis, what those tools bring to the party. And you can see from our corporate announcement, focusing on third-party growth is a core element of our strategy. I mean [indiscernible] Neighbors, I think Corp has the best set of apps for the rigs. And also, they bring to the table operator workflows. And so by combining forces here, we're hoping to create the industry premier platform to integrate all this up, have one-stop shop for operators and we're actually going to offer it all to drilling contractors as well. I think it's kind of a unique value prop for everybody involved, and we're pretty excited about that opportunity.

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

Perfect. That's very helpful. And you answered my core a follow-up in that as well. So I appreciate the comments.

So thanks for the good questions, Keith.

Thank you. [Operator Instructions] And ladies and gentlemen, this concludes 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 would like to follow up, please contact us. Rocco, we'll end the call there. Thank you very much.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.