Hello and welcome to the Q3 2023 Nabors Industries Limited Earnings Call. [Operator Instructions]. Please note today's event is being recorded. I'll now turn the conference over to William Conroy, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon everyone. Thank you for joining Nabors' third 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'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 and outlook. Activity in our major global markets was essentially in line with our expectations. Rig count in the lower 48 declined in the third quarter. It appears to have reached the bottom. Leading-edge pricing seems to have stabilized, lower drilling activity in the U.S. impacted results in our Nabors drilling solutions and rig technologies segments. The new bill of rigs in Saudi Arabia were a source of disappointment as reflected in our third quarter results. Specifically, the issues included delivery delays by our local supplier, field performance challenges with certain of the new build rate components, and higher startup costs, as we addressed these challenges. The impact to EBITDA in the third quarter was approximately $5 million. We have now addressed the existing quality issues. We expect our supplier's performance to improve rapidly as their local manufacturing experience increases. On the positive side, our lower 48 margins remain at historically high levels and international rig markets provide us with multiple opportunities at attractive pricing. For the third quarter adjusted EBITDA total $210 million. This result principally reflects the known decline in lower 48 drilling activity as well as the shortfalls in Saudi Arabia. Our global average rig count for the third quarter declined by eight rigs, all of which was attributable to the U.S. Our drilling solutions and Rig technology segments together accounted for 18% of total EBITDA. This contribution is approximately double the proportion immediately pre-COVID. Next, let me make some comments on each of our five priorities. First, performance in the U.S., daily rig margins in our lower 40 operation were in line with our expectation. Pricing in this market reflects the reduction in industry utilization this year. Please note that our margin performance in…

Thank you, Tony, and good afternoon everyone. Our third quarter financial results reflected primarily the expected reduction in lower 48 activity with an associated leading-edge pricing decrease. As anticipated, our US offshore results fell as we completed planned annual maintenance and critical components for our largest rig. I will also point out that results in Saudi Arabia, despite their quarter and quarter activity increase, fell materially short from expectation. Results were mainly affected by the disappointing performance and quality assurance by the supplier of our new builds. Standard experienced delays in delivery and commissioning of their new build rigs, which cost them significant revenue and which we only partially anticipated. These delays were compounded by unexpected downtime and newly delivered rig components by the same manufacturer. We are now forecasting additional loss margins in the fourth quarter from these issues. The drilling activity reduction in the lower 48 also impacted our NDS results more than we expected, driven by higher than anticipated rig count reductions in the general market. These affected our ability to increase penetration on third-party rigs. On the positive side, we continue to experience tailwinds in most international drilling rig markets, particularly in Latin America and throughout the eastern hemisphere. Revenue from operations for the third quarter at $734 million declined by $33 million or 4% as compared to the second quarter. Revenue for our US segment at $276 million fell by $38.4 million or 12%. This decrease reflected an eight-rig sequential reduction in low 48 rig count. Revenue per day of $35,700 fell by $1,054 from the second quarter level. US offshore revenue was $6.5 million lower sequentially as our largest platform rig completed its planned angle maintenance for major components. In addition, a second rig was placed on standby rate by our customer through the…

Thank you, William. I will now conclude my remarks this afternoon. Notwithstanding challenging marketing conditions in the U.S., we expect a material improvement in our consolidate financial results for the fourth quarter. In the lower 48, we expect to grow our rig count this quarter from its current level. As we look to put rigs back to work, we remain committed to our pricing, discipline, and expense control. Our international segment has excellent visibility to significant growth through 2024 and beyond, and additional opportunities are already emerging across our major markets. The international portion of our NDS segment is also growing as those clients realize performance benefits from the NDS solutions portfolio. In the U.S., we continue to focus on increasing penetration on our own rigs as well as on third-party units. We are encouraged by early signs of an acceleration in rig technologies, especially for capital equipment in the international markets. On top of that, we have high expectations for rig tech's energy transition initiatives. We remain committed to our goals of free cash flow generation and net debt reduction. We expect to report improvements in both metrics this quarter. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.

[Operator Instructions]. The first question comes from Derek Podhaizer with Barclays.

Just wanted to ask you about the 14 warm stack rigs you highlighted in the press release. You mentioned these things are ready to go. Just maybe give us a more color around your expectations on when those should be deployed, the cadence of deployment, maybe the customer type, the basin. Just help us with those 14 rigs as you look at them through 2024.

Sure. Well in terms of customer types, obviously we've seen a bit of a shift from the private to the public from where we were a year ago, and I think that shift is going to continue given other developments. In terms of basins right now, I think the most attractive right now is South Texas due to a combination of interest and rig availability. West Texas, there's been some redeployments of existing equipment there and there's no operator churn. But at the same time, we're seeing slight increases. And based on our survey, we see a pickup in early 2024 with budgets reloading. East Texas and Northeast s we alluded to, that those are gas driven. And right now, we see some stability. In fact, we think pricing, which had been disconnected from oil is actually firming up that gap between oil and gas is actually narrowing. So that's another area. And then finally, North Dakota, as you get into winter, that activity's going to be pushed into next year more. But there's some recent stuff now, but then later in the year. So pretty much in each of those markets. Northeast, I'm not so sure where you see much in the northeast for us right now.

I guess how many of those 14 do you think you can add back by the end of 2024?

It depends on customer demand, Derek. I mean, it's a bit early to be hazarding that, but if the demand is there, we'll be ready.

Just follow-up, just wanted to ask about the 2024 CapEx budget. Any help you can give us as far as color, maybe some bookends, how we should think about it between the US international, SANAD, technology, anything just to give us some preliminary guidelines here.

I think, SANAD will be similar to this year, maybe slightly higher. Because the suppliers going to get better and probably deliver those rigs, a little bit more reliably than they have in the past. We'll have a significantly higher rig count. And as you know, the maintenance CapEx is directly correlated to the number of rigs. So that will go up. So those are the areas where we see, on the other hand, we won't be buying a base in Argentina. And some of the things we have absorbed in places like the Algeria will not repeat. So, we will see, I would expect to see CapEx higher than this year, but we haven't yet finalized our budget exercise. And as you know, CapEx is a competition between different geographies. So, we are shooting to have a number that's going to be constructive in terms of free cash flow generation next year, but we we're not ready yet to share that with our investors.

And the next question comes from Arun Jayaram with JP Morgan.

Good afternoon. Tony, I just wanted to go through some of the call, the challenges you talked about in Saudi Arabia in the quarter. How has this impacted the future timing of the new build schedule? Is this going to be kind of compartmentalized to this year or does it have kind of a knock-on effect? And I know you gave us a bit of color around four startups next year and five beyond that?

Correct. Well, yeah. Let me give you some context first. First of all, the new build program vis-a-vis what neighbors normally does in countries, it's kind of sui generous. Because as you know, in this particular operation, it's unique because Aramco has committed over 10 years for us to build these, these 50 rigs. Five a year. But also, this was part of Vision 2030 and they wanted to source the manufacturing in local country and they award that sourcing contract to a joint venture between them and OV. So unlike where Nabors normally does stuff or our sales and controls at all, that's different. And also, the fact was that JV called on had no infrastructure. So, they had to build a new facility, they have to get up to speed, they had no inventory, all that stuff. And all that was occurring at the same time. The new build programs started to get underway. So, the only thing I tell you is, that we're committed to follow Aramco's wishes. I'm trying to make this work. We actually have a 30-year relationship with NLV [ph], so we respect them, but it's hard and it's -- these are -- this is actually a very big project and there's a lot of strain in the system when this stuff happens. Aramco has very deliberate acceptance testing processes and procedures and what's been going on these rigs is given -- it's all a startup operation from a manufacturing point of view, the acceptance for seizures are taken somewhere from two to three months just to go through acceptance testing, nevermind putting things that are coming up. And then there's issues of stock inventories for stuff that's never been there in the country before and all those kinds of challenges. So that's what's…

$50 million to $60 million roughly actually to be precise.

Yes. Well, so anyway, the magnitude as you can see is very large and therefore that gives us great visibility. And when you add that to the 11 rigs that you know about in other markets, I think international is really poised for a really great upturn here. And we can talk a little bit more about that context. But hopefully, that answers your questions about Saudi Arabia. If you have any other ones, I'll be happy to follow up question.

Let me say something what Tony said, that I think is very interesting and a lot of people are not seeing is that we still have some 11 rigs that have been awarded that are going to be deployed before the end of the year, 2024. And then we have another seven already awarded that would be deployed in 2025. So that's what are between the beginning and the end of 2025. So, there's 18 more rigs that are coming on the payroll over the next couple of years. And that's huge growth based on our 77 bases.

Yes, I would say there's nothing like that in the sector or there's ever been that much planned growth committed to in the land drilling sector ever at the, at this kind of numbers. It really is unparalleled, and then as I said, and then you have away from Saudi Arabia, you have the other things that's going on in the macro environment.

And the next question comes from John Daniel with Daniel Energy Partners.

Tony, just sort of a big picture question for you, but let's assume Middle East tensions, the situation escalates, and energy security, fears, ramp even higher. How quickly can you just ramp your international business, not country-specific, but just broadly speaking, how quickly could you ramp it further?

I would say very, very quickly actually that that's the benefit of having the integrated infrastructure that we have. And so, we actually have a bunch of assets around the world in various places that form the outlines of something and adding them and refurbishing them and bringing them out. The stuff is what we do every day. And that is just a question of the opportunity. So, if that comes up, whether it's enhanced energy security here in the US or there's other markets that need it, I think that that is really the power of the company that we have today. And that's actually what makes us different than everybody else, John, as. And so, that is really the strength of the company and I think, we're all positioned to meet that.

And I guess sticking with the energy security theme, are you seeing any change in behavior with people looking for longer-term contracts on equipment just to know you they've got it? Or is it too early?

Too early. Although, we have gotten inquiries from the Middle East. We've had a number of on the can rig side actually, we've gotten a number of inquiries from what you might call our local, what our local competitor companies. These are companies that really, we don't really compete with because they typically drill in the shallower part of the market or they're captive companies for certain markets where the national oil company controls it more. And those companies, we've had a lot of inquiries recently reaching out, asking about equipment and sizing things up. I mean, this goes consistent with the theme that William alluded to, which is the overall international arena here. I mean, just to give you an idea, there is a away from Saudi Arabia, I may have a list here just to give you an idea of the breadth of what's going on internationally. I mean, you've heard the big, all the big boys oil service companies, they've all talked about super cycles and things like that. But let me -- I can illustrate the following way. Let me give you a list of company’s countries, Kuwait, Algeria, Oman, India, Abu Dhabi, PNG, I mean, Papua New Guinea, Argentina, Mexico, Columbia, Venezuela. Those companies today have tenders out what we have in hand for more than 50 rigs. -- I've never seen, this is really something that we've never seen before. This kind of scale, it's kind of stunning. And what the reason for that, I think the reason alluding to what you're talking about, which is the security thing, I think, the AMCs appear driven to increase their production capacity. That's clearly a big driver of it. Second, obviously, the geopolitical events obviously are also reordering the flows of oil and gas, including into areas like North Africa where you're going to see people there that up to now are put a higher priority on increasing their production. And then finally, I think we're all underestimating the fact that all these major oil and gas countries, their internal energy consumption is increasing themselves. And so that also is a driver. So, you put all this together and the fact of lack of investment, what's gone on in the past five years, that's what all this -- that's what's generating all this activity. Now will this all result in that number of rigs being awarded that I'm not going to -- I don't want to -- I'm not overselling that, but I'm just trying to give you an idea to respond to your question of inquiries. When you have that many tenders out, you can see why can Rig is getting in inquiries from everybody in the world because they want top drives. They want things to be upgraded. They want all kinds of things. And so that's what's driving the activity.

[Operator Instructions]. And the next question comes from Dan Kutz with Morgan Stanley.

So, I wanted to ask on the lower 48 activity, it looks like you guys have kind of stated in a pretty consistent market share range recently, which is a little bit lower than maybe we saw in some past years, but that seems consistent with your strategy and what you're saying about defending, being disciplined in your bidding, managing costs and kind of trying to defend margins as much as possible. But I wanted to ask, is there a scenario where you could gain some market share and still achieve all the other stated goals? Or do you think that we're kind of at a fairly steady state from that perspective? And it's just going to be more the macro backdrop that will be the biggest driver of your lower 48 rig count. Thank you.

Well, obviously, we do like to grow, and but we like to go profitably. And so, there's always that balance. And what we've tried to prioritize in our thinking is focusing on customers that also have a similar view us as the adoption of technology, because as the rig count or our rig margins one thing, but that the added benefit of NDS margins on these rigs also it's material enhancer, not just of absolute margin, but also of return on capital. Because the NDS quality of that EBITDA is much higher than also the base drilling business where the cash conversion rate is almost 80% of the EBITDA, the cash conversion. So that's where the priority is. And we think that as customers begin to get the story of NDS more and more and learn about the product line, that offers great expansion opportunities to help drive the rig sales and it also helps to drive the use of NDS on third party rigs. And you saw in this quarter something quite interesting, which was even though our rig count dropped, NDS actually grew in third party business, which is interesting in and of itself, which proves the concept that what we're trying to unlock with this stuff is something that actually has a broader applicability away from just Nabors rigs. So, the answer is yes, I do believe as the market matures, as the big players take a bigger position in the U.S. market and they are more technology focused, that there isn't an opportunity to gain market share. So, one example of that is the focus on with the consolidation has occurred. I think one of the things people will be focused on is improving EOR, not just drilling wealth faster. As the industry's done a great job drilling wells very, very quickly. And at a certain point there's going to be a lot of diminishing returns. So, I think some of the metrics are, may go to looking at EOR per lateral foot drilled, and you've actually seen some of the big guys talk about that increasing lateral length as much as five miles and that kind of stuff benefits Nabors, because we've pre-invested in that move. We built the M 1000 rig, which was the successors to the X-ray a couple years ago, has a million-pound hook load that's perfectly designed for these longer lateral lengths. We also introduced to the market a new top drive that has the pious torque available that can actually handle a five-mile lateral. So, the company's positioned itself to capture that moment. And I think when as the market moves in that direction that all these were betts, we made the past couple years as the market moves in that direction, I think it help would help us also with share. So, that's a pretty long-winded answer, but I hope -- it's response is to what you wanted.

No, that's great. It was a long-winded question, so, thank you. And then, I guess just another one on the international space. So, if I back out the SANAD rates that are working today, you guys are somewhere in the low, mid-seventies. And if I look back to kind of the pre-pandemic period, when the SANAD program hadn't kicked off, you guys, international activity was another dozen, two dozen above where your ex nod activity is now. Well, what I'm basically trying to frame or understand is like, what do you think the potential is in the international space just to kind of get back to the level of investment and activity that's required to kind of get back to a normal production level? And then on top of that you have all of these capacity growth targets that a lot of the Middle East players are have put out there. But I guess, I'm just trying to understand if there's a historical period that you would point to that you think could be the opportunity for international activity upside outside of SANAD. And again, I appreciate you guys have given us a ton of color on your visibility over the next two years, but I'm just trying to understand what like the ultimate opportunity could be for international rig redeployments if, aside from the substantial SANAD opportunity.

Well, I gave you a pretty big list of those opportunities and it is really going to be a question of our prioritizing where we want to allocate the capa, what's best served is, what a way I would put it. And as we think about that, some of the other logic I've talked about, which is technology and NDS also applies to international in terms of which opportunities we choose to pursue. So, it's going to be a balance in terms of allocation of capital and what we want to pursue in terms of how fast we want to grow. But I think right now you're seeing an environment where there's not going to be a dear of opportunities. The question is what are the returns on capital are good enough to meet what our hurdle rates and what are they such that it makes 101 equal three when we pursue that opportunity. And I'll let William add anything to that.

I think, Latin America, which is under -- I would say, estimated piece of the pie, I think, we have real opportunities to grow in places like Argentina and Columbia where we already are the strongest player and in Mexico on the platform rig market, we're getting a lot of pressure from Pix to add rigs in that market as well. So, I don't even want to mention Venezuela because it's still a little bit up in the air and whether, how much the sanctions are going to be removed and how much some of our clients are going to go back to that. But we do have real opportunity. We have four rigs in prime condition in Venezuela waiting for a resumption and activity by some of the foreign players. And then we have seen places like, Kazakhstan that have gone down, but we don't know when that will come back. But I think, if it does, we're ready for that as well. And then Kuwait, we have some very important tenders coming and we are very well positioned in that market as well. Now we mentioned that we got an award in an Algeria for 4 rigs, which is a very impactful win for us. And we are looking at other places in North Africa as well to expand. So those are the areas where you would, where you would expect to see most of the uptick in Nabors. Now we do have to be conscious that we cannot address all the opportunities that are out there. So, we have to be selective. We have to focus, as Tony said, on places where you can get technology on top of the rigs. And we have to make sure we have a CapEx program for next year. That makes sense in terms of our free cash flow objectives.

And the next question is a follow up from Derek Podhaizer with Barclays.

I just wanted to follow up on the 11 rig highlighted international to be deployed by the end of next year. Is that a net number or, I'm just wondering how we should think about that. Will we see some offsets, maybe some rig releases in other regions? I know you highlighted Kuwait and Columbia as areas of softness currently. Just thinking about if that 11 is completely incremental or we should think the 11 minus something.

Listen, the 11 is stuff that we have in hand already, but we have others that we have very high probability of getting. So, the 11 could be higher right now. It's true that in some places it could be some releases somewhere. But again, we have very long-term contracts all over the place, so right now we're not expecting to see reductions in other places.

Got it. Okay. Very helpful. And then just, I know capital allocation strategy talked about it being towards debt reduction repayment, but considering just how constructive you are on NDS, I'm just curious how we should think about M&A opportunities, whether it's a Tuck-in or Bolt-on as far as technology or anybody else out there that can fold right into the under the Nabors solution. Just thinking about M&A opportunities and NDS how we should think about that.

I think you've hit on something that clearly, it's been on our radar for quite a while, and we have been looking and we've added some small software stuff that you haven't really seen much visibility to. That's become part of our product lines as well. So, kind of add to our internal growth with kind of small tuck-in acquisitions. And then we've also embarked on partnerships as well. So, our example is Cova out there, which has a software product that we competed with, but together we think we can actually do one-on-one equals four. And the marketplace is not a big marketplace, right? I mean, there's only x 100 -- 700 rigs, what in the international, I mean, altogether maybe 1500 rigs that are target rigs. It's not like the Microsoft and Apple, which have a gazillion customers out there. So, for the technology to work, it makes sense to try to work with incumbents and see if there's a way to make things work better. And so, we've embarked on that path with some of these deals we've done and we're open to it. We are looking at other similar deals, not just acquisitions.

I think we also deal with Halliburton, I think is going to be accretive to Nabors drilling solutions. And of course, one of the big objectives that we have is to try to convince some of our peers to take our technology rather than redeveloping, reinventing the wheel themselves. And we have been having some success on that.

Thank you. And this concludes the question-and-answer session. I would like to turn the forward management for any closing comments.

Thank you all for joining us this afternoon. If you have any additional questions or would like to follow up, please contact us. And with that, Keith, we'll end the call there. Thank you, very much.

Thank you. And as mentioned, the call has concluded. Thank you for attending today's presentation, and you may now disconnect your lines.