Nabors Industries Ltd. (NYSE:NBR) Q1 2024 Earnings Call Transcript

Nabors Industries Ltd. (NYSE:NBR) Q1 2024 Earnings Call Transcript April 25, 2024

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Operator: Good day, and welcome to the Nabors Industries First Quarter 2024 Earnings Conference Call. All participants will be in a 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 introduce William Conroy, Vice President, Corporate Development and Investor Relations. Please go ahead.

William Conroy: Good afternoon, everyone. Thank you for joining Nabors first quarter 2024 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.

Tony Petrello: Good afternoon. Thank you for joining us today as we present our results and outlook. Total adjusted EBITDA exceeded our expectations in the first quarter. Daily margins in the US Lower 48 remains strong and our two technology segments performed well. I would like to start my detailed remarks with comments on our international markets. The strength of the International expansion continues to surprise us. It’s been over a decade since I’ve seen an environment as robust as this one. We have a unique opportunity to strengthen our international footprint. On our previous conference call I mentioned we had scheduled the deployment of seven international rigs in 2024; three in Saudi Arabia and four in Algeria. In the first quarter we started two of the rigs in Algeria and so far in the second quarter we started the third Algeria unit.

That’s the update on our previously expected deployments. In addition, we have also been successful with recent negotiations for three rigs in Argentina. We expect two of those to go to work in 2024. That leaves a total of six more rigs slated to start up over the remainder of 2024. The third Argentina rig should commence operations in early 2025. And I would like to point out that all three of these awards in Argentina have long-term contracts with favorable pricing and high rates of return. Additionally, we have been short-listed for three rigs to go to work in the Middle East. These rigs would also have multi-year term contracts with favorable economics. In the Lower 48 industry activity has been disappointing. We had hoped for a moderate increase during the first quarter.

From beginning to end the Lower 48 industry land rig count declined by four rigs. The average Lower 48 industry count was essentially flat. Nonetheless, leading-edge pricing for the high-performance technology-focused rigs in the Lower 48 was stable. This helped support our own daily rig margin. Once again, our expense control in the Lower 48 was outstanding. Daily operating expenses declined. In the first quarter, total adjusted EBITDA for Nabors was $221 million. Our global average rig count grew by four rigs. This increase was spread across our operations. Our Drilling Solutions and Rig Technologies segments together generated EBITDA of $39 million. Combined they accounted for more than 17% of total EBITDA in the quarter. Next let me make some comments on five key drivers of our results.

I’ll start with our performance in the U.S. Daily rig margins in our Lower 48 rig fleet exceeded our expectations. The market for our rigs remains strong at slightly above $16,000. Daily margin in the first quarter was higher than we expected. Revenue is better than our projections. Expenses declined. I am pleased with this performance. These results demonstrate our team’s ability to execute at an impressive level in this market environment. We are working diligently to maintain if not improve this execution. The industry rig count was essentially flat in the first quarter. Our owned rig count increased but was below our target. As we have said before pricing discipline remains our priority. Our reported Lower 48 daily rig margin reflects the financial results of just our drilling rigs.

The Drilling Solutions portfolio NDS generate significant margin on top of that. I’ll discuss this in more detail in a few moments. Now I’ll review our International Drilling business. As I said earlier, this international market is the strongest we have seen in a decade, it is providing us with multiple high-return opportunities to reactivate rigs. We see tangible evidence in tendering and negotiating activity rig awards and deployments. During the first quarter, we deployed two rigs of our four-rig award in Algeria. A third rig has since started. We have also been awarded three incremental rigs in Argentina. These awards across multiple operators to commence operations around the end of the year, two in the fourth quarter and one in the first quarter of 2025.

All three of the rigs are currently idle in the U.S. We plan to transfer them to Argentina. This redeployment is an excellent use of our existing assets. In Saudi Arabia, the six newbuild is currently finishing its acceptance procedure. It should begin drilling imminently, two more will be deployed this year, another five are scheduled for 2025, and the final two of the existing awards should start in 2026. Finally, we were shortlisted for three rigs in a large market in the Middle East. The rigs that we bid are already in country. This opportunity would cement our position in this important geography. With these developments, it is clear our prior optimism was well placed, I am confident we will report even more progress on this front. For the first quarter, daily margin in our International segment was impacted by labor unrest in Colombia involving four rigs.

Looking forward, we expect deployments and operational improvements to generate daily margin of approximately $17,000 by the end of the year. Let me finish my remarks on our International business with a few comments on our activity in Saudi Arabia. Several offshore drilling contractors in the Kingdom have announced the temporary suspension of operations on a number of rigs. As for SANAD’s outlook, we are bullish. Aramco’s development of the natural gas resource is expanding. Its focus on the unconventional land reserves is increasing. SANAD’s fleet overwhelmingly targets gas. Moreover, the recent newbuild awards are for rigs capable of drilling for gas. The international expansion for Nabors still has legs. Beyond our announcements today, we see prospects for additional rigs in international markets.

These include units in Kuwait more opportunities in Algeria, rigs in Argentina, Mexico and elsewhere in the Eastern Hemisphere. Next, let me discuss our technology and innovation. NDS’ revenue grew sequentially on Nabors own Lower 48 rigs and on international rigs. This growth was offset by a decline in Lower 48 third-party market. Overall, NDS EBITDA exceeded our expectations. From a product line perspective managed pressure drilling and RigCLOUD drove the segment’s first quarter performance. Next, I will detail the value of the NDS generates in the Lower 48 market. The average daily margin in the Lower 48 from our Drilling and Drilling Solutions businesses combined was $19,440 in the first quarter. Of that, NDS contributed more than $3,400 per day.

This incremental margin is significant. We generated this margin with limited capital spending so the returns are impressive. In the first quarter, penetration of NDS services on Nabors rigs in the Lower 48 remains high. On third party rig, we saw growth in SmartSLIDE directional steering, our REVit stick-slip mitigation and our SmartSLIDE, SmartNAV directional guidance software. NDS’ first quarter results demonstrate the value of its broad portfolio and its focus on both Nabors owned and third party rigs. Looking ahead, we are making significant inroads with smaller contractors interested in adding Nabors solutions to their portfolios. At the same time, international clients are increasingly recognizing the performance improvements in the US.

They too are accelerating their adoption of Nabors’ advanced technology. Next, let me make some comments on our capital structure. Early in the first quarter, we redeemed the notes that were due in 2024 and 2025. We accomplished this with the proceeds from the 650 million of notes issued at the end of 2023. Our next maturity is in 2026. As we look ahead, our first priority for free cash flow remains reducing net debt and improving our credit ratings. I’ll finish this part of the discussion with remarks on sustainability and the energy transition. Our energy transition initiatives, as you know, focused on improving operational efficiency and reducing emissions intensity. These technology solutions made a significant contribution to our Rig Technologies segment results.

The most impactful remains our PowerTAP module. This unit connects rigs to the grid, greatly reducing diesel fuel consumption as well as related emissions. With the appropriate availability of grid power, operators can realize cost savings by employing PowerTAP. In a significant development, the first PowerTAP unit deployed outside the US is running in Argentina. This unit incorporates a frequency converter for international applications. We have additional units under construction including two destined for international clients. Interest in our energy transition portfolio remains strong in the US. On top of that, we see growing opportunities overseas. Next, I will discuss the rig pricing environment. First quarter results for our Lower 48 operation reflect continued stability in leading-edge market prices.

Our approach to the Lower 48 market is to exercise pricing discipline and support activity levels while delivering superior value to our customers. NDS is an integral element in this approach. In the international market, we have growing visibility to additional near-term rig deployments. Pricing on these pending deployments is attractive, reflecting the strong conditions we see across the international domain. We surveyed the largest Lower 48 clients at the end of the first quarter. Our survey covers 17 operators, which accounts for approximately 45% of Lower 48 working rig count at the end of the quarter. The latest survey indicates this group’s year-end 2024 rig count will be modestly lower than the total at the end of the first quarter.

Essentially, all of the projected decline relates to announced merger activity from our past experience combined activity usually drops immediately after the merger is completed. Over time, though, we have generally seen a return to prior activity levels for the combined companies. We anticipate the same behavior by our customers following this latest burst of mergers. Aside from the mergers, we believe that clients remain cautious about their plans for 2024, particularly in gas-focused basins. Our view of the international market is bullish. With the international additions now in hand, we would increase our international rig count for all of 2024 by nine rigs. That’s up by two versus the seven we had previously announced, so seven is now nine for 2024.

And for 2025, we have six expected deployments including five in Saudi Arabia and one in Argentina. The prospective Middle East rigs would add three on top of that 2025 total. Next, I will share other notable recent highlights and accomplishments in addition to the rig awards in Argentina. Canrig received an order from an existing client in the Middle East for six land drilling packages. This order demonstrates Canrig’s outstanding reputation in the international land market. It also evidences the wide breadth of the international expansion. And in the Lower 48, a drilling contractor has begun standardizing its entire fleet to Nabors’ RigCLOUD platform. This development is a significant endorsement of RigCLOUD and it clearly demonstrates the value of Nabors’ third-party strategy.

Let me finish my remarks with the following. Our performance in the first quarter exceeded our expectations. We are making meaningful progress capturing the significant opportunities in our international markets and for our advanced technology. Now, let me turn the call over to William who will discuss our financial results.

William Restrepo: Thank you, Tony and good afternoon everyone. During the first quarter, our global markets continue to diverge with a strong expansion driving international markets while the U.S. maintained its flat to downward trend. Our International rig count improved as we deployed rigs in Saudi Arabia and Algeria. At the same time, we were awarded three rigs in Argentina and in another tender in the MENA region, pending finalization of the technical review, we were successful commercially in an additional three rigs. The U.S. market is somewhat disappointed with fewer rigs added than we targeted but pricing was higher than we anticipated. And despite the weakening industry rig count in the Lower 48 market, Drilling Solutions and Rig Technologies beat our forecast.

Revenue from operations for the first quarter was $734 million compared to $726 million in the prior quarter, a 1.1% improvement. U.S. Drilling revenue increased by 2.3% to $272 million, primarily driven by additional activity in Alaska. Lower 48 drilling and offshore drilling also contributed to the increase. Our average rig count in the Lower 48 was 71.9 an increase of 1.6 rigs sequentially. Average daily revenue held at approximately $35,500. Revenue from our International Drilling segment was $349 million, a 1.9% improvement over fourth quarter results. This increase was driven by a new build start-up in the fourth quarter and operational improvements in Saudi Arabia as well as deployments of the first two of four rigs awarded in Algeria.

Revenue from Nabors Drilling Solutions declined sequentially by $1.5 million due to lower activity in the U.S. Lower 48 market. Despite flat average industry rig count in the U.S. we grew NDS sales on Nabors’ rigs by 3.6%. We also expanded our presence in international markets by almost 2%. The Rig Technologies revenue decreased by $9.1 million or 15.4% following strong seasonal year-end deliveries. Turning to EBITDA and the outlook. Adjusted EBITDA for the quarter was $221 million compared to $230 million in the fourth quarter. EBITDA in U.S. Drilling increased to $120 million from $118 million, a 2% gain compared to the prior quarter driven by higher activity in Alaska and higher Lower 48 rig count. However, a slight reduction in daily margins somewhat offset these gains.

Lower 48 drilling EBITDA decreased slightly. The Lower 48 results demonstrated the ongoing trends of the fourth quarter. Average rig count of 71.9 reflected an increase of nearly two rigs from the prior quarter in a market that is continuing to exhibit high levels of activity churn. Ultimately, the pending E&P mergers should result in a healthier and more sustainable Lower 48 environment. However, in the short-term, these consolidations have put pressure on the total rig count as operators absorb their acquisitions. In addition gas-focused drilling has continued to weaken. We anticipate our rig count in this market to average approximately 70 for the second quarter. The leading-edge price environment continues to be stable and our average daily revenue held up well.

Our efforts to limit costs remain effective. Average daily rig margin at $16,011 was a moderate $229 below the prior quarter. For the second quarter, we project our average daily rig gross margin at approximately $15,500. With leading-edge revenue per day in the low to mid-$30,000 range, the expected sequential reduction reflects repricing of renewals. On a net basis, Alaska and the U.S. offshore businesses performed better than we anticipated. In the first quarter, the combined EBITDA of these two operations was $21.4 million, an increase of $2.7 million. This improvement was primarily driven by activity in Alaska. Combined EBITDA for Alaska and US offshore in the second quarter should be similar to first quarter levels. International EBITDA decreased by $3 million or 2.9% to $102.5 million.

Average rig count increased 81 in the first quarter from 79.6 reflecting the start-up of a new build in Saudi Arabia and the commencement of two rigs going back to work in Algeria late in the quarter. The gain in rig count was offset by a $600 deterioration in daily margin reflecting a union strike in Colombia. During the quarter we saw the commencement of recertification work for several rigs recently renewed in Saudi Arabia. This process normally results in some lost revenue. For the second quarter, we project International average rig count to increase between two to three rigs, driven by the full quarter impact of the recent additions in Saudi Arabia and Algeria, as well as start-ups for incremental rigs in those countries. For average daily gross margin, we are targeting approximately $15,700.

The anticipated modest decrease as compared to the first quarter primarily reflects an increase in lost revenue from continued recertification activity in Saudi Arabia. Drilling Solutions adjusted EBITDA declined by 7.9% to $31.8 million in the first quarter. The fourth quarter of last year was particularly strong with several projects that came to an end late in the year. Gross margin for NDS was almost 52%. While we saw some softness in the Lower 48, we continue to see increased penetration in international markets. Internationally, NDS EBITDA grew by over 7% sequentially. We expect second quarter EBITDA for Drilling Solutions to come in essentially in line with the first quarter. Rig Technologies generated EBITDA of $6.8 million, a $2 million decline versus the fourth quarter mainly related to lower capital equipment and parts sales.

Normally, these items are seasonally strong at the end of the year. We expect Rig Technologies EBITDA in the second quarter to increase by approximately $2 million. Now turning to liquidity and cash generation. In the first quarter free cash flow as we anticipated was slightly above breakeven. As I have mentioned previously, the first quarter for Nabors has the heaviest cash outflows. In the first quarter, we incurred several annual payments including property and other taxes as well as employee incentive bonuses. Together, these payments which did not recur during the remainder of the year amounted to approximately $23 million. In addition, interest expenses on our senior notes are higher in the first and third quarters of the year. Capital expenses of $112 million including $35 million for the SANAD newbuild program were a bit lower than forecast.

But collections of customer receivables in certain large international markets were sluggish and offset the lower CapEx. For the second quarter of 2024, we expect capital expenditures of approximately $190 million, including roughly $70 million for SANAD new builds. We had expected the first quarter to be the high watermark for CapEx for this year. However, some of the spend anticipated to occur in the first quarter for Latin America, Saudi Arabia and the U.S. started lower than we had targeted. For 2024, we anticipate full year capital spend to total approximately $590 million. The increase as compared to 2023, reflects higher maintenance CapEx on increased international rig count and preparation expenditures for a significant number of international awards from recent tenders and negotiations.

Although CapEx from these recent awards should weigh on our free cash flow for 2024, we expect these long-term contracts to add over $50 million in EBITDA over a full year. In addition, Saudi Arabia EBITDA is expected to increase by another $50 million to $60 million per year as the new build program proceeds. In concluding I would like to point out that in addition to the international rigs we’re planning to deploy in 2024 and 2025, we still have a number of open international tenders and active negotiations. It’s increasingly evident that the remarkably robust International segment should continue to provide us with many more opportunities to redeploy existing rigs. Theseare coming with high returns and with very short payback periods. That being said, we intend to remain prudent.

We will remain focused on generating free cash flow and reducing our net debt. With that, I will turn the call back to Tony for his concluding remarks.

Tony Petrello: Thank you, William. I will now conclude my remarks this afternoon. As we look ahead, we see significant opportunities. From today, we have 6 rig start-ups over the remainder of 2024. More are on tap for 2025. This group should contribute significant incremental EBITDA over their multiyear contracts. To detail the remaining deployments, as of today, we have 10 in Saudi Arabia with three in 2024, followed by seven over 2025 and 2026; 3 rigs in Argentina with two in 2024 and 1 in 2025; and 1 more in Algeria in 2024. Altogether, these add up to 14 pending deployments. On top of these 14, we have the prospect for an additional 3 in 2025. This magnitude represents a rare opportunity, one that we are committed to capturing.

Our investment in this environment now provides the foundation for increased free cash flow and greater financial returns in the future. Looking ahead, we are evaluating additional opportunities in Latin America, the Middle East and elsewhere in the Eastern Hemisphere. Each of these opportunities will contribute significant free cash flow. As I’ve said before, we are able to use existing rigs to capitalize on this environment. In tandem with these rigs, we see very attractive prospects to materially expand the NDS business with limited incremental investment. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Dan Kutz with Morgan Stanley. Please go ahead.

Dan Kutz: Thanks a lot, and good afternoon. I just wanted to come back to the free cash flow comments. And I appreciate that this year, you’re kind of at the full run rate for the SANAD newbuild program. There’s a lot of investment required for the wave of deployments that you have — of rig deployments that you have coming in. You also mentioned higher maintenance CapEx. But I was just wondering if you can help us think through some of the other components that might impact free cash flow conversion this year outside of the CapEx guidance that you gave us, whether it’s working capital expectations, cash taxes. Even just — if I look over the last five years, I think your average net free cash flow conversion is in the kind of 30%, 35% range.

Should we be thinking about significantly below that this year? But is that a potentially achievable target in the coming years? Just anything you could share to help us think through the free cash line and free cash conversion. Thanks.

William Restrepo: Thanks, Dan, that’s a good question. I think a lot of people are hoping for some answers on the free cash flow for 2024. So as you know, we had to wait a little bit because we had a few or several important tenders to be decided, and certainly needle moving in both EBITDA and CapEx. So we hesitated to give something until we have more visibility on those tenders. But what I can do is, tell you a little bit the main components of free cash flow for the full year. And the most important is EBITDA. And so we do think that the rigs in the US Lower 48 will fall, some six rigs, versus the prior year. We were hopeful to retain the same average rig count in 2024 as we had in 2023, but that just didn’t happen. The market just moved down instead of going up as we thought.

So that has some significant impact. And in addition, we do think that as contracts roll into the leading-edge pricing, which has stabilized, fortunately, but as they roll into those new leading-edge prices, we’re going to see maybe an erosion of $600 year-on-year. And if you look at that, that’s just math, that gives you somewhere in the range of $50 million reduction year-on-year in terms of the US. Fortunately in terms of Lower 48 I’m sorry. But in terms of Alaska and the offshore market, we’re going to see an increase of about $5 million year-on-year. So that’s a $45 million reduction for the US. Internationally we hope to increase by roughly $50 million and that’s partially due to these new awards, but also the Saudi Arabia increase in activity.

Drilling overall on a global scale is going to be about $5 million higher than the prior year. And then we think NDS is probably going to be about 5% higher versus the prior year with the US market being a bit of a drag, but the International market performing very, very strongly. And finally Rig Tech is going to be like a $10 million improvement year-on-year. And that is based on the fact that internationally, we are expanding quite a bit. Tony mentioned some of the awards we’ve seen recently, but also energy transition is going to contribute to that number. So all in all, we think that we’re going to beat last year’s $915 million and the range that we can offer at this point. And again, take these numbers with a grain of salt. The uncertainty in the US is still high.

So we don’t really have fantastic visibility given the shortness of the contracts that we have today and that’s a trend for the whole market. But we think $920 million to $930 million is an EBITDA range that we’ll be comfortable with. And then if you look at the CapEx, interest expense is going to be about $180 million. Our cash tax about $50 million. That takes you somewhere into $100 million plus for the company as a whole. But in that number we have a negative 60 for SANAD, right? So we’re looking to about $160 million plus outside of SANAD for the company as a whole for those numbers alone. Then we expect working capital to provide tailwinds to our free cash flow this year. And of course, I haven’t mentioned the prefunding that we get on our CapEx as well that is paid in 2024.

So, if I were to put a number out there, I would say that our free cash flow for the company as a whole will be somewhere between $100 million and $200 million in 2024. Now keep in mind that we do have some $60 million that are going to be consumed in Saudi Arabia in SANAD. So outside of SANAD that number would be somewhere between $160 million and $260 million. So that’s the range of free cash flow that we would have available to bring down our debt in 2024. Does that answer your question, Dan?

Dan Kutz: It does. And I think it probably answered a lot of potential subsequent questions as well. So thanks for the super helpful color there. Maybe just a question on international contracts rolling. And just I’m trying to think through outside of SANAD and outside of the idle rigs that you’re redeploying for the rest of the international fleet that’s working right now. I’m basically driving at — that is 2024 or some year in the future a year where a big percentage of those rigs roll and would have the opportunity to kind of mark to leading edge in those international markets. Are there years that you call out as being I guess significantly above or below what would be like a normal contract roll? Just for argument’s sake, the average international contract is four years then 25% of the rigs would roll a year. Would you point to this year or any of the coming years as being above or below what the normal contract roll periods would be?

Tony Petrello: Looking forward for the next year, we’re looking about 20%. Actually the rigs are rolling right now. And I think the good news is with that number that given the market and given the amount of tenders out there, I think in terms of repricing, it does offer the prospect of maybe moving up leading-edge pricing because all these contracts do require capital and all the capital is going to be at market prices and some of these projects are significant amounts of capital. So I think the whole sector is actually being pushed internationally up to market pricing and that’s good for us. So that — but right now that would be a number I would refer to about up to reprice about 20% of the fleet, yeah.