Kurt Hallead: Hey, good morning, everybody.
Clay Williams: Hi, Kurt.
Jose Bayardo: Good morning, Kurt.
Kurt Hallead: Interesting time as always, right?
Clay Williams: No doubt.
Kurt Hallead: Yes. So look, I — the — your commentary around AI and the growth and utilization of that across multiple functions really definitely caught my attention, and I know that still kind of early stages. But maybe we’ve been doing this a long time, Clay. Is the adoption rate — what’s your sense on the adoption rate as we go forward? Is the industry on board with this and you think they’re going to accelerate it? And then just couple that with the value proposition as you see it evolving.
Clay Williams: Yes, good question, Kurt, and I appreciate it. I think the outlook here is really good. It’s early days, I’ll stress, a lot of these are new products being introduced, but the attention they’re getting is good. In fairness, it’s a crowded space. There’s a lot of people aiming at stuff like this. And it’s sort of sometimes challenging to sort of rise above the competitive field. I think in the products that we’ve introduced, though, we’ve got really good traction because we are demonstrating value. A number of these, we’ve developed with customer engineers, oil and gas company engineers that have been seconded to us for a period of time to sit by our developer and say, hey, add this, subtract this. This is really what I want.
So it’s a lot of a lot of dialogue with our customers around what do you really want and need and how can we add value? And I think that’s helped us land on products that really do add a lot of value. The other thing to think about here is the fact that a lot of these digital products, like, for instance, our NOVOS operating system, which is now operating on something like 125 rigs globally, both land and offshore, it really provides kind of a digital foundation for follow-on sales. And rig is a good example. Both land and offshore, our NOVOS operating system facilitates our new ATOM RTX rig automation package that we’re now — is working on a rig in South America offshore. We will — we’ve got a customer that will be spudding this quarter onshore.
We’ve got another one that’s using it at their training facility. And it really, I think, is going to be very transformative, a lot of interest in this technology. Not just by drilling contractors, by the operators who have seen it who say, wow, this is something that’s dramatically better. And so this digital family of products that we’re introducing aren’t being launched in isolation. They really sort of tie in to our more traditional product lines. And I think they facilitate future sales in those areas. And so there’s a lot of pull-through that comes with them as well. But on the whole, I’d say, very proud of what our team has been able to accomplish very robust computing capabilities on the edge. And by the way, edge in the oilfield is a lot tougher than a lot of other edges around the industrial space because rigs work in really remote areas and spotty communications are kind of the norm.
They always have been throughout my career. And so we’ve done a lot to address that and bring the power of big data analytics, artificial intelligence algorithms to oilfield operations. And so I think a lot more to come.
Kurt Hallead: Just a follow-up just in the context of the pause that the Saudis are putting on the expansion of the Safinaya and Manifa fields. Do you think the — what do you think is there more likely to do? Do you think you’re going to pause their new build program? Do you think they’re just going to move forward with the new build program and let some of these other rigs roll off contract? What’s your instinct telling you?
Clay Williams: Well, there’s two new build programs. One is the land rig program, which is — should be unaffected by that. They work in the offshore. And we’re continuing to execute those rigs very well and understand they’re operating really well. And the other is offshore. And a few years ago, they announced their plans to build a total of 20 jack-ups for the Kingdom. Since then, they’ve been constructing a shipyard in Ras Al-Khair, next door to our facility. And I think the contracting there has been somewhat gated by the progress on that shipyard to execute future work there. But for right now, I’d say — the short answer to your question, I don’t know. We’re still optimistic they’re going to move forward with their plans, but I’m going to, again, let Aramco speak for Aramco.
Kurt Hallead: Of course, yes. Got it. Hey, thanks. I appreciate the insight.
Clay Williams: You bet. Thank you.
Operator: Thank you. And our last question is going to come from the line of Stephen Gengaro with Stifel. Your line is open, please go ahead.
Stephen Gengaro: Thanks. Good morning everybody.
Clay Williams: Hi Stephen.
Stephen Gengaro: So, the re-segmentation chart, Jose, do I need a protractor? Like is this to scale?
Jose Bayardo: You might need a magnifying glass for the table. But no, the chart is not — is obviously not to scale. But just wanted to make it really clear as to which business units went into which segment. So, hopefully, that’s a little bit helpful. And then with the tables, we — I wanted to give you guys plenty of data to tune up your model. So, five years of pro forma information on the second page of that, if you haven’t yet gone through that.
Stephen Gengaro: Great. It’s very helpful. So, when we think about the free cash flow expectations and then just kind of combine that with sort of return on capital plans, should we think — I guess, two parts to the question, one on working capital. Should we think about that drifting kind of back towards historical norms? And then how do you think about kind of what’s going to drive the decision when it’s maybe time to accelerate a return of capital program?
Jose Bayardo: Yes. So, from a free cash flow and working capital perspective, first of all, we were very pleased to finally turn the corner in Q4 and generate really healthy free cash flow. I think that’s reflective of the potential that we have in 2024 and beyond. Historically, this company has been low capital intensity business, capitalizing on a high capital intensity industry, which tends to lead to very strong free cash flow. And that’s our expectations going forward, notwithstanding Q1, which is, as you know, is almost always a good cash consumption quarter due to the seasonality of the payments that really impacts us in Q1. So, the trajectory of the cash flow, use of cash in Q1, and then steady improvement in terms of free cash flow generation through the remaining three quarters of the year, due in part to the improvement in profitability that we’ve had to-date, more of that expected into 2024 and beyond.
And then also continued progression in terms of normalizing our working capital. So, we finished the year at roughly 29% working capital as a percentage of revenue run rate. That will take a step back in the first quarter due to what we just talked about, and then we should get back to steady improvement. And my expectation is the normalization process will take some time. But really sort of as we get into the — to the end of 2024, I would expect our working capital as a percentage of revenue run rate to improve, call it, 100 to 200 basis points versus where we are right now. And so put all that together, it presents a pretty good picture for free cash flow in 2024. And as we talked about in the prepared commentary, we’re optimistic about increasing our return of capital as we get further into 2024.
