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spk01: Good day, and welcome to Neighbors Industries' fourth quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star, then one on a touch-tone phone. To withdraw your question, press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to William Conroy. Please go ahead.
spk03: Good afternoon, everyone. Thank you for joining Naver's fourth quarter 2020 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 Naver's 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 neighbors.com. Instructions for the replay of this call are posted on the website as well. With us today, in addition to Tony, William, and myself, are Ziggy Meissner, president of our global drilling organization, and 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 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 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 measure. With that, I'll turn the call over to Tony for his remarks.
spk02: Good afternoon. Thank you for joining us as we review our results for the fourth quarter of 2020. Before I begin, I would like to express our thoughts and concern for the members of our community who were affected by the severe weather and the related power and water outages. Our rig operations in Texas were essentially unaffected. Turning to our results, I will begin with overview comments. Then I will follow with a discussion of the markets and highlights from the quarter. William will discuss our financial results. I will make some concluding remarks before opening up for your questions. First of all, as we close the books on 2020, I want to recognize the entire neighbors team for its outstanding performance in these extraordinary circumstances. Our company staff confronted the impacts of COVID and the depressed drilling market head on with perseverance and ingenuity. Those efforts across all of our segments and functional areas reinforced our leadership in our markets. At the same time, we managed to improve our financial strength. We are emerging from the pandemic as a stronger company. Neighbors is well positioned to capitalize on the upturn. Our financial discipline paid off in 2020. For the full year, we reduced overhead spending by 24%. This effort began in the second quarter. Our run rate in the fourth quarter represents a nearly 27% drop over the 2019 quarterly average. We also made further progress on our twin priorities, namely generate free cash flow and reduce net debt. We began the year at just under $2.9 billion in net debt. We deleveraged by nearly $400 million, fueled in part by free cash flow generation of $184 million. We ended 2020 with net debt less than $2.5 billion. We achieved this in the face of very difficult market conditions. Our results demonstrate the earnings power and resiliency of our unique portfolio of premium assets with geographical diversification. Notwithstanding the most adverse industry and macro conditions in decades, we maintained our position as the preferred drilling contractor and reset our cost structure. Our operational strength has supported our financial performance. Outside of North America, we remain the largest and most profitable land drilling contractor. And in the lower 48, we continue to deliver the highest daily gross margins among our peers. Based on the strength of our performance drilling offerings and our digital infrastructure, we increase the penetration of innovative drilling contracts. These contracts generate incremental margin based on value sharing. In the fourth quarter, the combined gross margin from our lower 48 drilling rigs and our U.S. drilling solutions significantly exceeded those of our peers. Our investments in performance, technology, safety, and importantly, human capital and sustainability are driving this success. We are positioned well for continued growth. I am looking forward to reporting further progress in 2021. Next, I would like to spend a few moments on the macro environment. After briefly testing the upper 30s in late October, the price of near-month WTI increased by 35% through the end of the year. Since the beginning of 2021, the price has risen further. Recently, WTI was trading above $61. Brent, which is also important to our global client base, made a similar move. It was recently priced above $64. Global oil demand continued to recover in the fourth quarter. The EIA reports consumption increased by more than 2% versus the third quarter. In part, this contributed to a global inventory draw of over 200 million barrels. In early January, the OPEC Plus Group agreed to keep its production essentially flat. That announcement was followed almost immediately by Saudi Arabia's reported reduction in output. The resulting higher prices which I detailed earlier, are generally supportive of increased oil field activity across all markets. Comparing the fourth quarter and third quarter averages, the Baker Hughes lower 48 land rig count increased by 23%. Our own working rig count increased by a similar percentage as we edit rigs with several customers. These additions more than offset the reduction of our rigs stacked on rates. From the beginning of the fourth quarter through the end, the end-risk lower 48 rig count increased by nearly 30%. The growth rate among larger clients was approximately equal to the growth in the smaller operators. It should be noted that more than half of the increase among the larger operators was driven by a single client, and most of that client increase was the reactivation of just one drilling contractor's rigs, which were stacked on rate. Once again, we surveyed the largest lower 48 clients. This group accounts for approximately 35% of the working rate count. Our review of these clients shows a modest pickup in activity planned for the balance of 2021. It is the smaller and medium-sized operators which appear more responsive to the recent strength in commodity prices. In our international markets, we have recently started to see demand increase in selective geographies as measured by the number of active rates. This trend extends across major markets in Latin America and in Saudi Arabia. To summarize our view of the markets, global oil demand continues to rebound from the pandemic low. Oil inventories, which expanded considerably in early 2020, are dropping. The resulting increase in commodity prices has improved operator economics. We see their response in the recent growth in rig count. Overall, assuming the worst of the pandemic is behind us, the market environment is poised to support higher levels of activity. Now I will comment on our fourth quarter results. Total adjusted EBITDA was $108 million in the quarter. These results reflect activity which was somewhat better than anticipated. Our lower 48 operation and our international and drilling solution segments exceeded our expectations. With this adjusted EBITDA performance, we generated approximately $66 million in free cash flow after funding $41 million in capital spending. Our global rig count for the fourth quarter was essentially stable at 131 rigs. Growth in the lower 48 in Canada largely offset the decline in international. In our lower 48 business, our reported daily rig margin of $9,541 exceeded our guidance and remained in line with the third quarter. For the international segment, adjusted EBITDA for the quarter was higher than our expectations. Daily margin outperformed, driven mainly by strong operational performance in Saudi Arabia and by revenue from early terminations. These items more than offset the decline in rig count. Our industry-leading fleet capabilities, outstanding operational and safety performance, and expense and capex discipline all drove this accomplishment. Next, I would like to mention some specific highlights of the quarter. During the fourth quarter, we completed a series of debt exchange transactions. In the aggregate, these reduced our outstanding debt obligations by $284 million. Adjusted EBITDA in our drilling solution segment increased sequentially by 44%. The adjusted EBITDA margin in NDS widened to 32% in the fourth quarter. This compares very favorably to 24% margins in the prior quarter. In NDS, we increased the penetration of our rig cloud platform for digital operations. In the fourth quarter, rig cloud was running on nearly all of our working rigs in the lower 48. We are now in the early stage of growing on third-party rigs. We saw continued growth in our SmartSlide and SmartNav apps. SmartSlide is our directional steering control system, which automates slide drilling. SmartNav is our automated directional guidance system. Our cumulative footage drilled for these apps working together increased by 11% in the fourth quarter. Our cumulative well count was up by 12%. Our portfolio of automation applications in NDS is second to none in terms of capabilities. We developed these products around our Smart ROS, or Rig Operating System. Smart ROS was conceived from the ground up to collaborate with customer workflows while optimizing rig operations. We believe we now have the broadest, most advanced, and most profitable automation solutions in the market today. Our focus on ESG is increasingly reflected in our ISS ESG quality scores. In the fourth quarter, Our ISS environmental score improved significantly, and the ISS social score improved again. We continue to reinforce our commitment to ESG, and I look forward to reporting on that progress. More recently, neighbors have signed on to the Science-Based Targets Initiative. We have committed to setting science-based GHG emissions targets. We are the only land drilling contractor to do so. The use of alternative power on our rigs is an excellent illustration of our efforts in ESG. I will cover this topic in more detail in a few moments. In addition to these highlights, I would like to discuss one of our smart apps in particular. Back in the second quarter of 2020, we released an improved version of Smart Drill, our automated drilling software. Smart Drill digitizes an operator's well plan with optimal task sequences as defined with the operator. Essentially, it executes virtually every task that a driller performs from the chair, and it compiles automated sequences of those tasks. It is the only automated drilling solution in the market that enables ad hoc changes to the sequence. By digitizing best practices, Smart Drill improves consistency and reduces the potential for human error. For example, we are able to minimize the risk of damage and reduce lost time. Tangible benefits of Smart Drill include an increase in single-run laterals, a decrease in unplanned trips, and improved and consistent connection times. We are excited about Smart Drill. Our pricing models for this app reflect the measurable value that it generates for customers. I look forward to reporting on its progress and on other apps in our portfolio in the future. I will also make some comments on neighbors' positioning in the energy transition. Our plan, as we embark on the transition, consists of two parallel tracks. Most immediately, we are examining alternatives to improve neighbors' own carbon footprint. We actually started down this track several years ago when we introduced the Fuel Tool. Fuel Tool is a system that monitors and optimizes rig engine usage. It was targeted to reduce fuel consumption. Now we are evaluating technologies aimed at carbon capture, emissions minimization, and power management. We have an inventory of 40 dual-fuel packages to satisfy market needs in the lower 48. Approximately 15 percent of our operating rigs in the lower 48 are currently running on either high-line power or bi-fuel. In addition, we have introduced our advanced energy management system on one of our rigs. This system yields a significant improvement in the rig's carbon footprint. We are also running 12 rigs in Canada with bi-fuel capability. Globally, I expect use of these technologies to increase in the future. The parallel track includes opportunities which are relevant beyond our own rig fleet. These prospects could include other drillers' rigs or scale beyond the traditional markets in the oil field. Our energy transition initiatives are still in the early stages. We expect to make tangible progress going forward and look forward to reporting further on this area. Before turning the call over to William, I will discuss our view of the market in some more detail. The lower 48 industry has hit 151 rigs, or 67%, since its low in August. Looking forward, we see the current commodity price environment supporting increased activity as the year progresses. We expect our own rig count to increase each quarter throughout the year. We are also starting to see some modest improvements in spot day rates. In our international markets, since the third quarter, we have seen our own activity increase further in Latin America. Our working rig count in the region rose more than 50% during the quarter. Accordingly, versus the fourth quarter of 2019, pre-pandemic, we have gained significant market share in both Argentina and Colombia. In addition, several customers in Latin America with temporary COVID pricing adjustments have returned to full day rates. Notwithstanding the macro challenges, the operation in Saudi Arabia performed exceedingly well. In addition, the expected rig restarts in the Kingdom have begun. Since the beginning of the year, eight of the auto rigs have returned to work. Our working rig count in Saudi Arabia now stands at 38. This leaves five expected to return over the next 12 months. These reactivations are consistent with the expectations we laid out last quarter. I would like to take a moment here to express our appreciation to our SanEd CEO and the members of the SanEd board, especially the directors from Saudi Aramco. The Aramco board members have been tireless in supporting the management team in delivering best-in-class operational performance. That concludes my remarks on our fourth quarter results, highlights, and the market. I wish to reiterate that our primary concern remains the health and well-being of the extended neighbors community. On behalf of the company, we extend our heartfelt thoughts to those affected by the pandemic. Now, let me turn the call over to William, who will discuss our financial results and guidance.
spk05: Thank you, Tony, and good afternoon, everyone. The net loss from continuing operations of $112 million in the fourth quarter represented a loss of $16.46 per share. The fourth quarter included $162 million of pre-tax gains from debt exchanges and repurchases, partially upset by charges of $71 million, mainly from asset impermanence, for a net after-tax gain of $52 million. Fourth quarter results compared to a loss of $161 million, or $23.42 per share in the third quarter. The third quarter included net after-tax gains of $6 million related to gains from debt repurchases, asset impairments, and severance costs. Revenue from operations for the fourth quarter was $443 million, a sequential gain of 1%. Revenue improved in most segments, with only international and RICTEC partially upsetting those increases. In the lower 48, despite some deterioration in the average pricing for a fleet, drilling revenue of $103 million increased by 6.9 million, or 7%, as our rig count improved by 11%. Lower 48 rig count at 53.6 was subsequently by 5.4 rigs, which is 2.4 rigs more than we had anticipated. Daily rig revenue in the lower 48 at 20,950 decreased by about $800 as we continued to sign contracts at current market rates that are lower than the average for a fleet. In aggregate, revenue in our other U.S. markets decreased by $3 million, reflecting a reduction in our offshore activity as one of our rigs finalized its contract in the prior quarter. Fourth quarter revenue fell with the lower rig count, as well as with the absence of the demobilization revenue we invoiced in the third quarter. International drilling revenue at $245 million, decreased by 3.3 million, or 1%. This decrease was primarily related to declines in activity across several markets, as rig count fell by almost nine rigs, or 12%. This rig count reduction was higher than anticipated. Saudi rig count decreased by five rigs, two more than expected, due to temporary suspensions as Saudi Aramco adjusted its drilling activity towards the end of the year. Kazakhstan and Colombia each had a one-rig termination, both of which we did not anticipate. In addition, Algeria and Kuwait had contracts expiring late in the third quarter that were not renewed. The softer rig count was offset by approximately $4 million in revenue from early terminations and from the restoration of full-day rates for customers with negotiated COVID rates. Canada drilling revenue was $14.8 million, an increase of 4.1 million, or 38%. Rig count increased by 2.3 rigs on the usual seasonal ramp-up in activity. The quarter also benefited from a $700 increase in revenue per day. Neighbors drilling solutions revenue of $32 million, up 2.7 million, or 9%, primarily reflected strong increases in our high-margin performance drilling offerings, as well as our rig cloud installations. During the quarter, we continued to increase the penetration of these services with neighbors and third-party rigs, while also benefiting from the higher Lowell 48 rig count. Rig technology's revenue decreased by $1.1 million, or 4%, as several clients delayed deliveries beyond the end of the year. Total adjusted EBITDA for the quarter was $108 million compared to $114 million in the third quarter. The decrease was driven by a $7.4 million reduction in our international segment and a more modest reduction in rig technologies. These were partially compensated by improvements in NDS as well as US and Canada drilling. US drilling adjusted EBITDA of $62.2 million was up by 1.6 million or 3.1% sequentially. The lower 48 performance came in better than expected on the stronger rate count and on higher margins. Daily rate margin of $9,541 was about $500 above the high end of our previous guidance and in line with third quarter level. Decreased costs, mainly a reduction of property tax expenses, offset the pricing deterioration we experienced in the fourth quarter. Cost control efforts continue to be a strong focus as we bring rigs back to work. As an example, we have improved our rig stacking and reactivation procedures, and the related costs are significantly better than in the last cycle. For the first quarter, we expect daily rig margins of approximately $8,500, driven mainly by the repricing of renewals as rigs continue to roll off pre-pandemic contracts and by the return to more normal levels of property taxes, with an adverse impact of approximately $600 per day. We forecast a two to three-rig increase for the first quarter of 2021. Our current rig count in the lower 48 is 57 rigs. International adjusted EBITDA decreased by $7.4 million to $64.5 million in the fourth quarter. or 10% sequentially. The lower rig count was somewhat upset by early termination revenue and return to full day rates from several customers. Average international rig count was 62.6, a reduction of 8.7 rigs, or 12%. Daily gross margin for the quarter was $13,500 as compared to $12,700 for the prior quarter. The fourth quarter included approximately $800 per day in early termination revenue. Turning to the first quarter, we expect an international rig count increase of two to three rigs, and several Saudi rigs return to work progressively during the quarter, and for gross margin per day to settle between $12,500 and $13,000 per day. Our current rig count in the international segment is 67 rigs. Canada adjusted EBITDA of $3.5 million, increased by $1.4 million. Rig count at 9.7 rigs was 2.3 higher sequentially. Gross margins per day of 4,633 also increased due to the higher activity level. We expect both rig count and daily margins to improve again in the first quarter by three rigs and $500, respectively. We currently have 14 rigs operating in Canada. Drilling Solutions posted adjusted EBITDA of $10.3 million up from $7.1 million in the third quarter, or 44%. The improvement reflected mainly the higher revenues from performance drilling offerings and rigged cloud infrastructure. In addition, a shift in our US casing running services from manual to integrated materially improved the profitability of that business line. We expect adjusted EBITDA in the first quarter to be in line with a strong fourth quarter. RIG Technologies reported adjusted EBITDA of half a million dollars in the fourth quarter, a decrease of $800,000. The first quarter EBITDA should be similar to the fourth quarter. Now let me review our liquidity and cash generation. Looking back at 2020, it was a challenging year. Nevertheless, we maintain our focus on improving liquidity and leverage, and we made significant headway. The capital and cost discipline actions we announced earlier, including cuts to corporate and operations overhead, salaries, dividends, and capital expenses, were fully executed. These actions were instrumental in helping neighbors deliver $184 million in free cash flow for the full year. In 2020, we reduced overhead spend by 24%. These reductions began in the second quarter and translated into cash savings of approximately $90 million over the last nine months of the year. Our run rate in the fourth quarter represents a nearly 28% reduction over the 2019 quarterly average. The decrease in overhead combined with capex reductions of $170 million and dividend cuts of $7 million translate into total cash savings of approximately $267 million versus our initial plan for 2020. Despite the substantial drop in activity and consequent EBITDA shortfall, neighbors delivered free cash flow almost in line with our initial pre-COVID target. In the fourth quarter, net debt declined by $290 million to $2.49 billion. This reduction was driven by positive free cash flow and by several debt exchanges we completed during the quarter. Free cash flow, defined as net cash from operating activities, less net cash used for investing activities, totaled $66 million. This compares to free cash flow of approximately $9 million in the prior quarter. The fourth quarter included minimal interest payments as compared to semiannual interest payments of approximately $80 million in the third quarter. During the fourth quarter, we experienced a slowdown in collections from a significant number of our customers. While our quarterly free cash flow was affected by some $30 million, we expect this situation to prove temporary. For the first quarter, we anticipate break-even cash flow. Please keep in mind that semiannual interest payments for all our senior notes are paid in the first and third quarters. In addition, the first quarter has an unusually high number of one-time annual payments, such as property taxes and bonus payments to our workforce. These payments and other one-time annual outflows in the first quarter typically amount to about $30 million. Ofsetting these negative impacts on our cash flow, we anticipate a strong recovery in our quarterly collections. We have already experienced an increase in collections during the month of January. During the fourth quarter, we completed a public debt exchange and various private exchanges. These transactions reduced our total debt obligations by $284 million and reduced our near-term maturities. During 2020, we reduced, through repayments, buybacks, or exchanges, near-term notes with maturities in or before 2023 by an aggregate amount of $1.5 billion. Subsequent to year end, we further addressed our capital structure by completing additional debt exchanges and open market purchases of our notes. These transactions, reduced our debt obligations by an additional $22 million. Let me continue with a comment on capital expenses. Capital spending in the fourth quarter was $41 million, compared to $39 million in the prior quarter. For all of 2020, CapEx totaled $190 million, $10 million less than we had planned. We are targeting CapEx of $50 million for the first quarter, and of $200 million for the full year 2021, excluding Saudi new bills for Sanad. At this point, Sanad has been awarded three drilling contracts by Saudi Aramco, and we have issued one purchase order for the first three. We do not expect that any new bills will be delivered in 2021. Nonetheless, capex for Sanad new bills, if any, would be paid out of Sanad funds. The final comment, It is worth mentioning that we determined together with our SANA management team and with our JV partner, Saudi Aramco, that at year-end 2020, SANA held cash balances beyond its future needs. Consequently, a cash payment of roughly $50 million to each partner was approved. This payment was executed in the month of January. With that, I will turn the call back to Tony for his concluding remarks.
spk02: Thank you, William. I will now conclude my remarks this afternoon with the following. As you are aware, NABIRS strategy focuses on three key themes. First, operating premium fit-for-purpose assets in diversified geographies. Second, expanding services at the well site using the RIG as a platform. And finally, using technology to unlock value and drive future growth. This past year's results demonstrate the value of this strategy. With regard to our assets, we continue to produce leading margins in both the lower 48 and international markets. This performance reflects the quality of our assets and the competency of our crews. Our safety record, which has outperformed our competitors, also confirms that our fleet is second to none. In particular, utilization of our innovative pad-optimal PACE X-Rig remained high throughout 2020. Utilization of the X-Rig as well as our other advanced Lower 48 models, has increased steadily since last summer. And in geographies as diverse as the Gulf of Mexico and the Middle East Desert, our rig utilization has held up better than most. We predicted in late 2016 that the drilling industry could not count on an ever-increasing rig count to grow EBITDA. In response, we created NDS. Its mission was to grow by using the rig as a platform. NDS delivers integrated website services in a more efficient manner, which unlocks value for operators and generates growth for us. Today, NDS has one of the most robust and sizable software offerings. Market challenges since 2016 notwithstanding, we have demonstrated that this is a value-creating strategy. Finally, with respect to technology, we have maintained our investment in R&D even throughout the downturns. Those investments have fueled our premium assets and MDS offerings. They yielded the first software for automated directional drilling and fit-for-purpose downhole tools. We strongly believe that the next wave of value will be created through process automation, including robotics and digitization. ESG and efficiency reasons alone will push operators to resolve the red zone management issue and remove employees from the rigged floor. We believe we are uniquely positioned to meet that challenge. We have an unmatched portfolio of assets, technology, geographic mix, and people that positions us well for the future. We remain convinced that our portfolio will deliver tangible value to clients and ultimately back to neighbor shareholders. That concludes my remarks this afternoon. Thank you for your time and attention. With that, we will take your questions.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question comes from Connor Lina with Morgan Stanley. Please go ahead.
spk04: Yeah, thanks. I was interested to see the cash payment out of Sanat. I think there's historically been some concern about your ability to extract cash from that. So could you help us understand, you know, should we think of this as sort of one time and maybe there's not going to be more of these as you start to embark on the new bill program? Or what sort of generally you were thinking about the ability to continue to pull some cash out of that asset?
spk05: So, Connor, thank you for the question. I think there are We have not been concerned at all about the distribution of cash. I don't know where that's coming from. We've been very clear that excess cash is to be distributed, and we have a mechanism to forecast and decide whether we have excess cash or not. And the only reason this distribution was made is because of that process. And by the way, that was driven by our partner, Saudi Aramco. We did not ask for it. We didn't really need the cash right now. But Saudi Aramco obviously tracks that very closely and they felt a payment of $100 million, $50 million to each partner was appropriate. I think that demonstrates they're obviously appetite for making sure that SANA doesn't really sit on cash it doesn't need. Our forecast, and I've been clear on that before, is that we weren't expecting to get any cash from SANA before 2023, 2024 in that timeframe because we're going to be building a significant amount of rigs which are going to be funded from SANA cash holdings and their own cash flow. We don't expect to fund any of that. So that hasn't changed. I don't believe we will have significant distributions before 2023, but I'll put a caveat on that. That's unless Saudi Aramco slows down the pace of awards of new rigs to be constructed in Kingdom. So if that happens, then we would have excess cash that would need to be distributed before that timeframe. Does that answer your question, Conor?
spk04: Yeah, I think so. And just to be clear, that was a market level concern, not your concern I was referring to. Certainly some pushback.
spk05: I know, I know.
spk04: Yeah, yeah. So I guess the question then is if you could just update us on the sort of thinking. I mean, I guess I think you said you had three awards for contracts. Can you remind me, was it five per year, Cadence, or two? 10 per year cadence that there was supposed to be? And then basically the question is, is three per year maybe a better baseline expectation, or do you think that's not indicative of anything longer term?
spk02: Yeah, well, I think, yeah, the cadence is pro forma five per year, but obviously Aramco has to review its own plans and its own budget allocations, and it's really up to Aramco to figure out how they want to optimize it. As William mentioned, there's three have been indicated. Only one has made it to a PO so far, but the idea is to do five pro forma. That was the original contemplation. The other thing I'd like to mention here is these awards are a high-class problem in the sense that these are the best use of capital in the world in our sector. I mean, all these contracts are against full payout contracts. I think we've indicated they're six-year contracts with a four-year renewal. and in the most important development market in the world, and they're all long-term, and with a great customer who supports the operation. So I think, and the size of these things are such that it's very meaningful, and therefore, if and when Aramco decides to do it, we're fully supportive of it, and we're happy to be part of the team. And our mission is to help them execute this well and help them build their own programs. That's our role.
spk04: Got it. That's helpful. Maybe just one more here. There have been some sort of conflicting reports around offshore activity broadly in the Middle East, maybe being slow or some suspensions out there. It seems like you have a lot of confidence that your activity is going to be trending higher. I guess, can you confirm that? And then just one other question, which is, you know, is there any sort of major pricing reset we need to think about either on the upside or the downside as we think about sort of your major Middle Eastern markets?
spk02: Well, with respect to Aramco in particular, there's the contract is there, you know, the pricing is actually determined by the contract. So, as I said, these contracts are full payout contracts. So, we don't really have that kind of concern. What we I think the concern will be Ramco has to decide whether these new bills make sense in the overall plans. And if they decide to go, the economics are already agreed between the parties. So with respect to that, I don't really think that's an issue.
spk05: Let me make a comment on that also, Connor, just to add on what Tony said. We've already renegotiated and reset prices for all of our rigs. going forward, and that was already embedded in the fourth quarter. So we don't expect any more resets. In fact, we have already brought back eight of the rigs that were suspended already today, and we expect another five to come back. So we're at 38 right now. We expect to get back to 43. Three more of those rigs are coming in the second half, and then we have two more that are coming in January. Aramco provides us that information on a regular basis. They provided that information at year-end 2020, and they basically met those internal plans that they had to bring back a rig. We understand, yes, that Aramco has tweaked some of their drilling activity, and that affected us a little bit in the fourth quarter, and that they're working on the offshore production and drilling activity. But for the land activity, and particularly Sanad, we have been exactly treated like Aramco said they would.
spk04: Great. Appreciate all the color. Thank you.
spk01: The next question comes from Carl Blunden with Goldman Sachs. Please go ahead.
spk00: Hi, good afternoon. Thanks for the time. You've outlined a lot of good work that you've done on your balance sheet over the last year or so. I think when folks take a look at it now and you have a little bit of that increase in liquidity available to you from Synod, you do have a clearer runway ahead of you. When you think about the revolver, I'd be interested in what kind of strategies you can use to address that revolver draw and ultimately extend that and give yourself more runway.
spk05: Connor, yes, you basically hit it on the nail. I do think our liquidity is not really an issue at this point. We've done a lot to address that. As I mentioned before, we've cut our near-term maturities in our nodes by a billion and a half. And we certainly only have about $86 million worth of maturities in 2021. And the next year is 2023, where we have still about $150 million worth of maturity remaining on our notes for that year. So liquidity itself is quite manageable, but there's a couple of things that we need to look at. One of them is our total leverage. And of course, we are still going to be working hard and bringing leverage down, basically, mostly through internal cash generation. But if we can find other ways to improve our balance sheet, we will. Part of the issue we have to look at as well is obviously the revolver, which expires in 2023. Good practices, best practices means that we are going to be working on that in the first half of 2022 to get an extension on a new revolver with a five-year term. That is a strategy, obviously, before we get to that period, we will have improved our leverage very materially in terms of net debt to EBITDA as you as you may know we finished a year at 4.4 times if you If you look at Schlumberger and Halliburton, we're in the same range. Obviously, I'm not comparing neighbors to those two powerhouses, but that tells you that the leverage is, on a trading basis, quite good. And we plan to bring this number down quite materially. Tony and I, our objectives, which we have committed to, had been that we would bring it down to the low $2 billion range in terms of net debt. We think that we're almost there, so we think that's no longer appropriate. The environment has changed somewhat. in terms of cost of capital and so forth. So we think that number is now clearly now a bit high. We want to get it well below the $2 billion mark. So we think that's achievable over the next two to three years. So again, the plan is in the early 2021 to potentially issue new debt. Remember, we do have available still $230 million of the senior priority guaranteed notes that we could issue. And those who are trading today are in the 8% range. We also have $500 million of the 2026-2028 junior guaranteed level, $500 million of those. So those two pockets would allow us to bring down the revolving credit facility. And based on the strength of better leverage and improving our maturity profile, we think we can negotiate favorable terms for a revolver in 2022. Thanks for the detail. Appreciate it.
spk01: The next question comes from Chris Voya with Wells Fargo. Please go ahead.
spk03: Hi, thanks. Maybe in the lower 48, I think you have about 110 super spec rigs. Your market share has lagged a bit in the last couple of quarters or certainly the guidance for 1Q. Just curious if that's driven by higher pricing discipline versus peers and whether you expect that to flip as we go through the rest of 2021. I know you mentioned expecting the rig count to grow throughout the year. So just curious how to think about market share for you guys as the year progresses.
spk02: Yeah, obviously our priority is not share growth, but profitable growth. And I think I would note that, you know, our daily margins and our revenue per rig are higher than our peers. And if you add MDS content, it's higher still. So what we're interested in is profitable growth and showing that discipline. I would note that the market in general has been disciplined so far, and there's good signs of a deliberate growth pattern, as we indicated in the prepared remarks. The Tier 1 kind of customers are looking at single-digit growth. As far as we can tell, currently single-digit growth right now for the remainder of the year. Obviously, what can happen given the commodity price moves is there's still budget cycle status openings and reviews given the commodity price, but that's where we see things. Obviously, in the Tier 2 and Tier 3, the activity is more, and so there are opportunities for us to expand. We are sitting on 50 more rigs, which I think are the best, or second to none, I should say, in the marketplace, and we want to deploy them, but we want to do it on a deliberate fashion to make sure that the margins on the air cover working capital, the expense of bringing it out, all that kind of good stuff. And that's our mission. And so far, we've done a pretty good job, I think, coming out of the downturn, adding the reach we have. We're at 57 today. We'll exit the quarter at 60. And we'll take it from there in terms of seeing how fast we ramp up.
spk05: That's also a good question. I think until third quarter, though, we outperformed. In the last two quarters, we saw obviously our peers getting a bit more aggressive given the ground they lost up to the third quarter. So Tony mentioned that we want to be profitable. So how do we look at this? We look at this that if we can't get a pricing for a rig, that gives us a margin that pays within the year for the cost to bring the rigs back and the working capital, then we're not gonna do it. So basically we are being selective and we're focusing more on clients that want to add incremental revenue on the solution side that are willing to do performance contracts So, we're not chasing pricing or just any rig out there or any customer. We are focusing on trying to generate cash in the next 12 months with a contract. Anything that doesn't do that, we just don't go for it.
spk03: Okay, that makes sense and good to see the discipline. As you mentioned, the guidance for $8,500 a day. Just curious if you could give a little color on maybe the mix of pre-COVID rigs in that. how Leading Edge now compares to that guidance in 1Q if there's going to be a further decline expected in 2Q and maybe just some sense of the magnitude.
spk02: Sure. So obviously our average day rate this last quarter was about $21,000. I think at the last call we said that we're seeing rates in the high teens. I think the good news is, given what I just said about rig count, is we are starting to see the trend of crossing the $20,000 threshold in terms of pricing. So the gap for us between the average current rig count and the spot price is actually narrowing pretty dramatically. And I'll leave it to you to figure out how soon those things can cross given the progression as the rig count goes forward. Obviously, there's a bunch of estimates out there where rig counts can end up at the end of the year. Anything north of 425, 450, there'll be pretty dramatic price escalation, I think, there. In the meantime, of course, we are benefiting from the backlog of current contracts we do have, which have higher margins in them. So to the extent we continue to add rigs at even this spot rate, there is going to be more margin degradation a bit. So that will continue.
spk05: And to add to Tony, the 21,000 does include about $1,000 of reimbursable revenue, which doesn't contribute to the margin. If you look at high teens, which we're seeing anywhere from $17,000 to $19,000 per day, that means $18,000 to $20,000 per day in terms of revenue per day. And that comparison is only $1,000 that Tony mentioned earlier. So we are converging, and we expect to see, we could even see convergence and inflection sometime this year in terms of revenue per day.
spk03: Great. Thank you very much.
spk01: As a reminder, if you have a question, please press star then 1 to be joined into the queue. The next question comes from Sean Mecham with JP Morgan. Please go ahead.
spk06: Thanks. Hey, guys. Hey, Sean. So maybe first just to follow on that discussion, but thinking about potential sensitivity in terms of activity in the back half of the year. In the lower 48, I think one of the big open questions is how your customers will react later this year if oil prices can hold near current levels. So what's your expectation in terms of potential upside to rig activity in the back half? And do you expect your customers to remain disciplined, or do you expect them to – react to the relatively strong oil prices much stronger than what's in their price decks. And if you could distinguish that between the majors, large and small publics, and private E&Ps, I think that would be helpful as well.
spk02: So if I knew the answer to that question accurately, I'll play the futures market. I'll quit my job. I mean, yeah. Like I said, the party line thus far from the tier one customers is to abide by the commitments of people making a free cash flow and therefore The census that we've taken, for whatever value you want to put on it, has been today to only see deliberate growth in the single digits. And that obviously does not take into account a big change in the commodity price. But we haven't yet seen people, we haven't seen that mirror crack yet, Sean. I'm not going to say it won't crack, and history has that it does crack, but that's in the lexicon of language today. With respect to second and tier three operatives, second and third tier operators, yes, they are being more aggressive, and there is the prospect of more activity in that group of people because they respond up and down, as you know, quite much faster. So that's the way I would look at it.
spk06: Okay. I think that's all fair. And then maybe a little more on free cash flow. Last quarter you guided 21 free cash, if I recall correctly, to be in the tens of millions. which I guess could be interpreted anywhere between $10 million and $99 million. So in William's comments earlier, he noted the slip of some collections in 4Q. Sounds like those are being recouped in the first quarter. Some other moving parts in 1Q, so let's say neutral on cash. But how do we see free cash progressing in the balance of the quarters? And if you have an updated guide on the full year for 21, I think that would be useful.
spk05: So I'll give you an updated guide. I mean, I think – I'm comfortable doing that based on the strength of our performance, Sean. I'm usually our company's harshest critic, even harsher than you, if you believe that. But I mean, at least I'm accused of that. But this quarter and this year, I really have very little things to criticize about. I think we had a great quarter. Our operations guys really delivered. I'm much more optimistic on NDS and our performance offerings and our total cash flow generation actually. And by the way, this is the last time I will say this to the team that's sitting around here because obviously it's not my job to be cheerleading. But based on that performance and what I'm seeing and what I'm seeing already in the first quarter, I think I'm more confident of our free cash flow this year. Obviously the 30 million from last year helps because we believe that will be collected this year and as the year progresses and our clients are a little bit less scrambling for cash themselves, we feel this year end will not be as impactful negatively as this one was. A lot of our NOCs were sitting on their hands at the end of the year and not affecting the payments that were due, right? So I think I said before tens of millions. I think I'm comfortable saying now between $50 and $100 million. So there you go. I narrowed the forecast.
spk06: Very good. I appreciate that. Thanks, William. Thanks, Jim.
spk01: This concludes our question and answer session. I would now like to turn the conference back over to William Conroy for any closing remarks.
spk03: Thank you, Tom. We'll wrap up the call there. Thank you ladies and gentlemen for joining us this afternoon. If you have any questions, please give us a call or email us.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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