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spk06: Good day and welcome to the Q2 2021 Neighbors Industries LTD 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, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to William Conroy, Vice President of Corporate Development and Investor Relations. Please go ahead.
spk03: Good morning, everyone. Thank you for joining Naver's second quarter 2021 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 Navers 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 Navers.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 Siggy 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 either by 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 measures. With that, I will turn the call over to Tony to begin.
spk05: Good morning. Thank you for joining us as we review our results for the second quarter of 2021. This morning, I will begin with our overview comments. Then I will follow with highlights for the quarter and a discussion of the markets. William will discuss our financial results I will make some concluding remarks before opening up for your questions. Let me start by saying our operations performed quite well in the second quarter. We also made significant progress across multiple strategic initiatives. Adjusted EBITDA in the second quarter topped $117 million. Execution across all of our segments was strong. Our global rig count for the second quarter increased by seven rigs driven by growth in the U.S. drilling, and international segments. Once again, we made progress on our priorities to generate free cash flow and reduce net debt. Free cash flow in the quarter approached $70 million after funding capex of $77 million. These results for the second quarter exceeded the expectations which we laid out on our last conference call. Net debt improved by $58 million in the second quarter, driven by our free cash flow. I am very pleased with our financial performance through the first half of 2021. I am looking forward to reporting further progress over the balance of the year. Next, I would like to highlight five key focus areas as you think about neighbors. First, our leading daily margin performance in the lower 48. Second, the upturn in our international business. Third, the improving outlook for our technology and innovation. Fourth, progress on our commitment to the lever, and fifth, our progress in ESG and the energy transition. Let me start with lower 48 drilling margins. The margin performance in this core business remains strong. Daily margin once again exceeded the $7,000 mark. Clients realized value from our leading fleet capabilities and field performance. We maintained our disciplined approach to pricing as we deployed rates. This unique combination is responsible for these robust results. Another way to look at our performance is to combine our drilling margin with the margin generated by NDS in the lower 48. That increment amounts to approximately $1,900 per day. So we're generating almost $9,000 per rig per day on this basis. As you compare results and business models from our peers across the industry, we think it's important to consider this point. Next, our international business. Our financial results benefit from our historic pricing discipline and our performance in the field. Coming out of the pandemic, significant improvements have occurred in Argentina, Colombia, and Russia. These markets collectively account for approximately 25% of our international rig count. Saudi Arabia has seen an upturn in activity. We currently have 38 rigs working in the kingdom. There's potential to add a few additional rigs before the end of the year. In addition, our Santa Joy Venture has been awarded five new bill rigs to date. These five units are expected to be deployed at approximately one per quarter starting in Q1 of 2022. They are estimated to contribute approximately annualized EBITDA exceeding $50 million. As you know, there is a long-term plan by Saudi Aramco to add successive generations of five rigs per year for an additional 45 rigs. If Saudi Aramco proceeds with this plan, we expect a similar EBITDA contribution in each successive year. These new bill rigs and their economics were one of the main attractions for our participation in the joint venture. Next, technology and innovation. Our technology pipeline remains full. NDS's penetration on our own lower 48 rigs with at least five services exceeded 70%. On third-party rigs, we are seeing strong growth and penetration. Revenue on third-party rigs increased sequentially by more than 50%. Growth occurred across most of the service lines. The third-party rig market remains fertile for NDS. We are investing to ensure that our products are rig agnostic, even though the full potential of the NDS product suite is still maximized when run on neighbors' rigs. For NDS in total, we are expanding our digital platform and expect to see greater penetration of these products across the market. Now, let's discuss delevering. We had quite a bit of significant news on this topic recently. We completed the provided distribution of equity warrants to our shareholders. This innovative structure places value in the hands of our equity holders. The warrants can be exercised with cash or certain of our outstanding notes. This transaction could result in substantial delevering of our capital structure. We also signed an agreement to sell our Canadian drilling assets. This sale will result in cash proceeds of approximately $94 million, plus we will liquidate the working capital in the business. With this deal, we pull forward multiple years of free cash flow, which we can deploy into our strategic priorities. In summary, we've made material progress even through the downturn. We look forward to making additional headway in the future. I'll finish this discussion of our highlights with ESG and the transition. We continue to refine and enhance our focus on ESG. We recently updated our annual ESG report with additional disclosure. This drove a two-point improvement in our environmental score from ISS. In addition to the environmental performance, we also recorded improvements in several categories of our social score. Our position in the energy transition also began to take firmer shape. Our strategy here is fully supported by the Neighbors Board and our investors. The scale of the energy transition opportunity is potentially huge. We believe it holds very attractive prospects for neighbors in two broad areas. First, to optimize the environmental footprint of our own operations, and second, to drive the transition in adjacent markets. Significantly, we believe our global footprint, technology, and scale can be applied to drive initiatives in the transition space. For example, we are working both to reduce our own carbon footprint and to apply our expertise in the broader energy market. We have exclusive agreements to market multiple fuel additives, which materially reduce fuel consumption and emissions of our own large diesel engines, as well as other fleets. We have also identified adjacent areas which we think are synergistic with our core operations. These include investing in several early-stage geothermal energy companies, We believe the geothermal market holds enormous promise as a source of base load renewable power. These ventures will enable us to deploy our expertise into this burgeoning field. We expect to realize investment returns to measure with the opportunities. We recently agreed to license innovative IP in the carbon capture area. The target markets are in drilling as well as other verticals. We're excited about this technology, which we see ultimately reaching beyond the oil field, so stay tuned. We are evaluating a variety of investment structures in the energy transition. Our intent is to enable our participation across the spectrum of investment opportunities. We are confident in our ability to participate in and ultimately help drive the energy transition. We think this is a compelling opportunity. Now, I will spend a few moments on the macro environment. The quarter began with WTI just below $60. By early June, WTI broke above 70. Since then, it has climbed into the mid-70s and fluctuated between there and the high 60s. This range should be conducive to increases in drilling activity across markets. Next, I'll review the rig count. Comparing the averages of the second quarter to the first quarter, the Baker Lowey 48 land rig count increased by 16%. According to Inverness, from the beginning of the second quarter through the end, the lower 48 rig count increased by 31, or approximately 6%. The growth rate among smaller clients significantly outpaced the growth in larger operators at 8% versus 2%. With our focus across the spectrum of clients, our average working rig count in the second quarter increased by 21%. This comparison excludes rigs stacked on rate. Our total average rig count increased by 7 rigs while the number of rigs stacked on rate declined by four. Once again, we surveyed the largest lower 48 clients. This group accounts for approximately 35 percent of the working rig count. In comparison, on the last call, the same group accounted for 40 percent of the working rig count. Our review of these clients show a modest uptick in activity planned for the balance of 2021. In our international markets, we saw a demand increase about as expected. In our served markets, we gained incremental share in the second quarter as activity levels in those markets continued to recover from their pandemic lows. To sum up, commodity prices have risen significantly as global economic activity increased. In their current range, oil prices generate acceptable operator economics in virtually all areas where we operate. With that in mind, we remain vigilant to the potential impact of a resurgence of the virus. That risk notwithstanding, the current commodity environment remains conducive to increased drilling activity. Now, let me turn the call over to William, who will discuss our financial results and guidance.
spk09: Thank you, Tony, and good morning, everyone. The net loss from continuing operations of $196 million in the second quarter represented a loss of $26.59 per share. Results from the quarter included a net loss of $81 million, or $10, and 80 cents per share related to one-time impairments, which were largely attributable to the sale of our Canada drilling assets and to reserves for tax contingencies in our international segment. Second quarter results compared to a loss of $141 million or $20.16 per share in the first quarter. Excluding the previously mentioned one-time items, the $26 million quarterly improvement primarily reflects better operational results as well as lower depreciation and income tax expenses. Revenue from operations for the second quarter was $489 million, a 6% improvement compared to the first quarter. Revenue continues to increase quarterly with the higher commodity prices. Revenue for all of our segments increased substantially both domestically and internationally with the exception of Canada which experienced its normal seasonal downturn. Total adjusted EBITDA expanded by almost $10 million to $117 million for the quarter. This was significantly higher than we anticipated, primarily reflecting the strong increase in revenue across our markets. This quarterly improvement is part of a trend that we expect to continue during the second half of the year. U.S. drilling adjusted EBITDA of $59.8 million was up by 1 million or 1.7% sequentially and a 14% increase in revenue. Although our rig count increased, our average margins fell in the lower 48 market. Lower 48 performance was in line with our expectations. Daily rig margins came in at $7,017, falling within our expected range. Nonetheless, leading-edge day rates have inflected, and high-quality rig utilization continues to increase with markets tightening for those rigs. For the third quarter, we expect average daily rig margin to remain stable with second quarter as market day rates continue to grind upward. Second quarter lower 48 rig count averaged 63.5, a quarterly increase of 13%, which was somewhat above our expectations. Currently, our rig count stands at 67. We forecast an increase of 4 to 6 rigs in the third quarter versus the second quarter average. Adjusted EBITDA from our other markets within the U.S. drilling segment improved moderately. For these markets, in the third quarter, we expect to remain at the second quarter levels. International adjusted EBITDA gained almost $9 million in the second quarter, or 14% sequentially. The improvement came primarily from higher activity markets with larger rigs, principally Saudi Arabia and Colombia, and generally strong operational performance in the eastern hemisphere. In the quarter, as anticipated, we experienced some headwinds in Mexico that we expect to persist into the third quarter. We continue to move rigs between platforms to accommodate modifications to the activity profile of our customer. We believe these changes in activity are linked to the higher commodity price. The unfavorable impact to our margins from these moves was $3.7 million in the second quarter and is forecast at $6 million in the third quarter. Also, we lost $1.9 million of revenue in the second quarter related to the general strikes and unrest in Latin America. Despite this friction, International delivered a strong quarter. Average rig count increased in line with expectation by 3.5 rigs to 68.3 or 5%. Current rig count in the international segment is 68. Daily gross margin for international increased by over $500 to $13,420 in the second quarter, beating our expectations by more than $900. The second quarter included approximately $900 per day in loss margin from the moves in Mexico and unrest in Latin America. Turning to the third quarter, we expect international rig count to decrease slightly by one to two rigs as two of our rigs move between clients. We forecast our average daily rig margin to remain in line with the second quarter. Our third quarter forecast includes approximately $1,000 in early termination fees from one of our rigs, offset by additional loss margin from the moves in Mexico. As anticipated, Canada adjusted EBITDA at $3 million, fell by $6.7 million, reflecting the seasonal spring breakup. At this point, we expect to close the divestiture of our Canada drilling assets by the end of the month. In the third quarter, we will include one month of activity for Canada drilling operations before the closing of the transaction. Drilling solutions adjusted EBITDA of $12.8 million was up $1.3 million in the second quarter on a 10% revenue increase, trending positively in all product lines. Most notably, improved performance software and casing running services. Penetration of the performance drilling solver in the lower 48 and TRS internationally strengthened, driving the improvement. Lower 48 gross margin for a drilling solution segment totaled $8.9 million for the second quarter. This comes on top of our lower 48 drilling gross margin of $40.5 million. We expect adjusted EBITDA in the third quarter to improve on the strong second quarter results. RIG Technologies generated adjusted EBITDA of $2 million in the second quarter, an improvement of $2.6 million on a 34% revenue increase. The growth was primarily related to higher repairs and equipment sales. For the third and fourth quarters, adjusted EBITDA should move gradually upward on improved capital equipment sales. Now, I will turn to review our liquidity and cash generation. In the second quarter, Total free cash flow was $68 million. This compares to free cash flow of approximately 60 million in the first quarter. Our cash generation was driven by improved collections and lower semiannual interest payments offset by higher capital expenditures and other outflows, mainly annual insurance premiums. Capital expenses in the second quarter of $77 million were up from $40 million in the first quarter. These amounts include investments for the SANA new builds of $32 million and $8 million for the second and first quarter, respectively. In the third quarter, we forecast $80 million in capital expenditures, including $35 million for SANA new builds. Our targeted capital spending for 2021 continues to be around $200 million, excluding approximately $100 million required for Saudi new builds. Free cash flow for the third quarter should total around $10 to $20 million, excluding proceeds from the Canada divestiture and moderate strategic transaction outflows. At the end of the second quarter, our cash balance closed at $400 million, and the amount drawn on our $1 billion credit facility was $558 million. Our net debt on June 30th was $2.4 billion, down from $2.9 billion at the start of the pandemic. We will continue to prioritize our future cash generation to debt reduction until we reach our leveraged targets. We previously announced the distribution of warrants to shareholders. By the end of the quarter, we had seen a small amount of the warrants exercised with notes. This transaction is another demonstration of our commitment to delivering. Putting things in perspective, the last 15 months have probably been some of the toughest neighbors has faced. Activity dropped across the globe, driven by industry fundamentals and COVID shutdowns. Our rig count plummeted and our leading edge pricing dropped. Despite that, we maintained our EBITDA at levels higher than the combined EBITDA of our three closest public competitors. These results were the fruits of an absolute focus and cost control and capital discipline. But we have also benefited from our overall strategy of maintaining the highest quality fleet with leading drilling performance, driven by our investments in automation, software, remote operations, and data infrastructure. As a result of our new revenue profile, our capital expenditures as a percent of revenue have dropped. In addition, our international business has delivered once again by helping us to much better absorb the sharp drop-off in U.S. activity in comparison to our competitors. Together with our superior operational results, we generated meaningful cash flow through the past 15 months, while also reducing our net debt by $500 million during the period. Despite the headwinds at the beginning of last year, just before the pandemic, we also issued $1 billion of new long-term debt to address near-term maturities. And we then renegotiated our credit facility during the worst of the pandemic to avoid potential covenant breaches and allow us to complete a material debt exchange transaction at the end of last year. I am convinced we have been good stewards of our shareholders' capital during the toughest of times. As we now launch a significant new initiative into the rapidly expanding field of new energy, we will maintain our commitment to absolute capital discipline and continued debt reduction. As you may have seen from recent announcements, despite the scope of our initiatives, we have limited our cash deployed into these activities. We have restricted ourselves to placing minority investments with companies adjacent to our own business, and we have signed alliance agreements with these companies to help them develop their technologies. In concluding, I would like to emphasize something. Despite our aspirations to develop our clean energy initiatives into a significant portion of neighbors' portfolio over time, we will retain our capital discipline as well as our focus on cash generation and debt reduction. With that, I will turn our call over to Tony for his concluding remarks.
spk05: Thank you, William. I will now conclude my remarks this morning with the following. These second quarter results, on top of our performance in the first quarter, reinforce that our strategy is working and we are making progress toward our goals. Once again, we made significant headway to de-lever. At the same time, we advanced our imperative to provide better execution with our portfolio of leading-edge technologies. The resilience of our financial results through the depths of COVID and now into the recovery is testament to our robots' portfolio of businesses. This process began years ago as we continually reevaluate the portfolio. We sold assets and businesses, pressure pumping and well servicing most notably, and now we're investing in digitalization and automation and the transition. This active management has served us well and we expect it to continue. We have entered a new phase in the evolution of the global energy industry. Neighbors has played a key role throughout the development of the drilling industry. We are investing now to extend this leadership in the future. That concludes my remarks this morning. Thank you for your time and attention. With that, we will take your questions.
spk06: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Taylor Zurcher with Tudor Pickering and Holt. Please go ahead.
spk01: Hey, everyone. Thanks for taking my question. My first one's on International, the guidance for Q3 was pretty clear from an activity perspective. But as we think in the back half of the year, you talked about a couple more rigs in Saudi, excluding the new builds, potentially going back to work. And as OPEC Plus starts to roll back some of their production curtailments, I suspect activity in some of the core GCC countries is likely heading higher into the back half of the year. So just curious if you could frame for us maybe thinking into Q4 and beyond, just any high-level thoughts on how we should be thinking about the cadence of international activity and momentum from here?
spk05: Well, what we currently have some visibility on is, as we reported last quarter, in Saudi, I think toward the end of the year, there should be an additional three rigs and possibly two more earlier in 2022. I think it's fair to say, given today's climate, and the rate of quantity prices, we're seeing a lot of robust activity across the region there, particularly in the Emirates, as well as in places like Kazakhstan. So activities generally is picking up. It's all conducive to entering in 2022 with an uptick in activity. Basically, that's across the board, both in the Middle East as well as in South America as well. So I think all the signs are positive. positive looking forward to 2022. And as I said, we have visibility on several rigs right now looking toward the end of the year.
spk09: And I think one thing we've noticed in the market right now is that there's been an uptick in tendering activity by clients. So we have more tenders and some of them quite significant outstanding than we've had in a long time.
spk01: Okay, understood. Thanks for that. And my follow-ups around the new builds, the $10 million of annual EBITDA contribution is pretty clear and certainly probably margin accretive to the current business. My question is more around NDS and how that might fold into some of these SANA new builds. Do you have the ability to fold in some of the various products and services around NDS into those new build rigs moving forward? And maybe just more broadly speaking, How do you think about the pathway from here for further international penetration within NDS?
spk05: Yeah, excellent point. I think the expansion of NDS is now on our target radar for international. Really, it's very hot for us right now, and it's going to be twofold. One, on the insider area in particular, our existing rigs, the NDS needs the platform of those existing rigs to be upgraded, and we're looking at that as a base case. And second, the new bills will provide us a platform to add the NDS services to them. So Saudi in particular is a target market for NDS. But regionally, I think as well, there's a high degree of interest from other players in the region to duplicate the scale and optimization that's been going on in the U.S. And a lot of the operators, in particular the NOCs, want to get to a level of performance that duplicates that. And NDS is viewed as a key element of that. So that's one thing that we're pushing really well. We've had some success with NDS already in Argentina. We're working for a super major down there. And NDS on some of the rigs here have produced incredible performance gains for them. So NDS, as you know, particularly with our latest automation, our Smart Drill application, basically allows operators to automate the entire rig sequence from slip to slip, not just off bottom. It's something that the other products in the marketplace don't do, and plus it allows the other services to be integrated into a rig. So we think for international markets in particular, these things could really offer a high degree of value for the operator and obviously upside for us. So it's very high on our priority right now.
spk08: All right, good to hear. Thanks for the answer.
spk07: Our next question comes from Dan Cutts with
spk06: Morgan Stanley, please go ahead.
spk00: Hey, thanks. Good morning. Morning. Hey, so I just wanted to ask, appreciate the color on pricing and activity in the press release and on the call so far. I was just wondering if you could kind of characterize or kind of juxtapose what you're seeing in terms of pricing traction in the U.S. versus international markets and kind of what your outlook is for those two markets moving forward.
spk05: Well, I think the good news is in the U.S., it's grinding higher on all fronts right now across all the regions. I think it's fair to say the leading edge rates are moving to high teens, below 20s. And as you see, we're getting convergence between our average working rate today and the leading edge, which suggests that crossovers should occur in the near term. In this sector as a whole, as you know, you don't get to a point of inflection until roughly you get to 70% utilization. I think we and others, I think we're probably the highest in terms of utilization of super spec rigs right now. I think we're at like 61% today. I think some of our competitors are a little less than that. But as we all march toward that 70% utilization number, I think we'll approach the point of inflection on pricing, which is equivalent maybe to a number around 500 rig count, roughly. So hopefully... We'll all get there. In the meantime, I think we, together with the other players, have all shown some good discipline in the market, and I think it's been all constructive. The market in the U.S., obviously, given where we are today, it's not a market where you're going to lock up on term anytime soon, given where things are, which actually helps us right now in terms of being able to move our pricing up as things march forward. On the other hand, the international market, as you know, The good thing about international is you have term coverage, so we have a portfolio of contracts in place, and therefore, you're not going to see the same, you don't see the same hockey stick up, nor the same downside down, which, as a company, that served us really well in the downturn. As William remarked, you looked at our combined, our combined EBITDA of our three largest competitors, you know, we exceeded them, and that's because of our international portfolio, which doesn't have that volatility. So the prospect for pricing increases when your group is so termed out, to move that quickly, it's not going to happen. But that's actually a good thing. That's a robust thing. But I think the good news is, as the market does heat up, the quantity of available good rigs to come into the market internationally doesn't exist in general. In other words, if you want a gas rate With all the bells and whistles today, 3,000 horsepower rig, those rigs do not exist, which means basically it's going to force the market to replacement cost pricing, which we think is constructive. So looking out for the international, I think it's directionally, it's going to be higher. In terms of translating to meaningful numbers, at the margins, it's going to be accretive and meaningful, but obviously the ability to price up our whole fleet is going to be more limited.
spk09: But I will point out that all the contracts that we're signing recently internationally are coming at significantly higher prices than the prior signings of, say, maybe a couple quarters ago.
spk00: Got it. Thanks for all that color. And then, so just to touch back on Sanad, quickly on the Sanad New Build program. So appreciate all the color that you guys have shared in terms of capital spending plans this year. Just wondering if there's any kind of range that you could give us in terms of what CapEx might look like on a quarterly basis moving beyond 2021? Like, is kind of the second half $30, $35 million per quarter CapEx number a decent run rate? Or, you know, could there be upside or downside to that, assuming the new build program moves on that five-rig per year plan pace moving forward?
spk09: So the five rigs a year and the SANA, it's relatively easy to estimate, but it does hinge on Aramco providing those drilling contracts. For now, it's fully based on that. It's not as if we have a guaranteed roadmap going forward on how much a capex is going to be. We are planning, however, we're assuming in our plans that we're going to be adding five rigs a year over the next several years. That piece is It's pretty stable. We know how much the rigs cost and how many rigs per year. The rest of our portfolio is really running very reasonably. As you know, we set about $200 million a year for everything exceeding those new bills. Now, the CAPEX, of course, is also linked to the number of rigs that are operating. We expect those to go up. So certainly next year, the number should be somewhat higher than $200 million, but in line with the rigs. We don't have any major programs to increase our rig footprint. We have sufficient idle rig capacity to continue expanding next year without having to invest in additional rigs exceeding those in Saudi Arabia.
spk00: Got it.
spk08: Understood. Thanks for the color. I'll turn it back.
spk06: Our next question comes from Carl Blunden with Goldman Sachs. Please go ahead.
spk02: Hi, good morning. Congrats on the strong results again this quarter on the EBITDA on the cash flow side. Just one question on your slides here. It looks like for the U.S. lower 48, you mentioned there are 64 rigs on revenue of which high spec are 55. So when I look at that sequentially, it looks like most of the growth is coming outside of high-spec, but you're also reporting increased utilization of the high-spec rigs. So I was just hoping you could give a bit more color on that dynamic, both the sequential change and then what you expect going forward. Please.
spk05: I don't know what you're actually looking at. All the rigs operating today are high-spec. And today the rig count is 67 rigs, and we have 110 high-spec rigs. So it's 67 out of 110, which is 61% today. They're all high spec.
spk02: Gotcha. Maybe I'll follow offline just to make sure I understand the numbers there. With regard to the warrants, you mentioned that a small amount of the warrants were exercised using bonds during the quarter. When you think about this longer term, and it obviously depends on where the share price is, Could you talk a little bit about the conditions under which you'd consider terminating the warrants to essentially encourage them to be exercised and accelerate debt reduction?
spk05: Well, I think we need some time to let the mechanism work. So you've got to step back a second and understand what this is all about. Basically, it was a means to allow the discount of the bonds to be captured and to be shared with the shareholders. As you know, there's no market available where debt can be easily swapped with equity. The only time that really happens is in bankruptcy, and that exchange usually results in the equity guys getting the square end of the stick. So what this really is a way of doing is allowing our shareholders in a non-lutile fashion to be given the opportunity to capture that bond discount themselves through the exercise of the warrant. Now, for that to be meaningful, what you've got to do is do the calculations with the shares, and on days where the the exercise price, you hit the bonus number of shares, you gotta calculate the amount, the value of the shares you get if you exercise using the value of the bond at face amount. When you do the math, you'll see that there's a lot of upside for debt holders, for debt that's trading at a discount to, in effect, get a premium to that current market price through that exercise. The good news is, since it's been announced, there's been really a huge volume of trading in the warrants. In fact, if you compare our warrant transaction to one that was done by Oxy, I think the first day of trading, we were double the amount of activity and volume compared to them. And so I think the warrants are now being put in position where the person who owns them, whether it's a shareholder that owns them who's going to think about buying bonds or a bondholder that's bought a warrant, I think it's being positioned that when the stock price gets into the zone where it's economic and where there's upside, that they'll be positioned to exercise. We're obviously not there yet, but as we march, when you look at the matrix, once that happens, then we'll see. Once that happens, then we'll assess what the future of the warrants is, but we expect a good portion of the warrants to be exercised to capture this discount.
spk02: That's very helpful and certainly in line with your debt reduction goals. Is there any kind of timing element around that and the exercise there relative to extending the bank facility or those two disconnected transactions?
spk09: That's a great question. Obviously, we'd like to see where we end up with a warrant transaction and see where a balance sheet stands. We think we'll be in a better position than we are today. In addition, we have the proceeds from Canada coming in, and we think we'll have a as strong as they can have in terms of free cash flow generation. So I think all those dynamics will help us have a better, more constructive discussion with our lenders. So I don't think you should expect to see anything with respect to our credit facility within the next couple, three months. There will be something more towards the fourth quarter, the end of the year. In addition to that, we will also explore options for issuing additional longer-term debt to take care of the short-term maturities and maybe term out some of the expanding on a revolver. So those are some of the things you could expect. All of that remains open, but obviously having a benchmark once the war interest action is completed will give us a better sense of what is achievable.
spk02: Thanks. You anticipated a bunch of my questions. Really appreciate the time.
spk08: Thanks.
spk06: Again, if you'd like to ask a question, please press star then 1. Our next question comes from Andrew Ginsberg with RW Press Bridge. Please go ahead.
spk04: Hi, guys. Thanks for all the call you provided so far. Most of my questions were answered. One clarification I wanted to make was around the proceeds from the Canadian drilling segment. You guys mentioned that you guys were going to use it for key strategic initiatives. Do you have any color on what proportion that's going to be for debt reduction versus other key initiatives?
spk09: The overriding strategic initiative in terms of cash utilization is debt reduction. So that's... We have made a couple of investments, minority stakes in some geothermal companies, but that's a pretty single-digit number for those investments, single-digit in terms of median. So that's easily accommodated within our existing cash flow. So I would say that the proceeds of Canada are fully going to be used to reduce debt.
spk04: Perfect. Thank you. That's the only outstanding question I had. Thanks for your time, guys. Thank you. Thank you.
spk06: This concludes our question and answer session. I would like to turn the conference back over to William Conroy for any questions.
spk03: Thank you, everyone, for joining us this morning. That will wrap up our call. If you have any follow-ups, please contact us at neighbors.
spk08: And we'll end the call there. Thank you.
spk07: Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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