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spk07: Good day and welcome to the Neighbors Industries LPD Q3 earnings teleconference 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. Please note this event is being recorded. I would now like to turn the conference over to William Conroy, VP Investor Relations. Please go ahead.
spk08: Good morning, everyone. Thank you for joining Naver's third 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 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 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 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 measures. With that, I will turn the call over to Tony to begin.
spk10: Thank you for joining us this morning as we review our results for the third quarter of 2021. I will begin my remarks with some overview comments. Then I will detail the progress we made on our five keys to excellence and follow with the discussion of the markets. William will discuss our financial results. I will make some concluding remarks and we will open up for your questions. Our operating performance in the third quarter was strong. All of our segments met or exceeded the outlook we gave a quarter ago. On top of that, we completed several milestones across our strategic initiatives. Adjusted EBITDA in the third quarter reached $125 million. We maintained our execution at a high level while we grew the overall business. Our global average rig count for the third quarter increased by two rigs, excluding the impact of the sale of our Canadian drilling assets. This rig count growth was driven by an increase in U.S. drilling activity. Volumes in our drilling solutions and rig tech segments both grew quarter on quarter. That drove sequential increases in both revenue and EBITDA in those operations. The third quarter again marked progress on our twin priorities to generate free cash flow and reduce net debt. Free cash flow in the quarter exceeded $130 million, including the Canada sales proceeds. Without those proceeds and the funding for our geothermal investments, we generated free cash flow of $55 million. This result was significantly above our expectations. In line with the cash generation, net debt decreased to $2.3 billion in the third quarter, driven by the combination of our strong operating performance, disciplined capital spending, improved working capital, and our strategic capital allocation evidenced by the Canadian sale. I am pleased with our financial performance, both in the third quarter and year-to-date. Last quarter, I highlighted five key themes that we believe support the neighbor's investment thesis. These drivers include our leading performance in the U.S., the upturn in our international business, improving results in the outlook for our technology and innovation, our commitment to sustainability and the energy transition, and our progress in our commitment to de-lever. Let me start with the U.S. performance. Our margin performance in the lower 48 remains strong. As we expected, For the third quarter, we held daily margins above the $7,000 mark. This accomplishment was in line with our second quarter and with the outlook we gave last quarter. We believe our value proposition leads the industry, specifically in operational excellence, advanced technology, top safety performance, and sustainability. Our financial results validate this. Next, our international business. We bring the same elements that support our lower 48 business to our international segment. Our financial results are benefiting from outstanding performance in the field and highly disciplined capital spending. Daily drilling margin in this segment remains robust. As you look through the end of the year and into next, we have visibility to reactivations of three more rigs in Saudi Arabia. This is in addition to the two restarts that recently occurred. Currently, we have 40 rigs working in Saudi Arabia. the in-kingdom rigged new bill program is progressing. Based on the manufacturer's delivery schedule, we expect to deploy the first of SANAID's five awards in the first quarter of 2022. The balance should come at approximately one per quarter. We expect each of these rigs to contribute annual EBITDA of approximately $10 million. SANAID's long-term plans call for a total of 50 new bills over 10 years. Each successive generation of five rigs should they have $50 million annually. Through the end of 2022, we have excellent visibility to growth at Sannit from expected rig activations and new builds. With that expected growth, our international EBITDA could increase by 20% versus the third quarter just reported. Let me next turn to technology and innovation. Our advanced technology is one of the key drivers of our industry-leading performance. Our portfolio continues to gain traction in the market. Quarterly EBITDA in our drilling solutions segment increased sequentially by 22%. This business has scale and is an earnings multiplier on top of our drilling business. Beyond this performance, our technology pipeline remains full. Penetration on neighbor's lower 48 rigs and on third-party rigs increased. Revenue on third-party rigs improved sequentially by more than 20%. We continue investing in apps and products that are deployable on third-party rigs. Notwithstanding that feature, the full potential of this portfolio is maximized on neighbors' rigs. In the third quarter, 74% of our rigs in the lower 48 ran five or more NDS services. This compares to 62% in the second quarter. For NDS in total, we are committed to expanding our digital portfolio further. Over time, we expect to see greater penetration of these products across the market. Next, I would like to highlight a significant technology breakthrough. During the quarter, we deployed the industry's first fully automated land rig, the PACE-R801. Earlier this month, Rig 801 reached total depth of 20,000 feet on its initial well. This rig incorporates a number of innovations. It features our fully automated robotic drilling package. It also incorporates leading edge controls and smart suite drilling software. The rig runs casing automatically with a high degree of precision and without the need for a separate casing crew and equipment. With this design, we have removed the rig hands from the rig floor. With less physical labor required, Rig 801 has the potential to greatly expand the pool of talent available to work on our rigs. By removing people out of harm's way, we are confident this rig will experience a step-change improvement in safety performance. With all this rig has to offer, we've already seen interest from other operators. Now let's discuss delevering. The third quarter marked significant progress to improve our capital structure. Free cash flow in the quarter was strong. We remain committed to a multifaceted approach to delever. The primary focus is to continue delivering free cash flow. I think our results thus far this year demonstrate our commitment and illustrate our success, but we're not finished. We look forward to reporting additional progress in the future. I'll now finish this discussion of our themes with sustainability and the energy transition. We continue to refine and enhance our focus on sustainability. We made additional progress on our environmental and social scores from ISS. We remain on track for an additional 5% reduction in greenhouse gas emissions in the US in 2021. Our employee safety record measured by TRIR has improved each quarter this year. This TRIR performance leads our industry. We also made progress in our energy transition initiatives. We are currently testing prototypes of our carbon capture and hydrogen technologies. These results have been encouraging. We have several more projects underway. As these proceed, we'll be reporting the results. During the third quarter, we completed investments in three early stage geothermal companies. We now have a portfolio that covers a spectrum of innovative geothermal technologies. We view geothermal as immediately adjacent to our existing business. Each of these companies will benefit from our asset platform as well as our engineering and manufacturing expertise. We are excited to help drive the widespread development of this source of renewable base load energy. We will help these companies cut down the time required to reach their respective commercial stages. Our global presence, technology, and scale will be applied to drive these and other initiatives in the transition space. We are taking a three-pronged approach to the transition. We reduce our own carbon footprint by applying new technologies. We can expand these technologies to other verticals. And we can take advantage of the opportunities in areas adjacent to our activity by investing in these companies and helping them to reach scale. Now I will spend a few moments on the macro environment. The quarter began with WTI above $70. By the end of September, WTI was in the mid-70s. Since then, it has reached the $80 mark, where it remained recently. This range should be conducive to increases in drilling activity across markets. Next, I'll review the rig count. Comparing the averages of the third quarter to the second quarter, the Baker Lower 48 land rig count increased by 11%. According to Inverness, from the beginning of the third quarter through the end, the Lower 48 rig count increased by 47, or approximately 9%. Smaller clients accounted for nearly all of this growth. Once again, we surveyed the largest lower 48 clients at the end of the third quarter. This surveyed group accounts for approximately a third of the working rate count. Our survey indicates an increase in activity approaching 10% for this group by the end of the year. This outlook is consistent with EMP spending increasing going into the end of the year. It is very encouraging as we look into 2022. We also see potential activity increases in our international markets. In particular, we have visibility to reactivations of suspended rigs in Saudi Arabia. We recently added an additional rig in Latin America, and we are optimistic for additional rigs beginning early next year. I'll wrap up this macro discussion with an update on our labor availability and the global supply chain. For labor, we have been successful at recruiting and staffing to support our increases in activity. Recently, this has become more difficult, particularly in the lower 48. As a consequence, we raised compensation in this market during the last quarter. This increase has helped, and we are monitoring whether additional steps will be necessary. Now, let me address the supply chain. We continue to see moderate cost inflation and lead times have stretched significantly. With our global systems, we are able to maintain operational continuity. I would also like to point out that we have delivered on our margins. The cost increases we have experienced have been offset by similar increases in our day rates for the fleet. To sum up, commodity prices have continued to rise as global economic activity has increased. In their current range, oil prices generate favorable operator economics in virtually all areas where we operate, Natural gas prices have increased to levels not seen in more than 10 years. We have observed early signs of increased interest from operators which can benefit from these higher prices. With that in mind, we remain vigilant to potential disruptions from the virus and challenges in the economy. Those risks notwithstanding, the current commodity environment supports an increase in the level of drilling activity. Now, let me turn the call over to William, who will discuss our financial results and guidance.
spk04: Thank you, Tony, and good morning, everyone. The net loss from continuing operations was $122 million, or $15.79 per share. The third quarter included a $13 million after-tax non-recurring expense, or $1.63 per share, related to the purchase of technology in the energy transition space. This compares to a loss of $196 million or $26.59 per share in the second quarter. The second quarter results included charges of $81 million after taxes, mainly for an impairment of assets on the sale of our Canada drilling rigs and a tax reserve for contingencies in our international segment. Revenue from operations for the third quarter was $524 million a 7% improvement compared to the second quarter. Excluding Canada, revenue increased by 9%, with all of our segments providing strong contributions, both in the US and internationally. Rig technologies and drilling solutions were particularly strong, growing by 22% and 17%, respectively. The constructive commodity price environment has continued to drive additional rig awards throughout our markets. In the lower 48, we are seeing increased rig demand from larger public customers, in addition to continued expansion for private operators. Recent awards in the Bakken point to increased activity in that basin, in addition to the steady growth we have experienced in the southern regions of the U.S. Internationally, we expect continued expansion in Latin America and the Middle East. Total adjusted EBITDA of $125 million increased by 8 million or 7%. Early termination revenue in international and improved activity in the U.S. more than offset lower recount than America and lower margins in Mexico. U.S. drilling EBITDA of $62.1 million was up by 2.3 million or 4% sequentially. Our lower 48 recount increased by 4.1 from 63.5 in the second quarter to 67.6 in the third quarter. Daily rig margins came in at $7,025, in line with the prior quarter. As utilization for high-spec rigs continues to improve, increases in leading-edge day rates have accelerated significantly. Although this price momentum has translated into higher average revenue for our feeds, The resulting quarterly improvement was offset by wage increases for rig crews. For the fourth quarter, we expect average daily rig margin to remain in line with the third quarter. Market day rates should continue to move upward as the market tightens, but we expect further wage adjustments for rig crews. Although these wage increases are largely recovered from our customers, the compensatory day rate increases normally come with a lag. Currently, our rig count stands at 72. We forecast an increase of five to six rigs in the fourth quarter versus the third quarter average. On a net basis, EBITDA from our other markets within the U.S. drilling segment remain in line with the second quarter. For the fourth quarter, we expect to add one rig in Alaska. However, the EBITDA impact of this increased activity will be offset by expected downtime related to recertifications on our largest offshore rig. International EBITDA gained almost $5 million in the third quarter, or 7% sequentially, at $7 million in early termination revenue, more than compensated for a move-related decrease in Mexico. Daily gross margins for international increased by almost $1,000 to $14,375. Early termination revenue added $1,100 per day to our margins, but the Mexico moves upset some of the improvement. Mexico performance should improve in the fourth quarter, but we expect RIC moves and idle time between contract expiration and renewal to still affect their fourth quarter margins. Without the early termination revenue and with the anticipated improvement in Mexico, the fourth quarter daily margin should come in between $13,000 and $13,500 per day. International average rig count came in at 67 rigs, a one rig reduction as compared to the second quarter. The lower rig count reflected incremental rig count in Saudi Arabia, offset by idle time between contracts in Latin America. Current rig count in the international segment stands at 69. Turning to the fourth quarter, we expect international rig count to increase by four rigs, as additional rigs are reactivated in Saudi Arabia and Latin America. Drilling Solutions EBITDA of $15.6 million was up 2.8 million or 22% in the third quarter. Penetration improved across all of our product lines with the largest contributions coming from performance software in the U.S. and casing running services globally. Activity in the lower 48 generally improved, taking our combined drilling rig and drilling solutions daily gross margin to $8,900. This translates into a $1,900 per day contribution from a rapidly growing solution segment. We expect adjusted fourth quarter EBITDA for this segment to further improve on the strong third quarter results. RIC technologies generated adjusted EBITDA $3 million in the third quarter, a $1 million improvement. The growth was primarily related to higher equipment sales. In addition to the already increasing spare parts, repairs, and certification revenue, we're starting to see additional sales for rig components. We believe that rig upgrades as well as upgrade cycles for specific components like top drives and catwalks should drive higher capital equipment sales going forward. For the fourth quarter, EBITDA should continue to improve on higher capital equipment sales and repairs. In line with the stronger results, Liquidity and cash generation exceeded our expectations. In the third quarter, total free cash flow reached $133 million. This compares to free cash flow of $68 million in the second quarter. The third quarter included a net benefit of $78 million from strategic transactions, namely the sale of our Canadian business for $94 million, partly upset by several investments in geothermal and other energy transition initiatives. Outside of these transactions, our free cash generation of $55 million reflected the strong operational results, disciplined capital spending, and continued progress on working capital reductions. Free cash flow for the fourth quarter should reach $80 to $90 million. This translates into a total 2021 free cash flow of around $350 million. Capital expenses in the third quarter of $62 million, including $19 million for SANA new builds, were down from $77 million in the second quarter. The $50 million reduction reflected $13 million lower spend for the SANA new builds. In the fourth quarter, we now forecast roughly $80 million in capital expenditures, including $30 million for the Sana'a New Build. Our forecast capital spending for 2021 is approximately $270 million, including $90 million for Saudi New Builds. Our net debt on September 30th was $2.3 billion, a reduction of $120 million in the quarter. At the start of the pandemic, our net debt stood at $2.9 billion. We have reduced our net debt materially despite the challenging environment. The third quarter was a further demonstration of NABER's leading operational performance, both in the U.S. and internationally, with a potential for meaningful growth in the year ahead. Our strong operational performance is also translating into robust free cash generation, allowing us to reduce our debt materially. We expect further net debt reductions in the fourth quarter and in 2022. With a rapid progress in technology introduction, our modern industry-leading fleet, and our close relationships with customers across the globe, Navers has never been stronger operationally. And with our deleveraging efforts of the last five years, our capital structure and debt profile are considerably stronger than they have been in a long time. We believe we are much better positioned to reach our leveraged targets while taking advantage of the numerous opportunities presented by the Improving Industry Environment. With that, I'll turn the call back to Tony for his concluding remarks.
spk10: Thank you, William. I will now conclude my remarks this morning with the following. These third quarter results, on top of performance in the second quarter, reinforce our conviction that we have the right strategies to reach our goals. We made significant progress to improve our capital structure. At the same time, we advanced both the development and deployment of multiple impactful technology solutions. We are committed to responsible hydrocarbon production as we pursue initiatives to support the energy transition. In the face of the challenge brought on by the pandemic, Neighbors has demonstrated material progress along both fronts. As well, our financial results have proved resilient, demonstrating the value embedded in our global portfolio of businesses. With all that we have achieved so far, I am confident the best is yet to come. That concludes my remarks this morning. Thank you for your time and attention. With that, we will take your questions.
spk07: We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're 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 role. Our first question comes from Taylor Sercher with Tudor Pickering and Holt. Please go ahead.
spk03: Hey guys, good morning and thank you. My first question is on international. You mentioned a number of different regions where you're seeing some improved rig add opportunities. In the presentation, you called out Argentina, Colombia, Kazakhstan, Kuwait, and Oman. And maybe if we just exclude Saudi for a moment, which obviously is going to be a strong growth market for you, both in Q4 and certainly in 2022 and beyond. But excluding Saudi for a moment, I was just hoping you could kind of compare and contrast what you're seeing from a rig tendering environment perspective or backdrop perspective in both Latin America and the Middle East. The Middle East feels like some of these tenders have has continued to be delayed due to COVID, but are starting to now reemerge as some of the COVID issues have died down a bit. Latin America seems to be gaining a lot of momentum. So just curious if you could compare and contrast those two markets as we think about 2022.
spk10: Yeah, I think you hit it all right on. I think Latin America, in particular, Colombia and Argentina, we are seeing some visibility into rate increases next year in both markets there. Obviously, COVID was a big factor in Argentina in particular. But our rig count in Colombia, I think we're at seven rigs right now. And I think we see visibility for several additions during the course of next year there. Argentina, the same. In the Middle East, you're absolutely right. Kuwait, for example, has been on. Everyone's talking this for years in terms of tenders. But again, we're seeing some solid activity suggesting that we're actually going to see some real steps taken in that market. and similarly in the Eastern Hemisphere as well, Kazakhstan as well. So I think you can't ever say things won't happen the way they're seeming, given COVID and given externalities, but I think the tenor of the market has changed, and I think people are making concrete plans and steps in each of those areas. That gives us the robust view of international for next year. And that, of course, is on top of our position in Saudi, where the visibility is very clear in terms of what they're, as we said in the remarks, two rigs just started at the end of the third quarter, so we will have a full two quarters, a full quarter, the fourth quarter for those two rigs, and we have two additional rigs, existing rigs going back to work, so our rig count will get to 43 by the second half of 2022, and plus the new build starts, and the illustration of that potential activity is that with the new builds, In 2022, that should add about $20 million EBITDA on top of a $75 million run rate roughly. In the last quarter, that's $300 million. That's a pretty healthy increase. And by the first quarter of 2023, that number is about $50 million. So it's almost a 17% increase in that market alone. And by the following year, when you have additional rigs hitting the market in 2023, that goes up roughly $70 million. So you have extraordinary double-digit growth there on top of the other markets we talked about. That's why we think international, our position internationally I think is actually second to none right now and divisively is pretty clear. Obviously in Saudi Arabia, it depends on things not in our control. Arabco has been pretty clear about their desire to increase their capacity from $12 to $12 million barrels to $13 million dollars. 13 million barrels, and given that, I think all signs point in the right direction, but obviously it's going to be up to what the pace is and how fast it's going to happen.
spk03: All right, good to hear. Thanks for that. My follow-up is on NDS. It's a business that continues to gain strong momentum. I think you said revenue from third-party rigs is up 20% sequentially, which is really strong. The strategy you outlined at the Analyst Day a number of years ago seems to be playing out pretty well. My question is, as we think about growth opportunities on the come, international growth is obviously one, but a question on the current portfolio. I think you made the comment, Tony, on the call that you're continuing to improve your digital portfolio or capability. One, just curious on more color on the digital side of things. Two, whether it be well construction services or other types of services that you can offer on the rig. Are there parts of the portfolio that you're not in today or that you're small in today that you see being good opportunities for growth in 2022 and beyond, whether organically or inorganically within NDS?
spk10: That's a mouthful of questions. So let me take it the following way. First of all, I think as we sit on the prepared remarks, there's a lot of room for additional penetration not only in the U.S., but internationally. If you take the U.S. number, it's $1,900 per day per rate additional margin equivalent. In the U.S., internationally, that number is $1,400 a day. That's point one. Point two, even with the existing portfolio, expanding some additional content with the stuff we have in the pipeline right now, those margins could actually double in terms of content of what existing technologies we have available today. And that's So there's a double hockey stick here. One is increased penetration and two to move into some other additional services that are in our portfolio. And that combination is what we're focused on right now. I think on the automation front in general, I think, you know, we've invested a lot in it. As you pointed out, we came up with this vision back in the analyst day when we talked about automated directional drilling back then, no one knew what we were talking about today. Everyone's trying to imitate us and do it. Um, I think, uh, The robotic rig that you heard about today has had an extraordinary spinoff application. It's sort of like what happens with the Moon Project with NASA, where you develop stuff. That actually helped us develop a robotic sequencing engine, which caused us to have process automation today on our rigs. And that process automation is driving a lot of the growth. And our goal is actually to make that available to third-party rigs, which may sound crazy to some people. But we view that the industry needs this, and therefore we're committed to actually making it available, including to competitors. Similar to our philosophy on CanRig, as you know, CanRig, even though we're vertically integrated, we commit to provide equipment to third parties. And my view is that that challenges us to be best in breed by doing that because we have to demonstrate we can beat out the competition. Today, when I compare my top drive to the leading top drive in the market, the leading manufacturer, I say size-wise, NOV, I think ours is second to none. In fact, our newest top drive, I think, beats everybody in the marketplace hands down as we're rolling up the new top drive. So that philosophy is coloring our NDS philosophy, and we've had some conversations with operators, which you can see third-party growth growing, where people realize we all need this automation, and maybe it's better to work together to expand it as opposed to everybody creating their own. Similarly, in Orange Street, we've historically been bad about that, If you compare us to the technology industry, like Apple, Microsoft, they're competitors, but you see Microsoft Word or Office works on Apple platform, and they have no problem doing that. In our industry, we seem to be reluctant to try to do things like that. But we're committed to try to grow that third-party market as well as our own base as well. So that's part of the strategy. And that, we think, gives a great opportunity.
spk03: Got it. Thanks for the response. Very helpful.
spk04: So I think I'll add to that. I mean, in our rig technology segment, about two-thirds of our sales are outside neighbors. That's not the case today in NDS. So we think the potential is enormous outside the neighbor's rig. So as Tony mentioned, we're going to increase penetration within neighbor's rigs. We're going to continue introducing new products. But the biggest market is really outside neighbor's rigs, and that's a big part of our strategy.
spk10: Yeah, I mean, obviously, there's customers that... don't want to focus solely sole source oil rigs with one drilling contractor. And at the same time, they have robust automation needs and technology needs. And so for those customers in particular, everyone knows that getting there is a big journey, and it's hard to do that in a bidding strategy. So people will be choosing technology partners to help advance that. We think we can help them along that regard by making that automation available to our competitor rigs, even though they're not using only neighbor's rigs. And that's part of the logic here, because we know we're not going to own the whole market in terms of iron, but if we can make NDS stuff available, more rigs, that helps everybody. It helps the operator in terms of standardizing what their desires are. It helps us create gain share, and frankly, it helps the third-party drilling contractors that haven't made those investments to be more efficient quickly, Because they'll get some slice of that action as well out of the rollout. So that's the concept.
spk03: Awesome. Lots of interesting things going on there. So eager to stay tuned moving forward. Thanks for the answers. That's it for me.
spk07: Our next question comes from Connor Lino with Morgan Stanley. Please go ahead.
spk09: Yeah, thanks. I was wondering if we could just talk sort of broadly about pricing. You know, obviously your thoughts around the U.S. would be great, but would also just appreciate an understanding of where things stand internationally and, you know, at a global level, how much do you think you need to raise pricing to offset the cost inflation dynamics that you're talking about? Specifically, is labor a de facto pass-through in your contract structure, or do you need to raise pricing to address that? Well,
spk10: I'll let you address the pass-through cost stuff.
spk04: Yeah, I mean, the vast majority of our contracts in the U.S. have adjustment clauses for labor, which are kind of automatic. We have to ask for them, of course. So there is a bit of a lag, and you miss one or two months of higher costs versus increases, right? But that is kind of automatic, and it's part of the accepted practice in the U.S., Internationally, not so much, but we're not seeing the same dynamic on compensation increases internationally that what we're seeing in the U.S. So I think we have, we think because we have been in this COVID and distressed kind of environment for over a year, we think our compensation fell somewhat behind other industries. So there's a bit of a catch-up going on now. And I don't mean our neighbors, I mean ours in the drilling industry. So you'll see a little bit of that where we bring our compensation to levels that make us competitive across industries. But those, I don't think those numbers are tremendously high. We probably, we saw an impact somewhere in the range of $300 per day in the third quarter, which we have set with pricing increases. and the actual compensation increases on the day rate haven't kicked in yet. So those will come in. The pricing I'm referring to is actually the pricing in the US, which has gone up. And I can tell you we are, you know, I'm always cautious when I try to look forward in terms of pricing, I'm not assuming the best outcome, but I can tell you that based on all the contracts that we have signed lately, our rates now are solidly in the 20K environment. Before, in the second quarter, it was kind of hard to get above 20. Now, the latest contracts, we're asking customers for 22K, and they're not flinching. So I think the environment has changed. It's changed materially, and it's changing in favor of the drilling contractors. Internationally, our pricing did not fall nearly as much as what we saw in the U.S. In fact, you can see that our margins throughout the downturn really stayed around the $13,000, $14,000 range where they remain today. So pricing increases are not really – it's not really the same dynamic as pricing really didn't really fall materially as we saw in the U.S.
spk10: I think international margins also will depend a lot on mix as well as rigs as well, depending on size of rigs, et cetera. The other point I'd make is that if you look at the average day rate, you'll see it was up $300, which represents the fact that the leading edge rates are crossing the average of the fleet, as William said. So we are pushing in the low 20s right now. And the point is, if our estimates are correct that we intend to exit the quarter close to 80 rates, that will be about 70% of our super spec fleet And as you well know, as you get to 70%, that's when the hockey stick in the industry starts affecting pricing. So I think all that is very constructive to where we are. But obviously, as William said, we have this compensation stuff that's working its way through, et cetera. But I think it's very constructive looking for next year. By the way, next year, in terms of the macro, the operators obviously are facing a great environment right now. Obviously, the supermajors probably will be reporting a record quarter. probably record incentive vested about 10 years, and that sets up nicely. At the same time, however, I think everybody has to be measured here. I think capital discipline is here. I don't think it's going to necessarily go away immediately at all, if at all, and you've seen some operators emphasize that in terms of being innovative with new structures. One operator in particular came up with a fixed and variable dividend to emphasize their commitment I think other operators are trying to figure out ways to reinforce that as well. So I think all that sets up for a constructive environment going forward. And in terms of talking with them, it looks like about half of them that we have talked to have indicated plans already. Some of the increases are modest. Others that are going through acquisitions are still digesting their plans in terms of acquisitions, what effect they're having on their rollout for next year. But all of it sets up, I think, for a deliberate increase for next year, given the macro.
spk09: Got it. Selfful context. Maybe turning the balance sheet, sort of a two-part question here. But the first part is just a simple clarifying question, which is just what drove the increase in debt levels in the quarter? Was that a rollover draw or what? And then just thinking through 2022, how should we think about your ability to delever in spite of the needs to increase capex
spk10: Okay, I'll answer the first question, which was that you saw the total debt went up 252, but the cash also went up 372. So net debt, to emphasize, went down $120 million, and that's because free cash flow in the quarter was 133. It was 55x Canada and energy transition investments. I think you pointed out exactly what occurred. There was a drawdown on the revolver that occurred at the end of the quarter. That revolver balance is down to... You'll see in the queue that number was $9.25, and that number is now $5.95. So basically debt management issues.
spk04: So we move cash around between legal entities, and the cash goes out in cycles and comes back in. Normally we do this during the middle of the quarter. We had a time-sensitive move that ended halfway on the first week of October. The revolver balance was down again by $300 million or so. The important part is net debt went down by $120 million in the quarter, and we expect to continue reducing it in the fourth quarter, and we did pay down the $82 million of the September maturities.
spk10: One add-on I'd like to make is, given what we're seeing this morning, some comments, I want to clarify our EBITDA for the quarter. The report number is 125. I just want to make sure you understand that the net of the international early termination in Mexico and other one-time items was actually a net positive of three. So if you actually back that out, the adjusted number for the quarter, X one-time item is actually 122, which is about $5 million above the 117 consensus. I think some people got confused by the reference to the seven million, thinking that was all gross, a net number, but it's not. The net number is actually $3 million. So the ongoing number for the quarter, X those one-time numbers, was actually 122.
spk00: All right, thanks. I'll turn it back here.
spk07: Our next question comes from Aaron Jaram with JP Morgan Chase. Please go ahead.
spk02: Yeah, good morning, good afternoon. Aaron Jaram from JP Morgan. Tony, I want to go back to some of your comments on some of the increasing engagement you're seeing from public companies. And so I just wanted to get your thoughts on, obviously, the publics have been very, very disciplined in 2021 and haven't really changed capex despite the strong commodity prices. But what are your sense, as we get into 2022, the publics could do next year? I think we're modeling kind of a mid-20% increase in U.S. kind of land activity, but I wanted to get your thoughts on how you see the market evolving next year.
spk10: I think, as I said, I think when you look, I mean, obviously from a balance sheet point of view, their situation is improving quite a bit, but I don't think they're going to put foot to the pedal like in the past. And based on our conversations, I think we're seeing modest increases, and I think that that number is probably toward the upper range rather than out of the box. I think people are going to be deliberate in terms of what they do right now. I think one of the first priorities for these people are going to be As Tier 1 operators in general come back to work, I think quality of operations is going to be a big part of their thinking now. People are all aware now to execute better. And when you want to execute better, you've got to focus on your existing quality. So I think in the operators we're looking at in terms of our pipeline, I think a lot of them want to basically high-grade some of their existing contractors as opposed to necessarily immediately going to increasing fleets. And so you're going to see some replacement as operators decide to focus more on They pick a strategic partner for that. They're going to want to upgrade and pick a person that can be a partner at the table with them. I think that's going to be the first step on the journey. And then, depending on the success rollout, then they'll put a foot to the pedal even more dramatically. But I don't want to tout that this environment is going to create this big rocket takeoff in the first of the year.
spk04: But let's not understate it either. I think we are looking somewhere in the range of 15% growth for activity next year, which is not insignificant.
spk02: 15% from the year-end exit rate or year-over-year?
spk04: Yes, correct.
spk02: Yes, yes. Fair enough, fair enough. Okay. Great. And then just my other question, you guys have highlighted how kind of leading-edge rates are eclipsing 20K per day. And I wanted to get a sense of, you know, how do you characterize demand patterns from high spec versus more standard equipment? Are you seeing a bifurcation in rates between different rig classes?
spk10: Well, if you look at our existing working fleet, it's all 100% high spec. And I think that's, at least the upgrades we're focused on, that's where the value prop is for us in particular. And that's where I think the market is a few of those people, as I said, that want to focus on quality and getting the best returns out of their operations. I mean, just the value from that is so clear, and therefore, that's what's going to drive things, I think. Obviously, the privates are more commodity-oriented and different dynamics in terms of their economics, and so I think there's going to be a role. Other rigs are not going to disappear in the market. They never have. There's always going to be a legacy tale of those other rigs, but the high-spec rigs are... Are ours today fully utilized? That's where we see the growth go forward.
spk04: I think there's a bit of an idle capacity still in the super specs in the market in general. And as that starts to tighten, we may see more increases in non-high spec rigs as well. But there's still enough high spec rigs out there that that's going to be the first pool that clients will try to sign up.
spk02: And how would you guys gauge reactivation costs if you go from 80 to 90, 90 to 100, just a sense of those reactivation costs?
spk10: Right now, I think we've done a great job of stacking out our procedures, stacking out our rates. So I think the return back to work for us is not going to be very disruptive or costly to do that. We don't see that as being a big hurdle.
spk04: So we were discussing this earlier, and there's a lot of demand. We have the rigs. The rigs are in great shape. I think the challenge for the industry will be the crews, right? If we're all trying to increase at the same time, you know, that's going to be the bottleneck, I think. Everything else should be fine.
spk02: That's great, Keller. Thanks a lot, guys.
spk07: Our next question comes from Carl Blandon with Goldman Sachs. Please go ahead.
spk01: Good morning. Thanks very much for the time. I appreciate it. I just wanted to follow up on the balance sheet. I think you provided some color on the debt draw at the end of the quarter from the revolver and the cash increase. I was interested, is there any connection there with that? You mentioned some debt management issues and potential flexibility it might give you as you think about liability management and debt reduction goals over time, which you've been progressing on and you have some more priorities in the coming quarters.
spk04: There's a lot of circular movements between legal entities. Like I said, they usually happen in the middle of the quarter. We had a time-sensitive one that we had to do and half the transaction was In Q3, half the transaction at the beginning of Q4, but the net of it is zero. So there's really nothing there. Got you.
spk01: Understood. You've had good progress on free cash flow. Some of that's been from working capital. I'd be interested, is there more you can do from a working capital standpoint in 4Q and then also into 2022?
spk04: I really do think that's low-hanging fruit. We still have a lot of ideas that we're working on. The team is extremely motivated and has done a great job on the collections. I'm extremely proud of what the guys have done because a lot of what we've seen over the last two years has come from being much better on our working capital management. But now we have some ideas in terms of automating some of the processes and putting more incentives on the troops. So we think we will continue to see that in 2022. to the point that the growth in activity that's coming will be offset largely by a lot of those initiatives that are already started and that will continue to bear fruit in 2022.
spk01: So, if I could squeeze just one more on the cash front. In terms of the funding strategy at SANA, is it still the the base plan to just fund organically from SONAT, from the cash that's there plus free cash flow that's generated at the entity, or could there be other ways you approach the growth CapEx needs in the region?
spk04: SONAT, I mean, if we forecast, and I think with a realistic pace of additions of rigs over the next several years, given the fact that they managed to accumulate a bunch of cash due to delays of Saudi Arabia, is really not that stressed in terms of the ability to fund organically. Obviously, there's potential there to suck more cash out of Sanad, by doing some sort of financing within SANA, but that's not really in the cards today. And I think by 2024, SANA will turn around and the new rigs plus the legacy rigs will generate enough cash to not only pay for the new rigs that are being built, but also to allow for dividends to the shareholders.
spk01: So very helpful. Thanks very much.
spk07: Our next question comes from Grant Brody with Bank of America. Please go ahead.
spk05: Hey, good morning, guys. It's Greg Brody. I was wondering if you could just address what your plans are right now for the revolver and where the process stands in terms of renewing it.
spk04: So that process is always under discussion. We like to do things early, so obviously, you know, we've already amended the revolver multiple times, and we'll continue to do so as needed. You know, I'm not going to telegraph right now because obviously there are multiple options on what we could do with the revolver, but you can be sure that something that it's on my radar screen and it's at the top of my radar screen. So that's as far as I'll go.
spk05: Got it. I won't push anymore there. I'm sure we'll hear about that in the next quarter. I saw the debt numbers in the presentation. I was curious if you can tell us if the warrants, if there were any exercises that were paid for with debt that was part of the debt reduction, or how much of that you've seen to date.
spk04: Well, I think the warrant has some specific requirements. to create the arbitrage opportunity for the bondholders to exercise those warrants and submit their debt. And those conditions haven't yet been met. One of them is a certain level of share price, but another one we have to trade with a 6% improvement over the past three days. So those conditions need to be met simultaneously. We haven't met them yet, so we haven't seen exercises yet. But the fact that the bonds that are eligible for exchange are trading at very, very high levels indicates that there is a compressed demand to do that. And a lot of the bondholders have piled onto those bonds because they see the arbitrage opportunities. Once those conditions are met, I think we'll see a lot of movement.
spk10: I think there has been some exercises by bondholders to test the process because it's obviously a unique structure. So we have had some testing of the process with a minor amount of bonds. But as William said, now that the stock is in the 125 area or so, was in the 125 area, you're at the range where if you trade and you qualify for your incentive shares, that combination makes it very attractive for the debt holders for the debt holder to convert.
spk04: We think 120 is a trigger point, but then you need to meet the condition of the 6% trading. I think as we move forward, it's very likely that these warrants will become a factor.
spk05: Thank you for the time, guys. Appreciate it.
spk07: Our next question comes from Andrew Ginsberg with R.W. Presperch, please go ahead.
spk06: Hi, guys. Thanks for taking my questions. One thing I wanted to get a better idea of, so we were talking a lot about on this call some of the labor inflation and labor pool being some of the bottlenecks. Do you see that as being a large demand driver of some of the automated services you guys are providing?
spk10: Well, I think obviously one of the things is to attract people in our industry. to our industry, and frankly, speaking very frankly, when people think of a drilling rig, they think of a person that is in coveralls covered with mud and has had an accident with a finger missing, right? And so one of the reasons why we're so interested in automation is to change that mindset and to make a driller sitting in a drill chair on a rig be like a profession for a pilot in a G5. That's the long-term goal here, to actually change the skill set change what's required to operate these rigs and upgrade the talent, make the job a more interesting job by removing some of these heavy labor skills and making it available actually to women as well to work at rigs as well. That's another priority of ours. So that's part of the logic behind our drive to automation.
spk04: So I think a lot of those people that you see on the rig today hauling iron on the deck floor, instead will be doing other stuff like other services that we provide that add value and incremental revenue rather than just moving equipment around and pushing stuff into the hole. That's the vision. So yes, I think compensation will help, but it's not something that's going to happen overnight. uh i think it's something that we we have in addition to the rmp rig we are developing a modular piece of equipment that can automate not only the rigs but other rigs as well and i think over time that's what you will see in the industry that will be a like the top drive that will be a requirement to drill in the future okay so is the point then that the demand is kind of just going to already be there and
spk06: getting that higher talent labor pool will help kind of drive that, you know, help meet that demand? Or is it a little bit of both?
spk10: I think it's a little bit of both. I think for the existing people to make the existing pool make the industry more attractive to work in, obviously the concerns about safety get ameliorated by this move on red zone management on the floor. And then it opens up a pool of people that historically we haven't had the ability to access at the rig site. in terms of their ability to be productive and value enhancing at the rig site. So it's both of those things, I would say.
spk06: Okay, that's really helpful. And then just kind of pivoting back towards the balance sheet, I know you guys talked a little bit about the revolver. From the perspective of the remaining unsecured notes in the capital structure, is there a preference on how you guys are looking to address some of the securities or the issues in the balance sheet in terms of maybe trying to tackle some of the higher cost debt first or really just the front end maturities or the highest priority above that?
spk04: Listen, I mean, obviously, again, those issues are top of my list. And the whole team is very focused on debt profiles, maturities, maturity walls, the revolver. That's just business as usual. That's just tactical debt management that we do all the time. So, you know, and it depends on many conditions. We have plan A, B, C, D, and E, depending on what the environment gives us. And yes, to answer your question, yes, we're looking at those high costs, but we're looking at everything as a global. I mean, that's no different from the last five years where we've been managing tactically and strategically all these pieces of our capital structure. That will continue. We haven't disappointed our shareholders or bondholders yet, and we don't intend to do so in the future.
spk06: That's great. Thank you for the call. That's it on my end.
spk07: This concludes our question and answer session. I would like to turn the conference back to Dr. William Conroy for any closing remarks.
spk08: Thank you for joining us this morning. If you have any additional questions or wish to follow up, please contact us.
spk00: We'll end the call there, Sarah. Thank you.
spk07: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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