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spk10: Good day, and welcome to the fourth quarter 2021 Neighbors Industries Limited 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. Please note this event is being recorded. And I'd like to turn the conference over to William Conroy, Vice President of Corporate Development and Investor Relations. Please go ahead.
spk05: Good afternoon, everyone. Thank you for joining Naver's fourth 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 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 Meisner, President of our Energy Transition and Industrial Automation 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. Good afternoon.
spk09: Good afternoon. Thank you for joining us as we review our results for the fourth quarter of 2021. This afternoon, we will follow our usual format. I will begin 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 comment on our financial results. I will make some concluding remarks and we will then open up for your questions. I am pleased with our strong operating performance in the fourth quarter. Once again, all our segments met or exceeded the outlook we gave on our previous earnings call a quarter ago. We also made further progress on each of the company's five key strategic initiatives. Adjusted EBITDA in the fourth quarter was $132 million. As you can see from this result, we finished the year on a strong note. We maintained our execution at a high level while we grew the overall business. Our global average rig count for the fourth quarter increased by 12 rigs, excluding the impact of the sale of our rigs in Canada. This rig count growth was driven by increases in both our US drilling and international activity. Revenue in our advanced technology drilling solutions and rig technology segments also increased. Combined, sequential EBITDA in these two segments grew more than 25% and accounted for nearly 18% of the company's total. This is a new high watermark for these segments' contribution to our EBITDA. In the fourth quarter, we again made progress on our twin priorities to generate free cash flow and reduce net debt. Free cash flow in the quarter totaled $50 million. As I mentioned, Our EBITDA generation exceeded our outlook. Looking another way, EBITDA minus CapEx exceeded our expectations for the quarter and totaled $68 million. Free cash flow was impacted by increases in working capital as the business expanded in the quarter. Net debt improved by $32 million in the fourth quarter, driven by the strong operating performance and disciplined capital spending. I am pleased with our overall performance in the fourth quarter and for the full year I look forward to reporting further progress throughout 2022. In 2021, we began highlighting the five key drivers that we believe support the investment thesis on neighbors. These 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 on our commitment to deliver. Let me update each of these, starting with our U.S. performance. Our strong daily rig margins in the lower 48 improved yet again. We exited the year with 79 rigs running. In the fourth quarter, our daily margin increased to $7,161. This accomplishment reflects our superior value proposition and was achieved even with upward pressure on costs. We remain committed to delivering the industry's best performance and most advanced technology while leading in safety and sustainability. Next, let's discuss our international business. We bring those same attributes I just mentioned to our international drilling segment. Our financial results in this segment were consistent with last quarter's margin outlook. This demonstrates our excellent performance in the field as we continue tightly disciplined spending. Looking ahead, We expect SADDED to deploy its first in-kingdom new-build rig around the end of the first quarter. The rest of the five which have been awarded should come at a rate of approximately one per quarter. We estimate each of these new rigs will generate annual EBITDA of approximately $10 million. We are excited as SADDED nears the deployment of the first new rig into the field. The JV's long-term plan calls for a total of 50 new-build units over 10 years. Each successive year of five deployments should add $50 million to annual EBITDA. This visibility to future growth is unmatched in the industry. Now, let's discuss our technology and innovation. Our focus on the development of advanced technology continues to pay dividends. Our initiatives span several key target areas, including automation, digitalization, integration, and robotization. Once again, our portfolio's market position improved. Quarterly EBITDA in our drilling solutions segment increased sequentially by 25%. This segment's EBITDA of $19.6 million exceeded its performance in the first quarter of 2020, immediately pre-pandemic. The business crossed another milestone in the fourth quarter when we combined the daily margins in the lower 48 from our drilling and drilling solutions businesses Drilling Solutions added more than $2,000 per day in the fourth quarter. We recognize some competitors' top performance contracts, which are not yet yielding superior margins. In contrast, our combined daily rig margin figure amounts to more than $9,200 per day, reflecting the value pricing of our rating and technology offering. This is the highest daily margin per rig by far in this market. In addition to this quarterly performance, our pipeline of advanced technology solutions remains full. Our development initiatives focus on the critical goals of improving customer well-being quality and productivity while reducing operator costs. We believe we are unique in that our apps and products are deployable beyond the neighbor's fleet on third-party rigs. This approach to the business significantly expands our addressable market. Notwithstanding this opportunity, the full potential of the neighbors' portfolio is maximized on neighbors' high-specification rigs, which we believe are the industry's most capable. Looking ahead, we expect to see greater penetration of our digital portfolio across the market. I'll wrap up my comments on our technology with a brief update on Rig 801. You will recall we deployed this groundbreaking, fully automated rig in the third quarter, for ExxonMobil in the Permian. The rig has completed its second full pad. Its performance is comparable to our other high-spec rigs, and it drills with the rig crew members away from the red zone. Now, let's discuss the levering and the steps we've completed to de-risk our capital structure. In the fourth quarter, we again generated free cash flow and reduced net debt. This performance kept a full year in which we generated significant free cash flow and made meaningful progress to deliver. Also, during the fourth quarter, we completed an offering of senior notes. Subsequently, we closed out a new revolving credit facility. These two transactions have positioned us with materially reduced debt maturities over the next three years. This enables us to potentially manage our debt maturities through 2024 with free cash flow. I'll finish this discussion of our key value drivers with sustainability and the energy transition. We continue to refine and enhance our focus on sustainability. With the emphasis we place on employee safety, we improved our safety record in 2021. With a TRIR of 0.41, we believe we lead the industry. This notable accomplishment by the neighbors team should be viewed in the context of activating more than 30 rigs worldwide during 2021. On the environmental front, we made significant progress. We reduced our 2021 greenhouse gas emissions in our lower 48 field operations by 10% versus the 2020 level, doubling our target. We also made progress across our initiatives supporting the energy transition. Initial prototype testing of our carbon capture and hydrogen injection technologies has been promising. We hope to have commercial products available this year. We have several more projects underway. As these proceed, we'll be reporting the results. Neighbors Energy Transition Corp., or NETC, which Neighbors sponsored, completed its IPO in November. The SPAC structure enables us to address the scale of energy transition opportunities with a lower cost of capital than Neighbors. This remains an exciting initiative for neighbors, as well as one we think could have material synergies with neighbors' existing operations. To reiterate, our approach to the transition is comprised of three pillars. First, reduce our own environmental footprint by applying new technologies. Second, take advantage of the opportunities in areas adjacent to our activity. And finally, invest in companies both adjacent to neighbors and in other verticals and help them to reach scale. Now, I will spend a few moments on the macro environment. The fourth quarter began with WTI just above $75, followed by a dip to the mid-60s. Since then, it's been a relatively steady climb to the $90 level. As we pointed out at our analyst meeting in December, sustained crude prices above the $60 mark provide returns that would incentivize operators to increase their drilling activity. This pricing drove activity materially higher in the quarter. During the quarter, neighbors added eight rigs, equating to 11% growth. In comparison, according to Inverness, from the beginning of the fourth quarter through the end, the lower 48 rig count increased by 54 rigs, or approximately 9%. This translates to a 15% share of the incremental rig count for neighbors. For the industry, larger clients accounted for slightly more than half of this growth. Once again, we surveyed the largest lower 48 clients at the end of the fourth quarter. This group accounts for approximately 30% of the working rate count. Our survey indicates an increase in the activity approaching 20% of this group by the end of the year. Nearly every operator amongst these 15 clients plans to increase activity. The pricing environment is moving upward quickly. Our own leading entry day rates now stand several thousand dollars higher than the daily average in the fourth quarter. We see pricing accelerating as industry utilization increases throughout the year. As we mentioned earlier, NDS's growth in the quarter was exceptional. This growth reflected the strong value proposition of the portfolio. Fully 74% of our lower 48 rigs run five or more NDS services. Our top service runs on 99% of those rigs. Going forward, in addition to our own domestic rigs, NDS will be focusing on both third party and international opportunities. In our international markets, those same macro factors exist. Strong commodity prices and expected production increases are driving oil field activity higher. We see potential activity increasing in several countries. In particular, we have visibility to the set of new bills coming in Saudi Arabia. tendering activity has picked up across other markets in the Middle East. The supply of suitable aisle rigs remains limited in that region, which should be favorable for pricing. We are also optimistic for additional rigs in Latin America beginning in the first half of 2022. Clients there are planning increases in activity, and we have the rigs and relationships to support those plans. 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 increases in our activity. We took actions to address the labor market tightness and remain competitive. In the fourth quarter, we increased compensation in the field and throughout the organization. As a result, this challenge has recently eased somewhat. Now, let me address inflation and the supply chain. We have seen higher costs across our supply chain. Their effects have been mitigated thus far through our vertically integrated manufacturing structure. The primary stress factor in our supply chain remains vendor lead times, which have widened significantly. Our team has been on top of this challenge and our operational continuity remains excellent. I would note that we managed to increase daily drilling margins in the lower 48 even as our costs increased. This speaks volumes to the performance we're delivering to our clients. To sum up, commodity prices remain at levels that are supportive of increased operator activity. We are also encouraged by the reduction in deduct inventory, which suggests a favorable shift in operator spending towards drilling. Natural gas prices, as indicated by the two-year strip, remain above $3. We are also seeing increased interest from operators which can benefit from these higher prices. With all of this, and the worst of Omicron seemingly behind us, we remain vigilant to potential future disruptions from the virus and challenges in the economy. Those risks notwithstanding, the current commodity environment supports increased global drilling activity. Now, let me turn the call over to William, who will discuss our financial results and guidance.
spk08: Thank you, Tony. The net loss from continuing operations for the quarter was $114 million, or $14.60 per share. This compares to a loss of $122 million, or $15.79 per share in the prior quarter. The quarterly improvement reflected the sequential increase in EBITDA. Revenue from operations for the fourth quarter was $544 million, a 4% improvement compared to the third quarter. Strong operational results more than offset the absence of $8 million in third quarter early termination revenue and the sale of our Canadian assets. Canada generated $6 million in drilling revenue during the prior quarter. Excluding those items, revenue increased by almost 7%, with strong contributions from all our segments. Drilling solutions, rig technologies, and U.S. drilling all delivered double-digit percent sequential growth. U.S. drilling and NDS benefited from higher rig count in the lower 48 market and from an improving pricing environment. Higher activity in international markets also drove revenue increases for both drilling and NDS. Total adjusted EBITDA of $132 million increased by $6 million, or 5%. Excluding the impact of early termination revenue and the Canadian sale, EBITDA improved by approximately 14% as compared to the third quarter. On a normalized basis, all of our segments deliver strong growth. U.S. drilling EBITDA of $69.2 million was up by $7.1 million, or 11% sequentially. Our lower 48 average rig count increased in the fourth quarter to 75 rigs, up 7 rigs. Daily rig margin came in at $7,161, $136 higher than the prior quarter. This improvement reflected a $457 increase in revenue per day, offset primarily by higher compensation for accrues. We have adjusted compensation for our rig employees over the last two quarters to ensure we remain competitive in the tighter labor market. Rig count continues to make progress on the strengthening commodity price, and higher utilization is pushing leading-edge day rates upward. During the last month of the quarter, on new pricing negotiations, we managed to push base rig day rates to between $22,000 and $23,000 per day. I would like to point out that these rates do not include additional items normally charged on top of the base day rate when providing grilling rig services, nor do they include our NDS offerings. This price momentum has translated into higher average daily revenue for our fleet. We expect average day rates and margins to continue to increase during the coming months. For the first quarter, we project our lower 48 average daily margin to be between $7,500 and $7,600 as we continue to roll our rigs onto contracts with higher pricing. Currently, our lower 48 rig count stands at 83, which translates into 75% utilization for our higher spec rigs. We forecast an increase of 9 to 10 rigs in the first quarter versus the fourth quarter average. On a net basis, EBITDA from other markets within the U.S. drilling segment grew moderately versus the third quarter due to the addition of one rig in Alaska. For the first quarter, we expect to add another rig in Alaska. However, the combined EBITDA of these two markets should decrease by several million dollars. The Alaska improvement will be more than offset by non-recurring downtime for recertification on our most impactful offshore rig. International EBITDA of $73.2 million in the fourth quarter decreased sequentially by $3 million, driven primarily by the absence of the early termination revenue realized in the third quarter. Excluding this item, EBITDA improved by roughly 7%, as rig count increased by 4.4 rigs on average. Daily margin of $13,172 decreased by $1,203, reflecting the prior quarter's early termination revenue. Current rig count in the international segment is 72. We expect rig count in the first quarter to remain in line with the fourth quarter average, with further rig additions coming in the following quarters. Daily margin is targeted at approximately $13,000 in line with the fourth quarter level. Sterling Solutions continued making meaningful strides in the fourth quarter. EBITDA of $19.6 million was up $4 million, or 25% from the third quarter. Gross margin for NDS was over 50% for the quarter. We continue to see penetration improvements across all of our product lines, with the largest contributions coming from performance software in the U.S. and casing running services in international markets. Activity in the lower 48 generally improved, taking our combined drilling rig and drilling solutions daily gross margin to nearly $9,300. This translates into approximately a $2,100 per day contribution from a rapidly growing solution segment up from roughly $1,900 per day in the prior quarter. The combined gross margin for lower 48 drilling and solutions reached $65.1 million and delivered gross margins of 36.2%. We expect first quarter EBITDA for the drilling solution segment to be just above the fourth quarter level. It is worth highlighting this segment's growth year over year. Comparing to the fourth quarter a year ago, NDS EBITDA increased by over 90%, and its EBITDA contribution to neighbors as a whole increased from 9% to 15%, while gross profit margin widened by 4 percentage points. RIG Technologies generated EBITDA of $3.8 million in the fourth quarter, an $800,000 improvement. The growth was primarily related to improved RIG activity, which resulted in higher aftermarket sales. Higher specification requirements also drove demand for recertifications. For the first quarter, we expect EBITDA to come in on the positive side of breakeven. Now turning toward equity and cash generation. Free cash flow totaled $50 million in the fourth quarter. We delivered material free cash flow even with higher accounts receivable, which reflected stronger revenue toward the end of the quarter. This compares to free cash flow of $133 million in the prior quarter. The third quarter included a net benefit of $78 million from strategic transactions, namely the sale of our Canadian drilling assets for $94 million. This sale was partly offset by several investments in geothermal and other energy transition initiatives totaling $16 million. For the full year 2021, we generated free cash flow of $312 million as we continue to deliver industry-leading results together with sustained cost and capital discipline. The first quarter is normally challenging in terms of cash flow generation as we pay several large annual items such as property taxes, insurance premiums, and employee bonuses. In addition, capital expenditures for the year tend to be front-loaded. Nonetheless, we are targeting break-even free cash flow for the first quarter of 2022, as we expect some tailwinds from our year-end accounts receivable to offset these annual payouts. Capital expenses in the fourth quarter were $64 million, essentially in line with the prior quarter. This includes $11 million for the SANA new bills. For the full year 2021, CapEx totaled $244 million, including 69 million for the SANA new bills. We're targeting CapEx between 95 and $100 million in the first quarter, including approximately 35 million for the SANA new bills. Our forecast capital spending for full year 2022 is approximately $380 million, including $150 million for SANA new bills. The increase in the ex-SANA CapEx reflects primarily the increase in average rate count for 2022 over the prior year's level. In the fourth quarter, net debt declined by $32 million to $2.27 billion. This improvement was driven primarily by the positive free cash flow, somewhat offset by the distribution of an additional $9 million to each of SANA's shareholders. For the full year 2021, we reduced net debt by $260 million, despite total distributions of $59 million to Saudi Aramco from our SANA JV. We also continued to take steps to improve our position in terms of liquidity and debt maturity profile. During the fourth quarter, we issued senior priority guarantee notes with a principal amount of $700 million due in November, 2027. We then used the proceeds from this transaction to reduce our near-term maturities. Subsequent to year end, we closed on a new revolving credit facility maturing in 2026 with a principal amount of $350 million. The new credit facility replaced our previous facility maturing in 2023. The facility, includes accordion and grower features for additional funding totaling up to $200 million, and a carve-out that can be used for a secured letter of credit facility of up to $150 million. With the closing of the new credit facility, we have also increased our senior priority guaranteed note capacity to over $400 million. Together with the capacity on our priority guaranteed notes, we have nearly $1 billion available for future debt refinancing. We made significant progress in 2021. We generated over $300 million in free cash flow and reduced net debt by $260 million. With the completion of the two recent financial transactions, we are well positioned in terms of liquidity and runway in our debt maturities. Currently, we are seeing a robust market environment. With our confidence in additional growth through 2022, we expect to continue capitalizing on the market upswing and make further progress on our long-term objectives to continue generating free cash flow and reducing our net debt. With that, I'll turn the call back to Tony for his concluding remarks.
spk09: Thank you, William. I will now conclude my remarks this afternoon with the following. In 2016, We unveiled our strategy aimed at extending neighbors' technology leadership in the global land drilling industry. With our advances in process automation, digitalization, integration, and robotization, we have achieved our goals. Over the same period, we set out to significantly improve our capital structure and materially de-lever. Our financial results, capped off by the fourth quarter, demonstrate material progress on those goals as well. Recognizing these successes, we believe the future holds unprecedented opportunities. Neighbors is ideally positioned to help drive the energy transition. At the same time, we are committed to the responsible production of hydrocarbons. We believe this combination opens up a long, wide runway for neighbors. As I have said before, the best is yet to come. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.
spk10: 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'll pause momentarily to assemble our roster. Our first question comes from Connor went off from Morgan Stanley. Please go ahead.
spk01: Yeah, thanks. One of the things that stood out to me most in the, in the press release was the $4,000 step up in day rates. I was wondering if you could give a little bit more color, you know, how nuanced was that contract signing? You know, was there any special features to the rig and how realistic would it, would it be to think of the rest of your fleet migrating towards that type of a rate over the year here?
spk09: Okay, well, I guess the color is that we see leading edge base rates moving pretty quickly here. The fourth quarter average revenue per day, as you know, was 21.7. And the number you referred to is leading edge. I wouldn't say every renewal was at that, but that's pretty applicable to most of the discussions. And interestingly, it applies to almost all the basins. Permian, the Haynesville, North Dakota, I think may not be as applicable to Marcellus given the fact that that market is suffering a little bit from takeaway capacity limits and the operators are ahead. So that puts a little bit of a damper on things. But generally, I think the market is very hot. In my 30 years of neighbors, it's probably the hottest in terms of ramping up, a ramp up of day rates that it's ever been. Of course, that's off an extremely low point that was also impressed at it. So take it with a grain of salt. I think the other point to note is that even at these higher rates, given costs and Other points, we're still not at prices where you cannot afford new capital investments, so we're not really earning the kind of return that we really need to keep the industry healthy. But all that said, obviously, it's all very constructive.
spk01: That's helpful context. I mean, if we could sort of stay on this point, is your view that the industry is sort of now out of whatever you want to call it, super spec, panoptimal, capacity? And is there a reason to think that there will be meaningful rig upgrades occurring later this year?
spk09: I still think there's some runway to go yet. I mean, we're at 75%. So, you know, if things stay on track by the end of the year, then I think you can reassess that question. Right now, there's still capacity to absorb. And obviously, at the numbers we're at, we're at 75% historically, as you know, that's when the hockey stick of pricing starts kicking in a little bit. So it's hot. And you can tell that from the operators. Operators today want a hot rig, and the guys that have rigs, even if they have a gap in their program, they're using the efforts to kind of hold on to the rig, even working out deals with other people to hold on to the rig because they want to let it loose, all of which are constructive signs. But I think there are still ways to get from calling that we're in a new era of replacement pricing for new builds or even for significant upgrades because obviously that depends on the long-term curve and what things look like, and I think it's way too early to say that. But in the meantime, it is pretty constructive.
spk08: I'll make an additional comment, Conor. I think we're going to be adding somewhere in the range of 9 to 10 rigs in the first quarter. So by the end of the first quarter, we'll be in the low 80% kind of utilization, which is really as high as it's been a long time. And I think we're going to exit the year around the 100 rig mark. So out of the 110 high-speed rigs that we have. So that's how hot the market is going to be, we think.
spk01: Yeah, that's all helpful context. Maybe just to sneak one more in here. So based on your comments there, it doesn't sound like we should really expect a lot of upgrade capital or anything like that. Really the only growth capital it sounds like is slated for this year is the SNOT program. Is that a fair summary?
spk09: Yeah, well, I mean, one of the things, obviously, where we're different is that with our 111 rigs, they all have walking capability already. So unlike some of our leading competitors, we don't have that as an issue. Now, so I don't think for us to get to that 111 number, there's significant growth capital. Beyond that 111 number, then we have to address that issue. But as I said, we're not at that point yet. So the good news is we've got a pretty good runway here in front of us, pretty clear runway, and that's what we're going to take advantage of.
spk01: Thanks for all the color.
spk10: The next question comes from Wakar Syed from ATP Capital Markets. Please go ahead.
spk00: Thank you for taking my question and congrats on a great quarter. You're welcome. William, you know, if you analyze Q4 EBITDA, you know, coming around $525 million. Now you have a target of $800 million EBITDA for 2023 that you highlighted. Could you remind us how you're going to fill up that gap, like $275 million or so gap that exists from analyzing Q4 to getting to 800?
spk08: You want to go that far out, huh, Wakar?
spk00: Yeah, no, just we got a question, this question again, so I just, you know, I think it would be useful for everybody.
spk08: I'll just give you a bit of a 10,000-foot But we think that, keep in mind that our run rate is about 520 right now, so let's call it a $300 million gap to get us to the 800 in 2023. So if you look at the growth, the rigs where we were in the fourth quarter, which were roughly 74 rigs in World 48, and you get us to about 105 average, say, in 2023, that growth in RIGS represents roughly about $110 million of incremental EBITDA. And if then you take our margins from 7,000 to 10,000, which you think will be the case by the year 2023, we're looking at another $90 million. So that's $200 million on top of what we had in the fourth quarter annualized. Then if you look at SANA, we're looking at another $56 million of incremental EBITDA. incremental capex from the rig additions that we have on the JV with the new builds that are coming out at 10 million EBITDA per year. And then our drilling solutions, I can't tell you how optimistic and positive and bullish we are about neighbors drilling solutions. That's going to be our strongest growing segment overall. You know, I have full confidence that we're going to be giving positive news all the time going forward with their drilling solutions. I think it's somewhere in the range of 50 to $60 million growth in that business alone. So that's how we get there.
spk00: That's very helpful. Now, in terms of you seeing very strong momentum in obviously rig rates, Do you see over the next three years or so break rates getting to levels that would, you know, getting to new build type economics in the U.S.? And, again, what would be the day rate at which, you know, that new building would be justified?
spk09: Yeah. I think at a minimum, that would be 30 plus in terms of a day rate. And, again, it depends on the outlook of what the real futures curves can look like so that people can actually plan accordingly, programs that will justify paying those incremental numbers. I think the other question is going to be what those rigs are going to look like. As you know, our thesis is that the industry has to move to automated rigs of a new level of automation, and that could help drive that move, but I think it's still too early to say that, and obviously the economics, they don't support it. But, yeah, it is a possibility. Again, I think it's too early to call. but you need at least a $30,000 day rate to get there.
spk00: Great. Thank you very much. Thanks for your answers.
spk10: The next question comes from Carl Blunton from Goldman Sachs. Please go ahead.
spk02: Hi, good afternoon. Thanks very much for the time. On the distribution from Sonod, I was wondering if you could provide just a bit more context around that 18 million number in 4Q. I realize it's small, but the context would be helpful. And then just bigger picture, taking a look at the SONOD rig program and new build program you have in place, it does look like the JV is positioned to turn cash flow positive in 2024. Just be interested in your expectations around when you would start receiving consistent cash distributions from the JV.
spk09: Well, from an initial comment I'd just like to make is when this deal was first announced, I think there was some concern about our the partner's willingness to actually cause their recast distributions. And with the two distributions I made this year, I hope those concerns have allayed. That shows that Aramco is also a partner that's looking at things practically and business-like. So I think it's really a testament to the partnership we have that you actually see that because that was one of the concerns. The other point, as you make, is yes, there comes a point where the new bill, once it gets in stream, then it should be self-funding in a way. And I'll let William talk about the exact timing of that.
spk08: Yeah, exactly. I'll give you what our forecast and our projections are. And by the way, the reason we distributed $59 million to each partner, which is roughly about $120 million out of SANA this year, is because we accumulated some excess cash in SANA. We still have more, but obviously we didn't want to take too much out of SANA at this point. So at the year end, we reviewed our forecast, our consumption over the next several years, and there's two conclusions. One of the conclusions is that we had a bit too much cash. So we continued to distribute in addition to the $100 million we did early in the year. And the second one is that we estimate somewhere in the 2024 timeframe, we reach balance sometime in that year. So from that point onwards, you could expect to see significant cash coming out of SANA on a yearly basis.
spk02: That's very helpful. I also took note of the comments that you made around debt reduction in December and January of the $89 million across the 23s and the 25s. I don't know if it's possible to provide more specifics around which of those 25s you took out and then just some context on addressing more of the 25s. Now, you know, one step at a time, and you did outline very clearly you plan to use cash flow through the 2024 bonds, but just thinking around those 25s, it's a bit of a larger maturity wall. Is that something that you would plan to address primarily with cash flow for a while, or is there a larger plan to just extend that and then not worry about the maturities for some time?
spk08: Well, we do have two sets of 2025s, right? We have the exchange notes, $218 million of those and the rest are the non-guaranteed, let's call them that way, 2025s. So our plans are to first apply our free cash flow to the remaining 2023s and 2024s, convertible bonds. And in answer to your question, about 80% of what we bought was in the 2025s, by the way. So our plans for the wall, as you described it, is to start making a dent also on the 2025s. But at some point when that number in the 2025 reaches somewhere in the range of $500 million, I think that could be refinanced with the $1 billion in capacity we have now to issue new guaranteed debt. So that's more or less the plan. When that will be, at this point I can't tell you. If our cash flow is a little bit stronger, and we can reduce it even more than, you know, that refinancing can be delayed. But, you know, usually I like to look at, and the company has done that in the past, but somewhere, you know, within a two-year period, we start looking at refinancing opportunities.
spk02: That's helpful. I definitely recommend it.
spk08: Two-year period of maturity, right? So before maturity, we start looking at opportunities. So that's something you could expect to see in the future.
spk02: That's very helpful. We definitely recognize the flexibility you have there with the guaranteed capacity. Thanks very much for the time.
spk10: Thanks. The next question comes from Arun Jayaram from J.P. Morgan. Please go ahead.
spk07: Yeah, good afternoon. I'd say one of the key called early themes from earnings season has been, you know, punchy spending increases for the majors. in the U.S., lower 48 Exxon, Chevron, Conoco. Historically, this has been a pretty important customer group for neighbors. Tony, you mentioned more recently that you've kind of been capturing about 15% of some of the incremental rig count additions per, you know, what you've reported versus what you're seeing in Enveris. I was wondering if you could maybe comment on what you're seeing from the separate customer groups and would a, you know, some increases by the majors, what would that mean to neighbors?
spk09: Sure. So, obviously, I think we have a pretty good position with the majors and any increase there will get our fair share, hopefully. I think in terms of the move that has occurred so far, however, if you look at our Tier 1 customer group, it's actually the large independents that have been driving that. And obviously, in the market as a whole, I think the privates have really played a great role in pushing it. So the supermajors have not yet stepped up, and notwithstanding the prices, they haven't yet put the foot on the pedal. I'd also comment that even the large independents, I think the increases have been tempered a little bit, even by them, given the fact that we've seen a large amount of consolidation in the sector. Obviously, Pioneer, Conoco, and Devon have well-done deals, and when they're digesting those deals, they don't put the foot to the pedal as aggressively either. So whether that will change as they get more into integration, that's an open question. But right now, at least in our customer base, the Tier 1s, those Tier 1s have been a bit more responsible for the charge rather than our historical supermajors.
spk07: Great, great. And just my follow-up, you guided to $380 million in CapEx in 2020, $250 million for the Sanaa JV. So for the $230 million... in capital outside of the Sanadji? Give us a sense of how much of that is maintenance CapEx versus maybe some upgrades in that total, just a little bit more flavor on the CapEx program.
spk08: I'll take a whack at that one. I think I would say virtually all the money that's being spent outside Sanad is for sustaining CapEx. So that includes... maintenance, which is most of that. We do have some, I would call, some CAPEX in the budget for bringing rigs back. But again, we had a lot of rigs brought back in 2021, and that was absorbed in our CAPEX numbers. We didn't really have huge numbers for that. And we do have some, maybe $9 million goes to our facility in Saudi Arabia. we have a big rig in Papua New Guinea that we signed five years ago, so it's maybe some $10 million for that. Everything else is maintenance slash sustaining CapEx. We're going to spend some money, a little bit more money in NDS, but it just doesn't move the needle. I told you multiple times before that NDS is very light, CapEx light. So in reality, what moves the needle are the rigs. And the rigs, as the fleet goes up, There's a certain amount of dollars per rig per year that need to be spent on the maintenance of those rigs. So that's where you see the increase.
spk07: Great. I just had one maybe quick housekeeping question. In the other long-term asset section of the balance sheet, it moved kind of almost $275 million sequentially from $408 million to $675 million. What is in that? Can you give us some detail on that increase? That's just the SPAC money. Okay, got it. Got it. Makes sense.
spk08: The investment in the SPAC, right? So that's what you see there.
spk07: Great. Thanks a lot.
spk10: Again, if you have a question, please press star, then one. Our next question comes from Taylor Zurcher from Tudor Pickering and Holt. Please go ahead.
spk04: Hey, Tony and William. Thanks for taking my question. My first one's on international pricing. Tony, I think you I talked about some tendering opportunities in Latin America for the first half of the year and some Middle East opportunities above and beyond Saudi, where you think you might be able to get some pricing in 2022. And I guess I'm just curious, for more color on the pricing outlook, just looking at your rig count, you're at roughly 70 rigs today. And exiting 2019, you were closer to 90. So if we just extrapolate that out, it would suggest that Capacity is not actually super soaked up right now, and maybe there's some mixed issues underneath the surface that I can't really see very well from my seat. But long and away of asking, I'm just curious how you're thinking about international pricing over the course of 2022 outside of Saudi.
spk09: Sure. First, let me comment on activity. So in terms of activity, obviously we have visibility on the Saudi rigs, which are four for this year. In total, we have good visibility on eight rigs, including Saudi, for this year, three in the second quarter. and the other five in the back here, and the other region will be Latin America. In terms of bidding activity, I think Oman, Kuwait, or other areas that are out there, and there is some activity there as well, although we're not yet willing to call actual visibility on it, but it's in our runway. And in terms of pricing, I think it's fair to say that it depends on the type of rigs. If it's oil stuff, then you're not looking at that big of increases. If it's deep gas, those rigs don't exist today. And even in our fleet, we have to dig deeper in terms of meeting the requirements because that has a lot of BOPs and heavy pressure equipment, all that kind of stuff. And that stuff is not readily off the shelf. So if you're landing in one of those things, those are going to be... They're going to require additional CapEx, as has been planned for, but they'll also be... replacement cost margins because the rings don't exist. So that is a great opportunity out there to the extent one can get it. So that's, and obviously that's stuff we're on the hunt for as well.
spk04: Got it. Thanks for that. And follow up on free cash flow for 2022. I don't think I heard, I might've missed this in prepared remarks, but the question is at the recent analyst day presentation, you outlined a plan for 200 million of free cash flow in 2022. I imagine this outlook's only gotten better since then or neutral at worst, but I'm just curious if 200 million... Let me correct that.
spk08: In the analyst day, we outlined 300 million for 2023. Yeah, I'm talking about 200 million for 2022. That must be your interpolation between numbers. It's early in the year, and at this point, the best I can give is some sort of range. I'll give you a wide range because it's early in the year. I think somewhere between $100 million and $200 million. It'll be positive. It'll be meaningful. And, of course, it will depend on what year-end collections are that always affect the number. To give you an example, in the fourth quarter of this year, we had a pricing increase with our largest client late in the year, and they didn't have the time to put it in the systems. So about $20 million of collections that should have come in the fourth quarter ended up in the first quarter. So that can happen at year end. So at this point, I can give you a wide range, but my range just tells you the confidence we have that we're going to be meaningfully positive. We'll continue using all that money to reduce our net debt.
spk04: Got it. Thanks for the clarification. We'll turn it back.
spk10: The next question comes from Keith Mackey from RBC Capital Markets. Please go ahead.
spk11: Hi there, and thanks for taking my questions. Just wanted to start off maybe on NDS, and I heard your commentary about the growth implied to get to your 2023 targets of 800 for the corporate and 50 to 60 in NDS. Can you just give us a sense of how much additional third-party penetration that implies, or is most of that growth on the neighbor's kits on neighbor's races?
spk09: Yeah, I can't give you an exact breakdown, but it's a two-step process. One is to go deeper. I mean, we're up 75% on five or more services in neighbors' rigs, and to make sure that all the high-margin stuff is part of that parcel to extract more content from neighbors' rigs. And then the second point is to do the third party, and right now the third party is relatively small, but... 50 million in revenue. 50 million in revenue. but we've made a lot of investment this past year in re-architecting our portfolio so that we can more easily put these services on third-party rigs. Obviously, a third-party rig will not get all the benefits of being on a neighbor's rig, but we think we have a way now, very cost-effectively, to introduce these services on third-party rigs, and we're going to do that not just in the U.S., but internationally as well. And also, we've also said that we're willing to put them on what you might view as competitor rigs as well, that You know, people don't normally think of working together, but we're trying to make the value proposition that this helps the customer and it will help you as well if you do it. And to go down this path, we think the genie's out of the bottle on this automation. And so, therefore, it's in everyone's interest. For example, our performance software and performance tools, our rig operating system, which I think is unmatched in the industry now with the sequence engine, which you saw the benefits of in the rack and pinion rig, that is now available as on every rig, on neighbors' rigs as well, third-party rigs will be available as well. If you go to the website, neighbors' website today, you'll see under insights on the landing page a video of the rack opinion rigs. It gives you an idea how automated it is. You'll see it's stabbing into a hole without a person on the rig floor. That level of automation is available now to be transported on our competitor rigs as easily, well, not as easily, but pretty easily. And we're going to try to make that accessible which helps the operator because this allows the operator's road plan to be executed digitally, which is the real value prop. You can't get to automation, you can't get to factory drilling today unless you go down the path of both automation and mechanization. And we think that that path has now been opened, that Pandora's box is open, and we think it's only going to continue. So our position is to try to take advantage of it by exporting some of this technology out to third-party rigs.
spk06: Simone, do you have anything to add? Yeah, I guess the key thing that we are focusing on NDF is to target the underserved markets that we have, where technology is really required to lower the cost for foot drills. And the other key markets are the LSTK markets. So aligning, because those customers which are operating those lump sum turnkey projects are really looking for a step change in their performance. So our focus on third party is is focused not just on lower 48, but also internationally to ensure that we work with the customers to grow the performance levels that are possible today in lower 48.
spk08: I'll make an additional comment, Keith. I think it wasn't missed by our competitors that one of the large independents decided to give us all their work, almost 12 rigs. They were getting good performance from their supplier at the time, but they just wanted to go a step further in technology implementation and using some of the techniques that have been very successful with our clients. So because of that, they gave us all their work, and this won't be missed by our competitors. I think this will be something that will allow us to start introducing those technologies with our peers as well.
spk11: Got it. Thanks for that. And maybe just one follow-up on that topic. How do you see the economic model changing at all? I know NDS is certainly very high margin as it is, but how do you see maybe the economic model changing as you increase the amount of mechanization on rigs and and adding value in the per foot drilled? Is it strictly a day rate model that you'll prefer, or is there a way to get a larger piece of the pie as you prove the benefits?
spk09: Obviously, it's a work in process. I mean, this has been the age-old question in the sector. When you look at NDS today, virtually all the NDS pricing is based on the value pricing. So when other operators talk about their performance contracts, To me, there's nothing revolutionary about those kind of contracts. They're just KPI. You do a KPI that you give the operator a KPI that you can't perform, that you think you can beat, and then you call that a performance contract. That's nothing innovative as far as I can see. What we're trying to do with MDS is deliver a service that he needs on the world board, but deliver it with a quality level and in a way that unlocks additional value, and on that additional value, we take a proportionate share. And that's the way the pricing on the NDS products work, which is why they've been so successful right now. And we intend to continue that. And as the RIG gets more integrated with this automation stuff, I think there'll be more opportunities to do exactly the same thing. And by the way, I think with our automation platform, I think we have this concept of using the RIG as a platform. It will also be the case that we can use the RIG as a service where other service providers like the big three or big four that have technology or apps they want to run on a rig, we can actually enable that onto our rig, which will allow them to be successful, but also we get our fair share of that pie as well because we're creating an ecosystem that allows us collaborative sharing. That's part of the mission as well. So in that sense, we are going to change the sector a little bit if we're successful in making inroads on that.
spk06: Subodh, can I hear that? Yeah. Just to complement what Tony said, our approach is to be flexible in our commercial terms, but the key thing that we are trying to drive is stickiness that comes either as service as a subscription model, platform as a service model. So the idea is to generate continuous revenue streams going forward, which helps in meaningful discounted cash flow for today. So I think that's our approach to ensure that what we provide is is going to be sticking around for a long period of time.
spk11: Okay, thanks very much.
spk10: This concludes our question and answer session. I'd like to turn the conference back over to William Conroy for any closing remarks.
spk05: Thank you for joining us this afternoon. If you have any additional questions or wish to follow up, please contact us. We'll end the call there, Jason. Thank you very much.
spk10: Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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