Nabors Industries Ltd.

Good day and welcome to the NABIRS first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. William Conroy, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining Naver's first quarter 2022 earnings conference call. Today, we will follow our customary format with Tony Petrello, our Chairman, President, and Chief Executive Officer, and William Restrepo, Our Chief Financial Officer, providing their perspectives on the quarter's results, along with insights into our markets and how we expect Navers to perform in these markets. In support of these remarks, a slide deck is available, both as a download within the webcast and in the investor relations section of Navers.com. Instructions for the replay of this call are posted on the website as well. With us today, in addition to Tony, William, and me, are Siegfried Meissner, 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 adjusted 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 adjusted 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. Thank you for joining us as we review our results for the first quarter of 2022. 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 open up for your questions. Our performance in the first quarter marked solid progress on each of our five key initiatives. Our strategies are paying dividends. At the same time, we benefited from the increasingly constructive markets for our services. The adjusted EBITDA in the first quarter was $131 million. Our operational execution remains strong, especially in our key markets. Our results reflect minor impacts from disruptions in our operations in Russia, as well as ongoing challenges to the supply chain. Our global average rig count for the first quarter increased by 10 rigs. This rig count growth was mainly driven by increases in our U.S. drilling activity. Revenue momentum in our drilling solutions segment remains strong, increasing by nearly 5% sequentially. EBITDA in this technology leader reached the $20 million mark, its highest level since the start of the pandemic. In the first quarter, we made significant progress to reduce net debt. For the quarter, EBITDA less capex totaled $47 million. Typical working capital needs in the first quarter were exacerbated by supply chain constraints, inventory, and the growth in the business. Net debt improved by $55 million in the first quarter, driven by exercises of our warrants, which were issued in 2021. Next, as I have outlined for the past few quarters, I will highlight our progress on the five key drivers that we believe support the investment thesis on neighbors. These drivers include Our leading technology and performance in the U.S. market Expansion of our international business Improving results for our technology and innovation Improving our capital structure and reduced leverage And our commitment to sustainability and the energy transition Let me update each of these starting with our performance in the U.S. Daily rig margins in the lower 48 improved yet again We exited the quarter with 87 rigs running In the first quarter, our daily margin increased by $533 and was just under $7,700. The continued growth in our margins demonstrates the market's demand for our value proposition and our ability to price to value. I'm convinced this leadership is driven by the quality of our assets and the level of our execution. But let's be clear, the technology leadership we bring to the market through neighbors drilling solutions is equally important in helping our rigs deliver best-in-class drilling performance. We remain committed to delivering the industry's best performance and most advanced technology while leading in safety and sustainability. Let's discuss our international business. We performed well and our financial results in this segment were consistent with our outlook. Operational execution in the field was excellent. Staten's first-in-kingdom new build rig, which was anticipated before the end of the first quarter, is now expected to deploy in May. The rest of the five new bills, which have been awarded, should come at a rate of approximately one per quarter. Given the terms of the JV agreement, we estimate each of these new rigs will generate annual EBITDA of approximately $10 million. With the JV's long-term plan for 50 new bill units over 10 years, the prospects for significant future growth are outstanding. Now, let's discuss our technology and innovation. We believe that development and deployment of advanced technology are key to neighbors' future success. Our focus areas include automation, digitalization, and robotization. Again in the first quarter, our market position improved. Quarterly EBITDA in our drilling solution segment increased to $20 million. We used the combined daily margins in the lower 48 from both our drilling and drilling solutions businesses to evaluate our business on an apples-to-apples basis versus peers. In the first quarter, drilling solutions get at more than $2,100 per day. With this contribution, our combined daily rig margin figure amounts to more than $9,800 per day. One of the core elements of NDS's strategy is to target the third-party rig market. This approach to the business expands our addressable market well beyond neighbors' own rigs. We've made progress on our goal to expand penetration of the NDS portfolio into this third-party universe. Last quarter, third-party customers accounted for more than 20% of NDS's lower 48 revenue. I'll wrap up my comments on technology with a brief update on our fully automated rig, R801. This rig runs our smart suite of performance automation tools, as well as integrated casing running. We are in the process of using lessons learned from this rig and applying them across the rest of our fleet. We have identified certain automation modules on the rig that can be exported in component form to replicate functionality of R801. We are now ready to install one of these automation modules on one of our Permian rigs. We expect that over time, these automation modules will be deployed on most of our existing high spec rig fleet. In addition, We also intend to make them available on third-party rigs. In this way, we intend to exploit these new technologies without the need for a new rig build cycle and broaden the knowledge and acceptance for these solutions. Now, let's discuss our delevering efforts and the steps we've completed to de-risk our capital structure. In the first quarter, we made significant progress to reduce net debt. In particular, exercises of our warrants contributed a reduction of net debt exceeding $120 million and a commensurate increase in equity. Recognizing our improved near-term debt maturity profile, as well as the completion of our new revolving credit facility, in February, one of the major debt rating agencies raised its issue-level ratings across our notes. I'll finish this discussion with remarks on our key value driver of ESG and the energy transition. Building on our industry-leading TRIR performance in 2021, we are looking to improve on that further in 2022. Less visible in the TRIR statistic is the significant progress in the severity of the incidents reported. Our incident severity rate improved by 44% in 2021. We expect a further advance in 2022. Both of these measures demonstrate the positive emphasis we place on employee safety. On the environmental front, in our lower 48 field operations in 2022, we are targeting a further 7.5% improvement in greenhouse gas emissions intensity, on top of the 10% we delivered in 2021. We made additional progress across our initiatives supporting the energy transition as well. We further build out the organization, adding support for our carbon capture and hydrogen injection technologies. We hope to have commercial products available this year. Most recently, we announced an investment in another advanced geothermal company, GA Drilling. This addition to our existing portfolio enhances our position to help drive next generation geothermal technology. Since then, we also invested in a company focused on monitoring and measuring GHG and other admissions. To reiterate, our approach to the transition is comprised of three pillars. Reduce our own environmental footprint by applying new technologies and best practices. Capitalize on opportunities and areas adjacent to our core activity using our global footprint and existing expertise. Invest in companies both adjacent to neighbors and in other verticals and accelerate their achievement of scale. As you can see, we are making significant progress on each of these fronts. Now, I will spend a few moments on the macro environment. The first quarter began with WTI just above $75 and climbed steadily through late February. Since the onset of the war in Ukraine, the price has been more volatile. The quarter closed with WTI just over $100. Food oil prices remained above the pre-war level Let alone above the $60 mark we highlighted in our December analyst meeting. Since that meeting, the forward market has improved as well. The futures price of WTI 24 months out from now stands 20% higher than its price 24 months out from the December of last year. In this range, oil prices provide returns that would incentivize operators to increase their drilling activity above our previous expectations. In response to improving operator economics, drilling activity for the industry will materially higher in the quarter. Neighbors quarterly average rate count increased by 12% in the first quarter. Once again, we surveyed the largest lower 48 clients at the end of the first quarter. This group accounts for nearly 30% of the working rate count. Our survey indicates an increase in activity of more than 15% for this group by the end of the year. Nearly every operator among these 15 clients plans to increase activity. The pricing environment remains bullish. Our average daily revenue exceeded $23,000 in the first quarter, which was up nearly $1,300 or 6% sequentially. Our own leading-edge day rates are in the high 20s. With the potential activity increase indicated by our survey, we see pricing continuing to increase as industry utilization climbs over the balance of the year. Turning next to technology and NDS, the first quarter's EBITDA exceeded the exceptionally strong performance of the previous quarter. This continued growth reflects the strong value proposition of the portfolio. Fully 82% of our lower 48 rigs run five or more NDS services. This metric is up by 8 percentage points versus the previous quarter and represents record high penetration. Among specific services, we saw notable growth in the penetration of Smart Drill and Rig Cloud and our related analytics, demonstrating our focus on third-party rig opportunities and DS revenue from third-party contractors who move more than 10% sequentially. In our international markets, strong commodity prices and expected production increases are driving oilfield activity higher. For neighbors, we expect to add rigs in several markets. In particular, We have visibility to the set of new builds in Saudi Arabia with the first deployment expected next month. In addition, in Saudi Arabia, we will be deploying a flagship rig from our M1200 series, which will incorporate our most modern technologies. Tentering activity has picked up across other markets in the Middle East, notably in the Gulf countries. This growth will likely require higher capability rigs, which should be favorable for pricing and presents an opportunity for can rigs. We are also optimistic for additional rigs in Latin America. Clients there are planning increases in activity, and we have the rigs and relationships to support those plans. Let me wrap up on this macro discussion with updates on several other areas. Russia, COVID and interest rates, labor availability, and the global supply chain. In light of the conflict in Ukraine, we remain concerned for the welfare of citizens there and throughout the region. We currently operate three drilling rigs in Russia under contracts that require us to continue performing for a period. While maintaining compliance with all applicable sanctions, we are refraining from making additional investments and from introducing new technologies into the country. Recent events in the credit markets, coupled with the resurgence of COVID in China, still loom as potential risks to global energy demand. We remain vigilant and the impact these factors could have on the forward outlook. For labor, the tight market we experienced through the end of last year has eased somewhat. Timely staffing for additional rigs remains challenging. We addressed compensation levels to remain competitive and those steps have been successful. Notwithstanding the increasing costs, profitability has continued to improve. Finally, let me address inflation in the supply chain. We have seen higher costs across our supply chain, including materials and logistics. We have been able to offset a significant portion of the pressures on our supply chain with our internal manufacturing infrastructure. We and the industry continue to experience significantly stretched lead times. This challenge has forced us to increase our inventories to ensure we can deliver, without disruptions, great components as spare parts to our customers and internally to neighbors. We remain committed to maintaining our operational tempo. To sum up, we are seeing indications for continued drilling activity increases globally. Our latest survey of the larger lower 48 operators indicates a slightly higher 2022 exit rate rig count than expected just a quarter ago. This reflects that, notwithstanding some hype, At least for now, operator plans appear to remain largely based on the pre-war commodity outlook. We see opportunities emerging in our larger international markets. We are also seeing a significant increase in gas prices and many countries reassessing their hydrocarbon needs focused on natural gas. These factors could spur additional activity as well. Inflation and supply chain constraints remain present. At Neighbors, we have demonstrated our ability to grow our business while improving our financial results and our capital structure. I fully expect this performance to continue in the coming quarters. Now, let me turn the call over to William who will discuss our financial results and guidance.

Thank you, Tony. The net loss from continuing operations for the first quarter was $184 million, or $22.51 per share. This compares to a loss in the prior quarter of $114 million or $14.60 per share. In the first quarter, the conflict in Ukraine led to a significant devaluation of the Russian currency and to disruptions in operations. These challenges resulted in a reduction in our adjusted EBITDA of approximately $2 million and charges to other expenses of close to $3 million for a combined impact after tax of $5 million, or 61 cents per share. The first quarter results also include a non-cash charge of $72 million, or $8.63 per share, related to mark-to-market treatment of neighbors' warrants. Because the warrants initially included an incentive shares feature, the number of warrants is not always equal to the number of shares obtained through a warrant exercise. Because of this disparity, accounting rules require that we mark to market the warrants based on their fair value at the end of the quarter. The quarterly gains or losses resulting primarily from the fluctuations in our common share price will add some volatility to our earnings as long as the warrants remain outstanding. However, this income or expense will have no cash impact and the net cumulative effect on our equity will be reversed at the end of the life of the worry. Revenue from operations for the first quarter was $569 million, a 5% sequential improvement, more than offsetting a 2% reduction in available days for the fourth quarter. In general, our results continue the trends for the fourth quarter, namely strong overall early results, particularly in the lower 48 markets. Revenue from U.S. drilling and drilling solutions was up significantly, reflecting improving pricing and higher rig count. The lower 48 market for drilling rigs surged ahead. While rig count increased by 12%, revenue was up 16%, as average day rates for the feed continued to improve. Higher activity in international markets also drove revenue increases for international segments. Total adjusted EBITDA of $131 million decreased by 1.1 million, or 0.9%. The fewer days available in the quarter versus the fourth affected our operational EBITDA by approximately $3.7 million as compared to the fourth quarter. Russian headwinds further reduced our EBITDA by approximately $2 million. These reductions were almost offset by longer-term trends in our results. U.S. drilling EBITDA of $74.3 million was up by 5 million, or 7%, compared to the prior quarter. This improvement was driven by our lower 48 EBITDA, which rose by $8 million, a 19% improvement sequentially. Our average rig count in the lower 48 increased in the first quarter to 83.4 rigs, up approximately 9 rigs from the fourth quarter average. Daily rig margin came in at $7,694, up $533. This improvement resulted from a $1,291 increase in revenue per day, $900 of which were from higher average day rates for the fleet. These pricing increases were partly offset by higher labor expenses and costs related to startups. Rick Young continues to move up on the strong commodity price and pricing continues to improve on the higher utilization for high spec rigs, now approximately 80%. During the quarter, we saw leading edge pricing in the high 20s for rigs alone without layering on any of our NDS offerings. As our fleet reprices to market, we expect this favorable rate trend to endure. For the second quarter, we project our lower 48 average daily margin to continue expanding and reach approximately $8,500 per day. Given the current level of customer interest and existing commitments, we forecast an increase of six to seven rigs in the second quarter versus the first quarter average. On a net basis, EBITDA from our other markets within the U.S. drilling segment decreased by a few million dollars despite the addition of one rig in Alaska. The reduction reflected primarily Lower deferred revenue on one of our offshore contracts. In the second quarter, the combined EBITDA of these two markets could improve by $1 to $2 million on higher day rates in Alaska. International EBITDA of $71.2 million in the first quarter decreased sequentially by almost $2 million, driven primarily by our operation in Russia. Despite the Russia impact, international daily margin at $13,134 remained in line with the prior quarter, driven by solid results in the Middle East and strong performance in our South American markets. Rig count at 72 rigs increased by just over half a rig over the fourth quarter average. Current rig count in the international segment is 73. We expect rig count in the second quarter to improve by nearly two to three rigs versus the first quarter average, primarily from deployments of the first Anadin Kingdom rig, as well as an advanced M1200 series rig in Saudi Arabia. We expect further rig additions in Saudi and Latin America coming in the following quarters. For the second quarter, daily margin is targeted between $12,700 and $13,000. with performance in Russia remaining challenged. Drilling solutions delivered EBITDA of $20 million up from $19.6 million in the first quarter. Gross margin for NDS was nearly 49% for the quarter. We continue to see increased penetration, particularly in third-party rigs, with the largest contributions coming from performance software in the U.S. Activity in the lower 48 generally improved. taking our combined drilling rig and drilling solutions daily gross margin to $9,818. This includes a $2,100 per day contribution from our rapidly growing solution segment. The combined gross margin for lower 48 drilling and solutions reached $73.7 million or approximately 36% of revenue. We expect second quarter EBITDA for the drilling solution segment to increase by more than 5%. RIC Technologies reported negative EBITDA of $1 million in the first quarter, due mainly to a delay of shipments into the second quarter and a significant reduction in Russia. For the second quarter, the segment should deliver a couple of million in EBITDA on improved capital equipment and aftermarket sales. Now turning toward liquidity and cash generation, net debt improved by $55 million, largely due to exercises of warrants, with equity issued in exchange for outstanding notes. These warranted exercises reduced the face value amount of notes outstanding by $131 million. After accounting for deferred financing costs and the equity component of our retired convertible notes, we reduced our recorded balance sheet debt for notes by $121 million. During the quarter, we also incurred approximately $4 million in costs related to the extension of our credit facility. Free cash flow totaled negative $40.8 million in the first quarter. As expected, the quarter was challenging in terms of cash flow generation since we normally pay several material annual items including property taxes and employee bonuses. These payments will not recur during the remainder of the year. In addition, the growth of the business and longer lead times for our inventory items led to a substantial increase in working capital of approximately $48 million from accounts receivable and inventories. Although we expected the revenue increase and its negative impact on accounts receivable, we also expected lower DSO than what we actually achieved. In addition, inventories expanded as a result of higher expected can rig activity in the quarters to come, as well as the need to compensate for significantly longer lead times. Some of these inventory increases were also related to can rig shipments that were delayed into the second quarter. Capital expenses for the quarter totaled $84 million. This included $33 million to fund a new-build program for a joint venture in Saudi Arabia. Looking ahead, we expect second quarter CAPEX to land between $110 and $120 million, including approximately $45 million for Senate and Kingdom new-builds. For the full year, we estimate capital spending will remain within our prior guidance of $380 million, of which $150 million support the summit no-build rigs. We are targeting break-even free cash flow for the second quarter reflecting the higher EBITDA, lower cash interest expense, the absence of material annual payments, and lower outflows from working capital buildup. We are committed to deliver well above $100 million of free cash flow in 2022. We remain focused on addressing our liquidity and leverage. In the first quarter, we took significant steps in improving our debt maturity profile. We closed on a new revolving credit facility maturing in 2026 with a principal amount of $350 million. The new facility replaced our previous revolver maturing in 2023. With the closing of our credit facility, we have also increased our senior priority guaranteed note capacity to over $400 million. Together with the remaining capacity on our priority guaranteed notes, we have nearly $1 billion available for future debt refinancing using our combined guaranteed note layers. With those actions, we are well positioned in terms of liquidity and debt maturity profile with only $260 million in note maturing before the end of 2024. With that, I will turn the call back to Tony for his concluding remarks.

Thank you, William. I will now conclude my remarks this afternoon with the following. With neighbors leadership in the development and deployment of advanced drilling technologies, we are well positioned for the current environment. Operators prioritize automation and digitalization. Our industry-leading solutions in those areas enable them to achieve their goals. More recently, an additional priority has emerged, namely the need to improve environmental impacts. We are developing a pipeline of technology both at the well site and beyond to enable clients to achieve their environmental targets through responsible hydrocarbon production. Ultimately, those solutions may grow into significant businesses. All of this is occurring as we continue to improve our capital structure and material ED lever. Our focus and progress on our five key value drivers are producing significant benefits across our stakeholder base. We are very encouraged by the growing adoption of our advanced automation, both in the U.S. and in our international markets, and we're confident there's more to come. I hope you share my excitement for the future. I look forward to sharing our progress with you. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Carl Blunden with Goldman Sachs. Please go ahead.

Good afternoon. Thanks for the time. I just had a first question on the utilization rates. They've been picking up very nicely, particularly in the U.S. lower 48 high spec area. Could you give us a sense of where you think that might be able to max out? What kind of utilization can you support? What happens from there when we get to that tight level? Is it additional cap backs, a spike in day rates, maybe some of the non-high spec rigs getting some business? Just be curious in your thoughts.

Sure. So as we said from the survey, you saw that we said there's an increase of about 15% expected by the market in general. That's about 100 rigs for the remainder of the year. And looking at neighbors, I think we can look at an exit rate maybe of a rig count exiting at over 100, which would mean adding a bunch of rigs. Now for neighbors, we have 23 additional super spec rigs in various stages. The first five we can bring out with very little capital. The next 11 for capital less than a million bucks. And then the remaining seven as you go into the seven deeper and deeper. So we have some firepower there to get us to that rig count above 100 by the end of the year. And so that's our plan right now. In terms of new bills, obviously the market pricing doesn't support new bills yet. I think the new bill price is going to be obviously greater given Thank you very much.

I know that the warrant website has some information, but I wonder if you could comment on how warrant exercise has trended so far this quarter, just given the expiration of the incentive shares, for example, and the strong stock price movement. And maybe more broadly, when you think about addressing your near-term debt, I'd be interested in your priorities around doing that through warrant exercise, which will come as the stock is strong, versus potentially just kind of waiting for free cash flow or even doing some new guaranteed bonds.

That's a mouthful. So I think in terms of the warrant, I think the warrant has served its purpose in terms of generating in a non-dilutive form pay down of debt, which was what it was designed to do. Now, we issued a notice that terminated the right of the bondholders to use bonds to exercise the warrant. We did that because we wanted the benefit to stay with the shareholders and we thought the extra benefit with too much extra benefit was going to go to bondholders, frankly, above their face amount. So we don't want to do that anymore. So the bonds as they currently are outstanding, they're only exercisable for cash and that, yeah, it's only exercisable for cash. And, you know, we will see and have seen some cash exercises roll in. And obviously at the price of 168, That's attractive right now as a means of going forward. In terms of additional financings, I'll let William talk to do that. But as I said, the warrant transaction served its purpose.

William Restrepo Yeah, I think when we removed the incentive shares, that basically took the bonds out of the equation. We formally eliminated the convertible bonds. We still could use the 25, but it's just not Thank you very much. We haven't decided if that's the best step or if we issue more equity in the future or if we issue other types of notes in the future. We'll continue evaluating the market. We think there's potential for more high yield in the future. Again, we will continue evaluating all the options. In today's, where share price stands, where coupons are today and our yields, we have a lot of options as compared to sometime in the past.

Thanks for addressing all of that.

Appreciate it. The next question will come from Dan Cutts with Morgan Stanley. Please go ahead. Hey, thanks, guys.

So I just wanted to ask if we're kind of thinking about how lower 48 margins trend beyond the second quarter, just kind of at a high level, is the prior cycle peak kind of Where do you think that we can get to? Can we get above that level? I think it was, you know, around $10,000 a day. And, you know, obviously appreciate that the inflation dynamics are changing kind of the cost and revenue per day calculus. But just wondering if there's anything you can do to help us think about, you know, where you could see margins going.

Sure. So, as we said in previous remarks, the base rate right now is in the high 20s, let's say 28 already. and if you add on the add-ons that make up a normal add-on rate, that's another roughly $3,800 on top of that. And so at those numbers, I think, as you said, from neighbors, that's a pretty attractive number from where we stand today. As we said, for the second quarter, it's $8,500 and I think we've made clear One of the good things about what we've seen happen is the fact that in December, when we did the analyst day, you'll recall we laid out a plan to get to $800 million EBITDA. And so the way we think about it is that plan, which some people had some head scratching about back in December, I think it only supports and reinforces our conviction that we're going to get there. And that plan relied on a $10,000 a day margin per rake. And that's what we see happening by the end of the year. will be well poised to do that. Got it.

Thanks a lot. So longer term, if you look at where our rates, leading edge day rates are today, and if we assume our fleet rolls into those rates and we execute on all of our contracts, that would imply a margin of $15,000 per day at some point. Obviously, we need to execute and and we need sufficient time for contracts to roll into those kinds of day rates. We do have some long-term contracts still that are not at anywhere close to those rates, so it'll take us a while to get there, but that certainly is the potential.

And the other thing just to remember is all the stuff that we talk about when we talk about drilling doesn't include MDS, which is you have to add that margin on top of it, which in this quarter that was about $2,200 a day.

you know on an apples to apples basis when you compare it compares to other people you always have to have the NDS margin on top of it because we break it out that's all really helpful thank you and then yeah maybe on the point of you know you said that you have some longer term contracts that'll that'll take a while to roll um and that you know there's there's still a lot of the fleet that is on contracts that was you know like you said it Leading edge pot rates are $5,000 above the 1Q average. So can you just help us think through the timeline for when the majority of the fleet will be able to reprice at higher levels or anything that you can do to help us think through that progression?

In the U.S., the majority is poised to reprice, taking advantage of what's happening now. That's what I would say. Internationally, on the other hand, The international market, as you know, is a term market, and there the average duration is a year to a year and a half out. And the only thing I could say there is that if you look at our rigs away from Saudi Arabia, by the end of the year, half of those rigs are going to be in a position to have price reopeners. So there is a great potential, not only in the U.S., but also international, to capture the pricing movement as we head there. Obviously, it depends on the international market's The next question will come from Taylor Zurcher with Tudor Pickering and Holt. Please go ahead. Hey, Tony and William. Thanks for taking my question.

Tony, I actually wanted to follow up on your prior response there on some of the international contract reopeners you have outside of SONOD over the balance of the year. So in the U.S., I agree with you, pricing momentum has really gone through the roof and surprised at least me to the upside. And trying to think about the case for a similar outcome internationally with the caveats being that the ethics I think it's going to be supply demand tightness in general. I mean, there are labor issues as well there. I mean, cost inflation is not unique to the U.S.

It applies internationally, particularly given the travel situations we've all been dealing with. But I think it's supply and demand. If you look at the activity away from Saudi, I think the markets that in that region have some tendering possibilities would be Kuwait and Oman in particular. And the rigs out there, one of the things that will drive pricing as well is some of those projects are going to require rigs that actually don't exist today. in the sense that some of the configurations require such high specs that you're going to require replacement capital to go on those projects. And that's going to uplift not only the new projects but the existing rigs as well. So I think that's one of the dynamics that work here. So as those contracts open up and there is a need for additional equipment, that need then is going to be competing with existing rigs that meet those specs as well as new rigs that require higher capital, which in turn will drive the whole pricing scenario up. So that's the upside, I think.

One thing that Tony pointed out is the Middle East, but the reality is the international market is not homogeneous. It's a bunch of different markets with different drivers. And most of the markets we are focusing on, we're experiencing tightness in rigs. I give you examples like Argentina where Vaca Morta is requiring and others. And then in Mexico, we are seeing some rebirth on land activity that again requires some fairly high spec rigs. So all of that is happening in multiple countries where the supply of rigs is just not there. So we are seeing a little bit of tension on the pricing and on the positive sense. So the pricing power, Thank you for joining us.

You're well on your way to exceeding the U.S. piece of the forecast, the international piece with the Russia impact in the near term. Just a little bit unclear to me if you can get to the margin guidance you gave for 2023, so just curious if you still feel comfortable about that with respect to 2023.

I'll let William answer that, but before he does, I just want to make a comment on our quarter. So our internal number was 132, actually, and You saw what the numbers were when we delivered, and that obviously was impacted by Russia for a couple million dollars. We also had Saudi slip into another quarter, and we also had some cost inflation that it showed that we were able to absorb the cost inflation and still make progression on the margin. And on top of it, CanRig had an order. I'm bringing this up because it relates to international. CanRig had an order which slipped into the next quarter, and that order was for an international project, and as typical one of the problems with international is there's always lots of things out of your control. In this case the client did some changes to their schedule and even though the can rig had ready to deliver the equipment they wanted to defer because the back end of the project wasn't ready. So but in the context I want to just give you an idea so that those were all things that were that kind of set off some of our bottom line results but all in it's a pretty good quarter when you look at that from that point of view. and some of those things are one-time things. So with that, I'll let William follow through on the roll forward to 2023.

So, yeah, good comment from Cotton. We were very happy with a quarter. The U.S. was very strong. International was very strong with the exception of Russia. The only hiccup, I would say, would be rig technologies with the can rig delays and shipments. and even with Russia we kind of absorbed that fairly well. It's not a huge amount, but it does count in the international margins. So we think that the second quarter we will see a little bit of impact from Russia still. Things have stabilized there. We're running off some of those contracts. So we are forecasting similar to the first quarter, but obviously we're being cautious. And then in Saudi Arabia we're deploying two Two brand new rigs that are highly competent, highly advanced, and will have a material impact. But there could be some startup costs. So we put a little bit of caution in our guidance for the second quarter. Throughout the remainder of the year, Russia will not even be a factor. You will not see it. It will disappear. And I think Saudi will continue to grow really very materially over the next three quarters. So we feel very comfortable about the guidance that we gave for 2023. If anything, I feel we will do better than that guidance, not only in the U.S., but internationally as well.

All right, good to hear.

Thank you. The next question will come from Derek Todd-Hazer with Barclays. Please go ahead.

Hey, good morning, guys. So we're believers in a multi-year upcycle, and you talked about exiting the year. over 100 rigs for 2022. You move into 2023, 2024, you can quickly become sold out of your 111 super spec rigs. So I just want to ask beyond that 111, can you talk about the different options that you have, be it upgrading some of the about the 60 legacy rigs you have, maybe for a new build economics or even an acquisition of a smaller rig operator. Just one of the levers and how you view that if we become sold out over the next couple of years.

Yeah, I think we have an install base of about 45 rigs that are candidates for an upgrade. We already have upgraded about five or six of those rigs to what we call the M750, and we have a formula for that. And the upgrade cost of that platform, even in an escalated environment, will be no more than 50% the cost of a new rig, and we have 40 of them. So we have at our disposal a pretty large inventory of additional rigs to work from to draw down on it. And that would obviously be one of the choices. The second choice, obviously, would be to do new bills on our M1000s, which is the flagship. I think it's the best rig in the marketplace today. No question about it. And that would be the second alternative to do a new bill there. In terms of acquisitions, yes, we always look at acquisitions. There you have to measure what you get. You have to measure the difference, the homogeneity of the fleets, etc. But we always keep our eye out for that as a possibility.

But to be clear, we haven't forecast in our CAPEX building any M1000s or upgrading any of those other rigs. That's not part of our guidance for results or for CAPEX today.

Right. Now that makes sense. I was thinking more about beyond into the next few years. Appreciate the call there. Switching over to the new energy angle, geothermal, obviously you guys are very active in the investments along with some of your other drilling peers. Can you spend some time, what's the outlook there, what's the goal, how these investments can materialize in their earnings potential for neighbors if you just think about over the next five to ten years, what's the outlook there? It seems like this is a natural crossover industry for the drillers. and you guys are on the leading edge of it. So just love to get some more expanded color and thoughts around how you see this materializing into potential earnings power.

So when I first joined neighbors 30 years ago, we actually had a pretty big segment that did geothermal, including in places like Japan and then later Costa Rica and then parts of Africa as well, obviously in California. So we've always been active in it historically. And obviously the push against geothermal is this niche play. and our proposition is that with technology is there a way to make it be something that's scalable that you can do in multiple places and then use our footprint to exploit that. And that's what drove the combination of investments we've made and we've identified these four companies which we think in the marketplace today have the best chance of unlocking one of those scalable solutions and that's what we're doing. And geothermal is the only It's the only source out there that's both baseload and renewable. And we think, you know, if one can do what we're talking about, it's going to be a huge game changer. And the companies we bought all approach it from a different vantage point. Neighbors was chosen not for just money on these things. We're part and parcel of the R&D that's going on with each of the companies to make the technologies come to market faster and more robust in the marketplace. So, William, you got anything to add?

Yeah, I think we're very excited about it. I mean, we think the companies on their own are good investments, but the reality is that we're going to be partnering with these companies, and then the amount of geothermal wells, if we're successful in developing these technologies, is going to be staggering. I mean, I envisage sometime in the next five years or so where a quarter of our business could be coming from some of these energy transition initiatives, including geothermal.

That's helpful. Appreciate the caller. Thanks.

The next question will come from Arun Jayaram with JP Morgan. Please go ahead.

Good afternoon. Tony, I was wondering if you could discuss kind of your contracting strategy at this point in the cycle. It still feels a bit early cycle, but talk to us on what you're thinking about in terms of locking in term versus spot. and also as you are capturing higher and higher margins, could you talk a little bit about the level of customer churn you're seeing today and maybe compare and contrast that to different cycles that we've been through?

Sure. So during the downturn, obviously, with the exit of some of the large publics, the super majors out of the market, obviously the privates really stepped up and today the privates play a big role in the marketplace, as you know. and we've tried to satisfy both groups' demands. I think it's fair to say, though, over the last six months, if you actually analyze our customer base, you'll see a shift that already has occurred about 10% away from the private portion of our customer base back to the publics. And that represents something that's probably going to continue in terms of a trend, in large part because of the nature of the contracts. The publics usually have longer-term contracts, but more importantly, they're embracers of technology. and so the value prop for neighbors, the ability to use the stuff that we can bring to the table and make a big difference applies and so I think you'll see that in our strategy going forward and you'll see that shift at work. In terms of specifically term contracts, obviously we went short during the downturn because we wanted to be poised for the upturn and have the freedom to reprice and I think we're in that mode now and as I said, the pricing has moved pretty robustly and it is true that right now, given where we are today as well as where operators now see the forward curve looking, which I think is equally important over the next 18 months, there has been dialogue with operators about trying to capture and lock in some term. And we're part of those discussions, but I'm not gonna give you my strategy as to percentages or anything, but obviously we'll start looking at it right now.

Great, and just to follow up, it's internationally, Tony Post, the Russia-Ukraine conflict. The question we're getting is, how is the world going to make up for some of the barrels from Russia, which, as you know, could be impacted by lower production, and then is the market of those barrels more problematic today? But can you give us any sense of any areas within your global footprint where you're starting to see some acceleration in terms of activity or pulling projects forward?

Well, obviously, here's the logical first choice in terms of making things happen. But I think there's a few hurdles, one of which is to preserve the financial discipline by the operators and to see who's going to actually back These programs to provide for long-term programs so people can make sure they make a return on their money. I mean, we've seen in the past 60 days the whole world's perception of everything has radically shifted. Mr. Putin has done in 60 days what people in the industry have been able to do, which is convince people that the renewables are not yet ready to poise to take over base load demand anywhere. And so that's set in, but the question is how long is that mindset is going to continue. And I think there's going to be reluctance on a lot of people to actually invest on just a promise right now. So I think there are areas where there is capacity to rev up. Obviously, the number one area away from the US is Saudi Arabia. And Aramco has been committed to increase their production capacity by a million barrels. And also, they're making a big commitment on the unconventional. Away from our new bills, there's actually interest in adding to their unconventional rig activity, and they have the ability to actually add up and provide a lot of incremental gas. So I think the opportunity exists out there. The question is who's going to put pen to paper and actually do the long-term commitments that we all can invest in, that we can build the rigs against, that the operator can be sure he has a proper takeoff contract, et cetera, to do it all. That's really the question. Thank you very much.

This concludes our question and answer session. I would like to turn the conference back over to Mr. William Conroy for any closing remarks. Please go ahead.

Thank you all 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, Chuck. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.