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spk06: Good afternoon and welcome to the Neighbors Industry Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touchtone phone. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to William Conroy, Vice President of Investor Relations and Corporate Development. Please go ahead.
spk01: Good afternoon, everyone. Thank you for joining NABR's second 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 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.
spk07: Good afternoon. Thank you for joining us as we present our results for the second quarter of 2022. We will follow our usual format I will begin with some overview comments. Then I will detail the progress we have made on our five keys to excellence and follow with a discussion of the markets. We will comment on our financial results. I will make some concluding remarks and we will open up for your questions. In the second quarter, all operating segments performed well, exceeding the expectations we laid out on last quarter. This performance reinforces our strategy. Adjusted EBITDA in the second quarter totaled $158 million, a 21% increase over the first quarter. Our operational execution remains strong across our global markets. Our average rig count for the second quarter increased by eight rigs. This rig count growth was primarily driven by increases in our U.S. and Middle East markets. Adjusted EBITDA in our drilling solution segment increased by nearly 14% sequentially. Looking at drilling solutions, Together with RIG Technologies, adjusted EBITDA from these two innovation engines totaled more than $26 million. This amount comprised over 16% of our consolidated EBITDA. In the second quarter, we made additional progress to reduce net debt. Our net debt declined to less than $2.2 billion, a $33 million improvement. Adjusted free cash flow was $57 million. This free cash flow was before strategic investments supporting the energy transition. These investments totaled $17 million in the quarter. Next, I will highlight our progress on the five keys to excellence that we believe support the investment thesis on neighbors. These include our leading performance in technology in the U.S. market, expanding and enhancing our international business, advancing technology and innovation with demonstrated results, improving our capital structure and reducing leverage, and our commitment to sustainability and the energy transition. Let me update each of these, starting with our performance in the U.S. We finished the quarter with 92 rigs running.
spk13: Daily rig margins in the lower 48 continued to their upward trend.
spk07: Average daily margin there increased by more than $1,000 in the second quarter and exceeded $8,700. We have been progressively repricing the fleet toward the current leading edge. With our pricing and contract duration strategies, we have been very successful in recovering cost increases and expanding our margins. The results demonstrate progress on both fronts. The rig market remains highly focused on premium rigs and performance. We also have an unmatched portfolio of technologies in our drilling solutions business. This portfolio is one of the keys to our drilling performance and an important differentiator. I will discuss this in more detail in a few moments. Next, let's discuss our international business. Daily margins in this segment improved significantly. This measure increased by nearly $1,200 to $14,331. Our performance was strong across our markets. Financial results in this segment comfortably exceeded our prior outlook. Saudi Arabia and Latin America were particularly strong. In Saudi Arabia, Saned, our joint venture with Saudi Aramco, deployed an enhanced M1200 series rig. This is our most advanced rig in the country. It includes our proprietary operating system, full AC capability, as well as an upgraded mast and substructure. We expect this rig's performance will showcase in the region the full potential of Naver's advanced technology portfolio, especially in unconventional development. Saturday's first in-kingdom new build rig was commissioned during the second quarter. The rig spotted its first well in early July. This is an important milestone for the joint venture. We expect to add new builds at approximately one per quarter going forward. Each new build should contribute annual adjusted EBITDA of approximately $10 million during their initial six-year contracts. With these economics and the deployment of the first rig, we are now firmly on the growth trajectory that initially attracted us to this venture. Now, let's discuss our technology and innovation. There is no question that our advanced technology is one of the cornerstones of Neighbor's future success. Our focus areas include automation, digitalization, and robotization. Once again, in the second quarter, the performance of drilling solutions improved. Quarterly adjusted EBITDA increased sequentially by 14%, reaching nearly $23 million. The combined average daily margin in the lower 48 from our drilling and drilling solutions businesses reached nearly $11,000. Of that, NDS contributed more than $2,200 per day. The typical neighbor's rig in the lower 48 runs six NDS services. This metric has increased steadily and reflects the strong value proposition of the portfolio. Among automation and digital services, we saw a significant step up in the penetration of SmartDrill. We also saw strong growth in SmartSlide SmartNav, as well as Rig Cloud Analytics. In the second quarter, we continued to make progress targeting the third-party rig market. Drilling Solutions' lower 48 revenue from this client base grew sequentially by 7%. I'll wrap up my comments on our technology with a brief update on our robotics offering. As mentioned previously, we are rolling out new robotic modules to retrofit existing rigs. This builds on our experience with the robotic rig. We plan to make them available on third-party rigs. This strategy enables us to deploy these technologies at a small fraction of the cost for a new build. It also significantly increases the addressable market for these innovations. Let's discuss our progress to improve our capital structure. In the second quarter, we again reduced net debt. Driven primarily by excellent free cash flow, we drove net debt below the $2.2 billion mark. We remain focused on generating free cash flow as we continue to delever the capital structure and improve the balance sheet. I'll finish this part of the discussion with remarks on ESG and the energy transition. We remain committed to our strong environmental stewardship, In line with this strategy, we continue to progress along our three focus areas. These are reduce our environmental footprint, capitalize on adjacent opportunities, and invest strategically in leading-edge companies and accelerate their achievement of scale. Since the beginning of the second quarter, we completed investments in three high-potential companies. The first focuses on monitoring and measuring GHG and other emissions. The second focuses on the sodium-based battery technology. And the third is developing ultra-capacitor solutions. We believe these companies will have significant synergies with our existing platform and create offerings in our own sector as well as in other verticals. In our lower 48 field operations in 2022, we are targeting another improvement in greenhouse gas emissions intensity. We have also made advances in our carbon capture and hydrogen injection technologies. Commercial products should be available this year. Now, I will spend a few minutes on the macro environment. The second quarter began with WTI just above 100. By early June, it reached 122. The quarter closed with WTI above 105. Since then, the price has retreated into the low to mid 90s. The futures price of WTI 24 months out stands at the 77 level. This is 20% higher than its price 24 months out from December of last year. This pricing outlook provides returns that would incentivize operators to increase their drilling activity. Accordingly, we saw the quarterly average industry rate count increase by 13% in the second quarter. Once again, we surveyed the largest lower 48 clients at the end of the second quarter. This group accounts for 30% of the working rig count. Our survey indicates a planned increase in activity of more than 11% for this group by the end of the year. More than 75% of these operators plan to increase activity. None anticipated dropping rigs during the remainder of the year. We expect these rig additions to be weighted more heavily to the fourth quarter. The pricing environment for rigs remains bullish. Our average daily revenue increased by more than $2,500 sequentially. This was an 11% increase and took our average daily revenue to nearly $25,600 per day. Our own leading-edge day rates are now approaching the mid-30s. With the potential demand indicated by our survey, we see pricing continuing to increase as industry utilization climbs through the end of the year. As utilization increases and margins widen, The cost to activate incremental high-spec rigs will also grow. This puts additional upward pressure on day rates and margins. For our idle high-spec rigs, we see reactivation capex and spending ranging from an average of $2 million for the next 12 and up to $6 million for the last five. Beyond these rigs, we have over 40 M550s, which could be upgraded to super-spec. We upgraded seven of these a few years ago. Today, the cost to upgrade one of these rigs would likely total $13 million. At that level, we would require a term contract with day rates into the high 30s. As for new bills, we estimate the capital cost of a rig we would build today exceeds $30 million. Such a rig would incorporate our full suite of advanced technology. That investment would require term and day rates in the mid-40s. We are focused on maintaining well-defined metrics and discipline regarding high spec capacity additions. As you can see, it would be a difficult, if not financially irrational decision for the industry to build new rigs into the current market. As such, we expect the market will remain capacity constrained for some time to come. In our international markets, the strong commodity prices and expected production increases are driving oil field activity higher. we expect to add rigs in several markets. In particular, we have visibility to additional SANA new bills in Saudi Arabia. Tendering activity has also picked up across markets in the Middle East, notably for neighbors in the Gulf countries. This potential growth will likely require higher capability rigs, which should be favorable for pricing and present a significant opportunity for canned rigs. We also remain optimistic for rig additions in Latin America. Clients in these markets are plenty increases in activity, and we have the rigs and relationships to support those plans. We have seen increased interest by international clients to add our NDS services. As an example, automation software and managed pressure drilling are gaining traction. Looking forward, there are a few issues that could impact our industry. Recent events in the credit markets, heightened fears of a recession, and a contraction in global oil demand are all potential risks to industry fundamentals. We have not seen any changes in our customers' behavior following recent moves by the Fed. We remain, however, vigilant to the impact these factors could have on the forward outlook. The labor market in the US remains tight. Timely crewing for additional rigs remains an area of focus. We have taken a number of steps to attract employees and increase retention. We continue to see some upward pressure on costs across our supply chain, as well as extended lead times for certain materials. Our internal manufacturing operation continues to pay dividends. We can lever its global sourcing network to help ensure operational continuity, both for neighbors' rigs and for our third-party customers. To sum up, signals in our markets point to increased drilling activity globally. The higher oil price environment and limited spare capacity for oil production are incentivizing clients to increase activity. Operators appear to remain confident in a constructive commodity price outlook. With the disruption from the conflict in Ukraine, we see a reorientation of international natural gas markets. This could spur additional activity as well. Now, let me turn the call over to William, who will discuss our financial results and guidance.
spk08: Thank you, Tony. The second quarter results were significantly better than we expected across all our segments. Increased pricing, higher activity levels, and strong operational performance more than offset cost pressure in certain markets. In the second quarter, the net loss from continuing operations was $83 million, an improvement of $101 million as compared to the prior quarter. Both periods had non-cash charges related to the mark-to-market accounting treatment of neighbors' warrants. The second quarter results included $22 million in as compared to 72 million in the first quarter. Adjusted operating income for the second quarter of negative $4 million, improved by $30 million sequentially. We expect this operational profitability metric to turn positive in the third quarter. Revenue from operations for the second quarter was $631 million compared to $569 million in the first, an 11% improvement. All of our segments contributed to the growth. U.S. earnings revenue increased by 16% to $253 million. Lower 48 revenue grew by more than 20% on higher rig count and an increase of over $2,500 in average daily revenue, an 11% increase from the first quarter. Coming into the second quarter, almost all of our fleet in the lower 48 was working on short-term contracts. Virtually all of our fleet has already reprised or will reprise before the end of the year. Higher activity also drove revenue increases for our international segment. Revenue of $296 million improved by $17 million, or 6%, reflecting an increase in rig count of 2.3 rigs in Saudi Arabia and Latin America. Drilling solutions and rig tech moved up sequentially as well, with the latter segment delivering 23% growth. For the company in total, we expect the upward revenue trend to continue in the third quarter at a rate close to what we experienced in the second quarter. Total adjusted EBITDA for the quarter was $158 million compared to $131 million in the first quarter, an increase of almost $28 million, or 21%. All our segments deliver strong sequential growth, which resulted in EBITDA margins of 25% and improvement of over 200 basis points. Years drilling EBITDA of $87.4 million was up $13.1 million, or 18% compared to the prior quarter. This increase primarily reflected higher margins and expanding activity in our lower $48 trillion business. The lower 48 drilling EBITDA rose by $12.7 million to $64.4 million, a 25% improvement sequentially. Our average rig count in the lower 48 increased to 89.3 rigs, up approximately six rigs from the first quarter. Daily margin came in at $8,706, up more than $1,000. Rig count continues to move up on the strong commodity price environment, while our day rates increase with a higher utilization for our higher spec rigs, now at 81%. Our most recent contracts averaged approximately $33,000 per day for a rig segment alone, before layering on the contribution of our drilling solutions offerings. For the third quarter, we project our lower 48 margin at $10,400 to $10,600 per day, as we continue to roll our rigs under contracts with higher pricing. We anticipate an increase of three to four rigs in the third quarter versus the second quarter average. Our international drilling segment delivered EBITDA of $82.4 million, an improvement of $11.2 million, or 16%, over the first quarter results. International average rig count increased by 2.3 rigs, while daily margin improved to $14,331, up 1,200, or 9.1%. This margin improvement reflected strong operational performance in Saudi Arabia and Latin America, as well as favorable currency movements in certain markets. We expect RICM in the third quarter to remain approximately in line, as RIC additions in Saudi Arabia and Colombia should be offset by the end of the contract for one of our Kazakhstan RICs. The first silent new build commenced operations in early July, and we anticipate a second new build to start late in the third quarter. We project daily margin for the third quarter, roughly in line with the second quarter. Drilling Solutions EBITDA continued on its upward trajectory, delivering $22.8 million, up 13.8% from the first quarter. Gross margin for NDS was nearly 52% for the quarter, up from 49%. This is an all-time high for this segment. We continue to see increased penetration, particularly in third-party rigs, with the largest contributions coming from performance software in the US. Overall drilling activity in the lower 48 improved, taking our combined drilling rig and drilling solutions daily gross margin to $10,935. This includes a $2,228 contribution from our solution segment, which is another high. We expect third quarter EBITDA for the drilling solution segment to increase by approximately 12% over the second quarter level. WIC technologies return to a positive EBITDA contribution, generating $3.4 million in the second quarter. The $4.4 million sequential improvement reflected primarily increased rentals and aftermarket sales. For the third quarter, the segment should deliver additional EBITDA growth of approximately $2 million on growing capital equipment sales. Cash generation exceeded our expectations. In the second quarter, adjusted free cash flow reached $57 million and $96 million improvement compared to the first quarter. Our cash generation was driven by increased debit jobs from operations, lower quarterly interest payments, and a reduction in the working capital despite higher activity levels. DSO improvement drove the working capital decrease. Capital expenditures in the second quarter were $98.9 million. This amount included investments supporting the SANA new builds of 27.4 million. For the full year, we are still targeting capital spending of $380 million, of which 150 million support the SANA new build rigs. Our planned investment projects and require sustaining activity remain unchanged. Nonetheless, as a result of some inflationary pressures on our rig spares and components, we may have to cut back on some existing projects to meet our annual CapEx target. We expect break-even free cash flow for the third quarter, as higher EBITDA will likely be offset by increased CapEx and interest payments, as well as by headwinds in working capital related to the expected growth in our business. For the full year, we are targeting free cash flow comfortably above the $100 million mark. We remain focused on addressing our leverage and expect to continue reducing our net debt during the second half of 2022. The strong acceleration of the global drilling market has exceeded even our most optimistic assumptions. The 2022 and 2023 projections we provided investors last December look significantly short of what we now expect for the two-year period. Our expected lower 48 and international third quarter daily margins are already at the levels we only anticipated seeing mid-year 2023. Drilling solutions and RIC technologies are also well ahead of our projections. Before the end of 2022, once our budget process is complete, we would expect to provide updated projections for 2023 more in line with the current reality. With that, I will turn the call back to Tony for his concluding remarks.
spk07: Thank you, William. I will now conclude my remarks this afternoon with the following. The benefits of our strategic initiatives are increasingly apparent. With the growth we expect this quarter, annualized EBITDA and our neighbors' billing solutions should reach the $100 million mark. We see significant expansion potential from increased penetration on neighbors' rates, growth of the third-party business, and further additions to the NDS portfolio. In our international segment, Sanad's deployment of the first in-kingdom new-build rig marks a key achievement. The scale of this 50-rig new-build program has no equal and dwarfs other capital deployment opportunities in the global land drilling business. As additional rigs are added to Sanad's fleet, the joint venture's free cash flow should improve. That will draw us closer to the expected commencement of significant regular distributions from Sanad to the partners. Our lower 48 drilling metrics continue to improve. With focus and technology, we are approaching daily margin levels last seen in early 2020 with a path to further increases. As for the capital structure, we have successfully navigated difficult markets and significantly improved our leverage. Since the peak in 2014, we have reduced net debt by more than $1.6 billion. We have established a track record of progress to restore our financial flexibility. Our sights are set on more advancement. The goal is to reach leverage metrics consistent with investment-grade debt ratings. With the continued dedication of the entire neighbor's workforce, I am convinced the best is yet to come. I look forward to reporting that progress. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.
spk06: We will now begin the question and answer session. To ask a question, you may press star and then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. At this time, we will pause for a moment to assemble our roster. Our first question today will come from Derek Podhazer of Barclays. Please go ahead.
spk11: Hey, good afternoon, guys. I was hoping you could spend some time talking about your view of the overall supply side of the market, specifically how many idle super specs are out there and the related costs to bring those off the fence. Then beyond that, how many upgradable rigs are out there that would cost that 50% of new build or less? Just try to get a better gauge of the supply side. I know you gave us great detail and ran down your fleet, but just curious from an overall market standpoint to help us on the supply side.
spk07: Well, our guess is there's probably about 150 rigs out there that are capable of being upgraded to super spec. And the cost will vary greatly in terms of which operators they are, what the status is. So I can't give you a specific number, but those numbers could range from several million dollars up to almost $15 million, depending on operator and which category of rig. But there is about 150 of those. That's why we've said that I think new bills should be a very far distance away because the cost of a new bill, we're estimating plus $30 million with the metrics I identified, which would require day rates in the mid-40s, and a term contract, and maybe some upfront money as well. So given all that, I don't see new bills happening. And the depth of the market in terms of that potential market is pretty concentrated as well in a bunch of people, and therefore I see a lot of discipline amongst everybody right now. I think our priority, as I said, is to roll out what we have today. And as I mentioned, we have in the pipeline, we have a path for a bunch of rigs that are relatively inexpensive to keep rolling out. We're at 91 rigs today. I said three or four rigs next quarter. And the second half, we'll probably try to shoot for an exit number of around 100. And the cost is relatively minor around 100. As I said, the first 12 rigs are roughly around $2 million, $2 million and change. So relatively inexpensive. Then for us on the back end, the last five on a March to adding 20 to our 91 rigs would be about $6 million. So again, it does dip up, but not substantially. And then for us, we do have 40 plus M rigs, and we have another maybe another dozen on top of that. And those could be substantial capex, but again, less than 50% of the cost of a new build. So that's why I think the market's pretty constructive right now. I think the focus on everybody is to focus on the existing install base and push pricing as much as you can.
spk11: Got it. That's helpful. I appreciate the color. Follow up, the 40 plus M rig that you talked about, it sounds like if you exit at 100 rigs this year, you're going to reach 111 at some point next year. Can you talk about when you expect to reach that level? and then line of sight to when rig 112, that 112 one being one of those 40 M rigs, come out when we can see that, and is the supply chain in place where you can get that rig out if it's going to be a second half next year event? Just thinking about the timing and cadence of when we move from exhausting our super spec into reaching into one of those M rigs.
spk07: Okay, we exhaust our super spec at 111, and so... And that, I'm hoping that we, expecting maybe toward the first half of 2023, second half of, the end of the first half, end of the second quarter of 2023, we should hit that. That's the goal. And depending on, we'll be monitoring that, and depending on what happens and where we are on pricing, et cetera, and where the market is, then we'll judge whether it makes any sense to even think about the M rigs or upgrading additional rigs. But as I said, right now, Our focus is on maximizing the existing capital and the existing investment capital and get the returns up as much as we can right now. That's where the focus is. And we have, because of our integration, we can quickly pull the lever on adding, upgrading rigs. That's one of the benefits of neighbors, given the fact that all the long lead-ons, which is smart components of the rig, the top drive, the VFD, the draw works, the wrench, all those things that neighbors build itself, and therefore we have a lot of control over the supply chain. We do have a bunch of inventories and spare parts that we have in the normal course of things just to support our existing customer base. As you know, in the top drive market, for example, Neighbors today is 40% of all the top drives in the world. So we have a pretty robust supply chain and ability to lever our things up. So that would be a high-class problem, is the way I would say. But right now, our focus is on maximizing the cash flow from the existing assets.
spk13: Great.
spk11: Appreciate the thoughts. I'll turn it back.
spk06: Our next question today will come from Carl Blunden of Goldman Sachs. Please go ahead.
spk00: Hi, good afternoon. Thanks for the time. You notice that you're guiding to a pretty sizable increase in lower 48 margin for 3Q. Could you discuss a little bit more about what's You gave some drivers in the prepared remarks. Is there a large proportion of contracts resetting, or is there something else underlying this big step change you're seeing there?
spk07: Well, as you know from our prior conference calls, we made a tactical decision last year to go very short on our contract length. So that put us in a position now that we have price reopeners on a large portion of our fleet. I think 70% of our existing rigs, we have an ability between now and the beginning of next year to reprice. And so we're going to take advantage of that, given the fact that the market has moved quite a bit. And that's the goal, and that's the strategy to do that. So that's exactly where it comes from. You're absolutely right. And today, as I said in the prepared remarks, that number is about $8,000 above our second quarter average. So it's very substantial. So in the third quarter, we'll be focusing on trying to get as many of those as we can. As I said, 70% of the fleet by the by the first quarter next year can reprice and that's the strategy to take advantage of that window.
spk00: Those numbers are helpful. With regard to capital allocation, it sounds like we should continue to see debt reduction as a primary focus. I was wondering if you're open also to accelerating that debt reduction with equity-linked transactions.
spk08: I think at this point, there are more attractive ways to handle our liquidity and our maturity profile. But nothing is off the table.
spk12: Thank you.
spk06: Our next question today will come from John Daniel with Daniel Energy Partners. Please go ahead.
spk05: Good morning, guys, or afternoon. I just have two quick questions on the 70% of the rigs that will have the ability to reprice. I know the objective is to move pricing closer to leading edge, but is there any reason that you wouldn't expect those 70% to be comfortably in the low 30s when they reprice?
spk07: No, that's exactly what the goal would be to do that. I mean, at 8%, as we said, at $8,000 above 25, you're already at the mid-low 30s already. And if the market keeps accelerating as those openers come up, we'll try to take advantage of that as well. But Yes, you hit it right now on the head. It's in the mid-low 30s already.
spk05: Yeah. I mean, it just seems to me, and I know you don't want to give forward guidance too far out, but there's, it seems very, you know, nothing else changes from a macro perspective that you guys could comfortably be north of $15,000 big cash margins by second half next year.
spk07: You're trying to push us higher, but there's no question. In the second half, yeah.
spk02: Yes, sir. I mean,
spk07: At 8,000 top of 25, you're approaching 50% on just the base rig. And then just remember, for neighbor's numbers, please bear in mind, we have additional margin from NDS on top of that, okay? So all those numbers go up, and the additional trunch on top of that as well. So that's where the extra juice is.
spk08: So I think one of the things that Tony pointed out, John, is that, you know, we have a lot of potential for repricing, and... We would even like to see prices above where they are right now, leading edge pricing. So the 8,000 is if we reprice everything at today's leading edge. But we think there's some potential for further increases in pricing during the remainder of the year. So 15K, if we don't get that before the second half of next year, I'd be very disappointed.
spk05: Okay. I just feel like some dumb monkey mouth as I'm driving here. It's very impressive. So thank you for letting me. Make sure I'm not smoking anything funny.
spk08: Thanks, John.
spk05: All right, guys. Take care.
spk06: Our next question today will come from David Smith of Pickering Energy Partners. Please go ahead.
spk02: Hey, good afternoon. Thank you for taking my question. Sure. I just wanted to follow up to the first question on the call today. You mentioned 150 SuperSTEC upgrade candidates across the industry. If I understand correctly, that would probably include, you know, about 40 from you. I wanted to try to reframe that question to ask your view of, you know, how many super spec upgrade candidates you see out there that aren't owned by the big three U.S. contractors?
spk08: I don't know. Maybe. Well, I think the 150 was the remaining idle high specs and potentially upgradable. Right. It's not upgrades to super spec, to be clear.
spk02: Okay. I appreciate that. On the theoretical upgrade to super spec question, I understand your focus is putting all 111 of your high spec rigs to work. But if we just step back, talk theoretically, what kind of lead times could you be looking at? And maybe what is a pace of upgrades that could be realistically achievable if operator demand was there?
spk07: Well, I mean, for us to go from the 91 to 111, that's just day-to-day stuff for us. I mean, as I mentioned, the cost of that is relatively inexpensive for us to do that. So as I said, we're thinking of targeting exiting the year around 100. So that's nine more from where we are today. And by the second half of 2023, that would be another roughly 10 or so. And so all that, we don't see any herculean efforts. We don't see any supply chain issues. nor do we see a big capex for us to do that. That's one of the advantages we have. So I don't really see that being a big deal. And as your prior question guy referenced, then during that process of the second half, we will monitor to see whether the market has a need and appetite for and whether we're interested in supplying that additional layer, which then does move us to a higher cost number and also a higher lead time, but We'll have visibility on that several months in advance to try to mitigate the lead issues with that.
spk12: Okay. I appreciate it.
spk06: Our next question today is going to come from Dan Kutz of Morgan Stanley. Please go ahead.
spk03: Thanks. Just wanted to... Ask us, and sorry if I missed it, but just wondering if you guys could comment or expand on any comments you made in terms of pricing trends that you're seeing across international markets. Thanks.
spk13: Pricing trends.
spk08: Yeah. We're seeing, I mean, the prices have steadied up and continue to steady. I mean, in certain markets, like in Latin American markets, we've seen increases in pricing versus prior. and better conditions on the contracts with respect to exchange rate and such. We're hoping to see some increases in prices in the Middle East as well in our biggest market. And in general, the market is a little bit more dynamic, more tenders coming up. And the market is tight internationally as well. So we are seeing some increase, but obviously not to the level of what we've seen in the U.S. the international markets were seeing more like 5% to 10% as compared to the US, where we're seeing basically over almost 80% increases in pricing at this point.
spk03: Got it. That's really helpful. And then, Tony, I think you kind of alluded to recession risk in the prepared remarks. That's definitely a big debate, or a big debate is the extent to which a recession, maybe call it a mild recession, would actually impacts, you know, oil and gas development activity. So just wondering what you guys' thoughts are. You know, say we do go into a recession, what would be the implications for activity maybe in the U.S. and international markets? Are these your thoughts?
spk07: Well, I mean, given volatility in general that we've lived with for so long, we're constantly aware of that. So we do everything to prepare for the downside. So we're not getting over our skis on any commitments. We're trying to maintain our cost structure, even though there's a lot of pressure on it right now. As activity goes up, we're trying to be vigilant about adding to our body count, et cetera, all because I'm keenly aware of the macro there, and I want to make sure I'm not locked into something, and I'll respond to it with the same speed and swiftness I did in the last downturn that you saw. Neighbors, that first quarter, we did cuts dramatic compared to most of our competitors as well, where we took 20%. out of the SG&A, et cetera, we responded really quickly. So we're doing everything to keep the culture of maintaining our whole infrastructure in a way that maintains that flexibility, given the fact that other things are going on in the world that we can't control. Got it.
spk03: Thanks very much, guys. I'll turn it back.
spk06: Our next question today will come from Keith Mackey of RBC Capital Markets. Please go ahead.
spk10: Hi there. Thanks for taking my questions. I think we have a much better understanding of where you expect the top line on the U.S. daily rig revenue per day to trend through the end of this year and into next year. But I did want to get a little bit more color on how we should be thinking about OPEX per day. We've seen that sort of come up a little bit as well. Just what is the base level of OPEX we should be thinking about with the existing rigs running and then any OPEX startup costs on these next rigs as you get up to the $111 would be helpful.
spk07: On the startup costs, the numbers I gave you include CAPEX and startup costs in that Two million numbers. I want to be real clear about that. That's what I'm saying. Our rollout of those rigs, the next 12, is relatively painless. That's the point I'll make. On the operating expense itself, there's a few categories. There's obviously labor friction. We do have cost pass-throughs with the contract, but there is labor friction given that the fact that competition adjustments are having to be made the past six months given the market and labor shortages and tightness on everything. And then we do have some R&M cost increases as well. Obviously, in the industry in general, given things like in the material side, things with high metal content, steel and copper, et cetera, all that stuff has subject to cost escalation. Probably the R&M component, probably about 8% there of just that one component. And then, of course, in our cost numbers, there is a bit of churn because as you press rates and you're you're not doing a good job unless you lose some as well. So there is some churn there as well. So we have those three things. But on top of that, I'll let William address the operating expense column again.
spk08: So about, Tony highlighted the biggest one, which is compensation, and the one that's gone up the most over the last six months or so. And compensation today is about 70% of our OPEX. So that has some components that are permanent, like the salary increases. Those have cost us about $600 per day this particular quarter. Others are more transitory that are more related to churn. When you push a client to increase prices, as Tony mentioned, most of the time we're going to be successful, but there's still a significant amount of churn where you have to move to another client. But of course, you keep the people, the crew stays on and you may be a month down. So you have more people really than than probably you need for a time. And we're going through that right now. So we are just south of $17,000 per day right now, including reimbursables, which are about $1,500 per day. We think that number has some transitory elements that will take us to below $1,700 next quarter. But again, we are going to be working on bringing back those costs. to a more traditional level, which we think hope in the 17K or slightly below range.
spk09: Got it. Thanks for the color.
spk10: And just to follow up, the survey that you did with some of the customers and their expected rig additions through the end of the year certainly does point to some incremental rigs going to work by the end of the year. Just curious what you're thinking as far as contract lengths and durations on rigs that'll go to work in 2023. Do you think it'll still be shorter term or will we start to see some longer term contracts get signed?
spk07: I think as pricing goes up, typically you see operators get interested in longer term contracts. In my prepared remarks, I may reference that fact. And we will be looking at that as well. I think, as I said, 70% of the contracts contracts have price reopeners in the next, by the first quarter of next year, that means we have room to move that remaining 30% up and we'll be focused on that opportunistically as we move forward. But I don't want to set a specific target number of term contracts, but we are looking at it and depending on the customer and, you know, the term contract makes sense for us, particularly if a customer is focused on technology and is committed to that, because then it's a win-win for both of us because technology added to a rig requires a long-term commitment And if we can find rigs, place rigs with those kind of customers, that'll be a win-win for us. So that's kind of the priority for us. So term matters, but also the right term with the right kind of customer. That's more equally important to us.
spk09: Perfect. Thank you very much for the color.
spk12: That's it for me.
spk06: Again, if you have a question, please press star then one. Our next question will come from Arun Jayaram of JP Morgan. Please go ahead.
spk04: Good morning, or good afternoon, pardon me. Tony, I wanted to get your thoughts. If the neighbor's share of the U.S. land rig count, using a Baker Hughes as the denominator, around 13%, 14%, if the U.S. land demand increases by 100 incremental rigs over the next few months, what's your expectation around You know, neighbors as market share, would you expect to grow your market share just based on your, you know, your super spec and ability to upgrade super spec? Just getting your thoughts on that.
spk07: Well, I'm not really a market share guy. I mean, I'm really a guy that looks at returns, so I'm more interested in getting proper returns and growing that. Now, if you look at the numbers I gave you, I said 10% for the market as a whole. And then I point to the fact that neighbors said 91 rates. I said we're going to be at 100, hopefully at 100 targeting for this year. So that's kind of in line. And then second half of next year will be another 10%. So that could yield an incremental market share improvement. But again, my priority is more make sure these rates get placed with the right customers. where I maximize my technology and I maximize my return on investment. That's more my priority as opposed to market share. On NDS, I think there, the growth is not just on neighbor's rigs, it's on third-party rigs. And we're still in the first or second inning of that ballgame. And I think that's one of the attractions of NDS because it does have the potential to grow beyond neighbor's rig market share. And the economics of that are such that it's a capital-light model. So the returns on capital are even more attractive. So that's an equal priority for us. Right now, our main priority at NDS is to grow penetration as opposed to pricing. Pricing actually stood up pretty well during the past COVID downturn. So right now, our goal is to garner penetration both on neighbor's rigs and third-party rigs. So there, the goal specifically is to grow market share because we think we have some really unique things to add value to.
spk04: Great. And I know it's early, but I just wanted to get your preliminary thoughts as we sharpen our pencil around 2023 CapEx. Just trying to think if there's any things that you can maybe give us some color on maintenance CapEx for rig, Sanad new build CapEx, et cetera, just thinking about the market next year.
spk08: So you highlighted the two important pieces. One is Sanad, and that's going to be somewhere in the $150 or so million per day, depending on the deployment. Not per day. I'm sorry, for the year. For the year, yeah. $150 million. So that is sort of baked in, and it all depends on the pace that the local manufacturer can maintain. So that is a little bit of a very digital number. It could go up by $30 or $40 million or maybe down $30 or $40 million. But that's one piece. The other piece, our rig count is increasing. It is increasing from this year to next year. And probably the cost of maintenance capex per rig per year has gone up a little bit. So we do expect some increase in that piece of the business. Our maintenance capex should go up maybe towards the... closer to the 1 million mark versus the 800 that we've traditionally seen in the past. So it's a combination of both. So to give you a number, well, we expect to exceed 400 next year. And by how much, I'm not sure yet. And that does include Sanan.
spk12: Great. Thanks a lot.
spk06: Ladies and gentlemen, at this time we will conclude our question and answer session. I'd like to turn the conference back over to William Conroy for any closing remarks.
spk01: Thank you all for joining us this afternoon. If you have any additional questions or wish to follow up, please contact us. Alison will end the call there. Thank you very much.
spk06: And thank you. The conference is now concluded. We thank you for attending today's presentation. You may now disconnect your lines.
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