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spk11: Good day, and welcome to the Neighbors Industries third quarter 2022 earnings conference call. All participants will be in a listen-only mode today. Should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw a question, please press star, then two. Please note that this event is being recorded today. I would now like to turn the conference over to the Vice President of Investor Relations and Corporate Development, William Conroy. Please go ahead, sir.
spk04: Good afternoon, everyone. Thank you for joining Naver's third 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 perspective on the quarter's results, along with insights into our markets and how we expect neighbors to perform in these markets. In support of these remarks, a slide deck is available, both as a download within the webcast and in the investor relations section of neighbors.com. Instructions for the replay of this call are posted on the website as well. With us today, in addition to Tony, William, and me, are other members of the senior management team. Since much of our commentary today will include 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 for 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.
spk09: Good afternoon. Thank you for joining us as we present our results for the third quarter of 2022. All of our operating segments once again performed very well. We have the right strategy. Our execution is strong, and these results demonstrate the earnings power of our portfolio. Adjusted EBITDA in the third quarter totaled $191 million, a 21% increase over the second quarter. Strong revenue growth across all of our segments drove these results. Consolidated revenue increased 10.2% sequentially. Our global average rig count for the third quarter increased by four rigs. This growth was primarily driven by increases in our U.S. and Saudi Arabia markets. Building solutions once again recorded double-digit EBITDA growth. In the third quarter, we continued to reduce our net debt. Our net debt improved to $2.16 billion. Adjusted free cash flow was $35 million, much better than we forecast. I am pleased to report we again made progress on our five keys to excellence. These critical objectives drive the investment thesis for neighbors. These include our leading performance and 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 95 rigs running, up three rigs from the prior quarter end. Daily rig margins in the lower 48 increased significantly. Average daily margin increased by nearly $2,500 in the third quarter. With that growth, our fleet average margin in the lower 48 broke through the $11,000 mark. These results reflect our ability to reprice the fleet towards the leading edge. which continues to trend higher. Our strategy to remain short on contract duration and capture strong leading edge price momentum has fueled our performance. At these levels, we believe day rates are starting to reflect the value of our rates. Going forward, we are looking to add term to our backlog. To this end, we have recently signed multiple rates to most of your contracts at these higher rates. In the lower 48, operators remain highly focused on top tier rigs and execution in the field. The value of our technologies in the drilling solutions business is a key driver to our leading drilling performance. For neighbors, this portfolio is an important differentiator. I will cover NDS in more detail in a few moments. Next, let's discuss our international business. Daily margins in this segment improved once again in the third quarter. This increase reflects higher profitability in certain international markets, most notably in the Latin American and Middle East regions. We also benefited from the startup of our advanced fit-for-purpose rig in Papua New Guinea. On our last earnings conference call, I announced that SANA's first in-kingdom new build rig flooded its first well in early July. Since then, our crew has done an excellent job in bringing the rig up to its expected performance in a very short period of time. We expect the second new build to deploy during the current quarter. Three more new builds from the initial awards will be deployed early in 2023. All will be contracted for six-year initial terms, followed by a four-year renewal. We expect additional awards at a cadence of five per year. In addition, Sanad recently agreed to renew 24 rigs on four-year contracts at current market rates. This means over half the fleet in Saudi Arabia now has contracts with more than four years remaining in duration. Now, let's discuss our technology and innovation. Driving technology remains our principal goal. Our focus areas include automation, digitalization, and robotization. In the third quarter, the financial performance of drilling solutions improved substantially. Quarterly EBITDA increased sequentially by 13% and exceeded $25 million. At this run rate, NDS is now a $100 million a year EBITDA business. On top of that, the combined average daily margin in the lower 48 from our drilling and drilling solutions businesses approached 13,600. Of that, NDS contributed more than $2,400 per day. The typical neighbor's rate in the lower 48 runs more than six NDS services. This metric increased again in the third quarter and reflects the strong value proposition of the portfolio. Among automation and digital services, we saw 16% growth in Smart Slide and Smart Nav and 11% step up in Smart Drill and early success with smart plan. Our digitalization and process automation services accounted for more than 60% of the segment gross margin. In the third quarter, NDS continued to grow its business on third-party rigs. Lower 48 revenue from this client base grew sequentially by 9%. Previously, we discussed our plans to roll out robotic modules to retrofit existing rigs. This strategy builds on our experience with our fully automated R801 robotic rig. During the third quarter, we installed the first robotic module on one of our own existing rigs working for a super major in the Permian. This module fills the long-sought need for a manless red zone on the rig floor. This safer work environment also delivers consistent high performance. The unit has already successfully drilled several wells, We are now fielding interest in additional units. Next, let's discuss our progress to improve our capital structure. In the third quarter, we once again reduced net debt, driven primarily by excellent free cash flow. As you know, we have prioritized free cash flow generation and capital structure de-levering. As William will explain in more detail, we continue to make progress on these twin objectives. I'll finish this part of the discussion with remarks on ESG and the energy transition. Our commitment to environmental stewardship is unwavering. We have three focus areas, reducing our own environmental footprint, capitalizing on adjacent opportunities, and investing strategically in leading-edge companies with clear adjacencies to our core activity while accelerating their achievement of scale. Our effort to reduce our carbon intensity are paying off. In the US, we are introducing technologies that should result in a step up in emissions reductions. First, CanRig has developed the PowerTap module, which allows us to quickly connect rigs directly to the grid. On top of eight units currently installed in our working lower 48 fleet, we are in the process of deploying another seven by year end. We plan to add an additional 10 units in the lower 48 during 2023. Also, we have developed a solution for the international market that will be commercialized during 2023. Second, we are testing a new concept for battery storage on a rig working in the Bakken. As you know, several competitors are using containerized lithium battery storage for load balancing and peak load shaving. Our differentiated solution utilizes ultracapacitors instead of lithium. This ultracapacitor-based technology results in faster charging times and reduces the risk of explosion of fire. We are also testing a hydrogen injection system. This system reduces fuel consumption and emissions when installed on diesel engines. We believe this solution will have application in the broader oil field as well as in marine shipping and heavy trucking industries. Finally, our efforts in advanced material science may result in new products for battery storage, electrolysis, and hydrogen fuel cells. We expect to have better visibility on all of this in 2023. Now I will spend a few moments on the macro environment. WTI currently stands in the mid-80s. The 24-month futures price is approximately 10% above its price in December of last year. This outlook supports continued increases in drilling activity. We expect these increases to materialize beginning next year with the completion of the current budget cycle. In this current macro environment, we remain vigilant to factors which could impact the market. Among these, we see tightening credit as well as the possibility of a recession. Even in light of these factors, energy commodity markets have remained constructive, giving us confidence in our outlook through 2023. In the U.S., labor availability to support our operations remains challenging, though surmountable. We remain convinced of our ability to deploy additional rigs as we continue to respond to increased market demand. As for the broader supply chain, we continue to see some upward pressure on costs. Putting this in perspective, our repair and maintenance costs account for only about 14% of operating expenses. In addition, Extended lead times for certain items persist. However, we have been able to navigate around these challenges with our internal manufacturing operation. Next, I will spend a few moments on day rates. The pricing environment for rigs in the lower 48 remains as bullish as we have ever seen. Our average daily revenue in the lower 48 increased by more than $3,600 sequentially, or 14%. and exceeded $29,000. We have recently signed contracts with revenue per day approaching $40,000, and that's before adding NDS content. Industry-wide, high spec regularization continues to climb. We are now in discussions for additional rigs in 2023. With this combination and assuming constructive commodity prices in 2023, we expect continued increases in leading edge pricing. At the same time, the cost to reactivate incremental high-spec rigs continues to increase. For our idle high-spec rigs, we see reactivation capex and spending ranging from an average of two million for the first eight or so units up to six million for the next eight. We expect to have all our high-spec rigs deployed by the end of 2023. Our plans for 2023 do not include upgrades to units beyond our current fleet of 111 high spec rigs. We still have more than 40 stacked M550s. These rigs could be upgraded to high spec capability at a cost of approximately $13 to $15 million each, still less than half the cost of a new build. We completed seven M550 upgrades a few years ago, and all of those units are currently operating. International activity is increasing across markets. This expansion has favorably impacted day rates. Recently, we have renewed a number of rates and added additional units in several markets, all with price increases. Once again, we surveyed the largest lower 48 clients at the end of the third quarter. This group accounts for 31% of the working rate count. Our survey indicates a planned increase in activity of 4% for this group by the end of the year. In our international markets, several operators have indicated plans to increase their activity levels. In turn, we expect to add rigs in several markets. Of course, we have a unique opportunity for additional standard new bills in Saudi Arabia. Beyond those, tendering activity has increased in multiple markets in the Middle East. We also see tangible opportunities for additional rigs across multiple markets in Latin America. In summary, with the backdrop of supportive commodity markets, we expect U.S. rigged demand to continue to improve, U.S. pricing to continue to increase, and we see strong prospects for growth in Saudi Arabia and Latin America as well as other international markets. With these tailwinds, we are confident we will meet, if not exceed, the expectations that we have laid out for 2023. Now, let me turn the call over to William, who will discuss our financial results and guidance.
spk05: Thank you, Tony, and good afternoon, everyone. Third quarter results were significantly better than we anticipated. Across the company, we continued to experience strong pricing momentum, coupled with higher activity levels, more than offsetting cost pressure in certain markets. Pricing and activity trends continued to improve across the globe. We expect four-quarter results for all segments to increase materially over those of the third quarter. Revenue from operations for the third quarter was $694 million compared to $631 million in the second quarter, a 10% improvement. U.S. drilling revenue increased by 17% to $297 million. Lower 48 revenue grew by more than 19%, reflecting higher rate count and an increase in daily revenue of over $3,600, or 14%. Average daily revenue reached $29,200, and we expect it to continue increasing over the quarters to come. We have recently started signing contracts with revenue per day approaching $40,000. This is before layering on additional revenue for drilling solutions. Clearly, our decision to keep most of our fleet on short-term contracts has paid off. Although we believe pricing will continue to trend upwards, we are now long-term onto our portfolio of contracts. At these leading-edge day rates, we believe it makes sense to contract a portion of our fleet on longer term. Revenue from our international segment also increased, to $306 million for about 3% for the quarter on stable rig count. The improvement was driven by higher revenue in Saudi Arabia and Latin America. Revenue from drilling solutions and rig technologies moved up as well, each improving by more than 10%. Total EBITDA for the quarter was $191 million compared to $158 million in the second quarter. an increase of $33 million or 21%. All our segments deliver strong growth, which resulted in EBITDA margins of nearly 28% and improvement of over 240 basis points. U.S. drilling EBITDA of $114.5 million was up by 27 million or 31% compared to the prior quarter. All three components of our U.S. drilling segment were up sequentially, with the lower 48 drilling rig business contributing the most. Lower 48 EBITDA rose by almost $24 million at 37% improvement. Rig count increased to 92 rigs, up approximately three rigs from the second quarter. Daily margin came at $11,165, up by almost $2,500 per day, a 28% increase. On the other hand, OPEX deteriorated by about $1,100 per day, primarily driven by higher compensation costs. Although repair and maintenance costs per rig has also trended up, its weight on our total cost is much lower. Lower 48 rig count continues to expand on the strong commodity prices. Day rates are still accelerating, driven by higher utilization for high-spec rigs. Neighbor civilization is now at 86% and we expect it to reach 90% by year end. The industry is essentially sold out of readily available high spec rigs. So any meaningful rig count expansion will require bringing back units from stack. Rigs that have been idle for over two years require three months to redeploy at a minimum. For the fourth quarter, We project lower 48 margin between $13,400 and $13,600 per day. As we continue to roll our rigs onto contracts with higher pricing, we anticipate an increase of four to five rigs in the fourth quarter. Our international segment delivered EBITDA of $86 million, an improvement of 3.5 million, or 4%, over second quarter results. International rig count increased slightly, as additions in Saudi Arabia and Colombia were partially upset by a one rig reduction in Kazakhstan. Growth margin improved to almost $14,600 per day. Rig count in the fourth quarter should improve by one rig. The first sign of new build commenced operations in the third quarter. We anticipate deploying one more new build and a legacy Saudi rig before the end of the year. We project daily margin for the fourth quarter to increase to approximately $14,900, reflecting margin improvements across Latin America and higher day rates in the Middle East. Additionally, during the fourth quarter, our state-of-the-art rig in Papua New Guinea should deliver one-fourth quarter of operating revenue. Drilling Solutions delivered EBITDA of $25.6 million, up approximately 13% from the second quarter. All our business lines showed sequential growth, with especially strong results in our software and digital offerings. We expect fourth quarter EBITDA for drilling solutions to increase by approximately 15% over the third quarter level. NDS gross margin per day for the lower 48 increased to $2,429 in the third quarter, yielding a combined drilling rig and solutions gross margin of $13,600 per day. We expect this metric to reach approximately $16,200 in the fourth quarter, with approximately $2,700 from drilling solutions. For the third quarter, RIC Technologies generated EBITDA of $4.8 million, a 43% increase. This improvement primarily reflected higher capital equipment sales. The current upgrade cycle appears to be accelerating. For the fourth quarter, we expect EBITDA of approximately $7 million, reflecting higher upgrade and recertification activity. Free cash flow for the quarter reached $35 million, significantly above our expectations for breakeven. This improvement was driven by better than expected performance on customer collections and higher EBITDA, as well as by stable CapEx as we tighten our capital spending discipline. Capital expenditures in the third quarter were $95.5 million, including $13.7 million for SONNET new builds. For the fourth quarter, we target $100 to $120 million in capital expenditures, depending on the timing of our year-end projects. SONNET new build CapEx accounts for $60 to $70 million. As we mentioned last quarter, we have faced cost inflation throughout our supply chain. To mitigate the impact of these cost increases, we are revaluating noncritical projects budgeted for this year. We continue to forecast free cash flow comfortably above $100 million for the full year 2022. We are targeting fourth quarter free cash flow of around $80 million. The expected sequential improvement reflects higher EBITDA and lower interest expense, somewhat offset by increased capital expenditures. Net debt fell to $2.16 billion, with additional reductions expected in the fourth quarter. At the end of the third quarter, our cash and short-term investments stood at $425 million, and our $350 million credit facility was undrawn. During the quarter, we bought back at a discount $60 million of our five and three quarters 2025 notes. We will continue opportunistic purchases of outstanding notes with future cash generation. Looking forward to next year, we anticipate a continuation of the tailwinds experienced in 2022. Last December, we provided projections for 2023. Given our recent awards in the U.S. and internationally, it's clear that we underestimated the pricing momentum for our services in an increasingly tight global drilling market. In the lower 48, we're signing contracts approaching $40,000 in revenue per day. With our current OPEX at around 18,000 per day, these leading edge margins exceed what we've seen in a very long time. Maybe ever. In this kind of environment, it's even more important that we remain disciplined. Our commercial strategy remains unchanged. We continue to prioritize pricing over market share on a global basis. In the lower 48, this may mean moving some rigs to customers that value our technology and are able to pay the higher day rates. We also recognize we may miss some opportunities internationally. Finally, we will stay disciplined and avoid reactivating rigs without long-term customer commitments. Given the environment I have just discussed and assuming a constructive all-price environment for 2023, we're now targeting EBITDA above $1 billion for next year and free cash flow of approximately $400 million. With that, I will turn the call back to Tony for his concluding remarks.
spk09: Thank you, William. I will now conclude my remarks this afternoon. First, let me summarize our third quarter highlights. Quarterly adjusted EBITDA increased by 21%. We generated free cash flow while reducing that debt. Lower 48 margins topped $11,000 with an outlook for further significant increases. And NDS has reached annualized EBITDA of $100 million. Strong execution of our strategic initiatives drove these results. In addition to growth in these initiatives, and as we look ahead to the fourth quarter, We also expect our results to reflect the robust market conditions. In the lower 48, we are seeing rig rates and daily margins more reflective of the enabling technology that we provide. This prospect is driven in part by additional activity. Operators in the lower 48 continue to plan to add rigs through the end of 2022 and to ramp activity in 2023. In our international segment, additional new bills and standard together with the recent contract renewals should lead to increased financial performance. Momentum in NDS remains strong. We see potential for both increased penetration on neighbors rates as well as growth in the third party business. Since the onset of the pandemic, we have reduced our net debt by more than $700 million. Our accomplishments in this area are noteworthy and we are absolutely committed to more progress. I've said for some time, the best is yet to come. All of our achievements in financial performance, technology, and ESG notwithstanding, that is still the case today. With the industry's most talented and dedicated workforce, indeed, the best is yet to come. Before we open for questions, I'd like to recognize Jim Crane, our board member and owner of the Houston Astros, for building an exceptional world-class organization for Houston. Thank you for your time and attention. With that, we will take your questions.
spk11: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. And our first question here will come from Carl Blunden with Goldman Sachs. Please go ahead.
spk00: Hi, good afternoon. Thanks for the time. You know, I was interested in the comments about getting some more term on some of the contracts that you're signing now. Could you give us some idea of the type of term you're targeting and what proportion of the book you could ultimately shift to longer-term contracts?
spk05: So, listen, I mean... Normally in the past, and since I've been here, we've stayed around a 20 to 30% term proportion. During COVID, we debated what we should do and we decided to stay very short term because we thought this was going to be a strong rebound and this was going to be a short downturn. So this has been exceptional for neighbors. We have never carried so little term in the past. And that has paid dividends. We did very well because of that, much better than we even expected. We think at these kinds of prices, which are pretty close to giving us a very good return on capital, I still have hopes for some more increases. But at these kinds of prices, we think we can go back to a normal range, which is 20 to 30. And we'll try to do that during the fourth quarter. We think our target to be at the end of the year around 20% I think is reasonable.
spk00: That's helpful. You had impressive guidance for net debt reduction next year of $400 million. Should we expect gross debt reduction to trend similarly to that? Maybe a bit of a lag. You don't have a lot of securities that are very easily prepayable. I'd be interested in any thoughts around the mechanisms of also targeting gross debt reduction. If you feel like you need any more than just using cash flow, if there's any other levers that you'd look to use.
spk05: So we do have about $210 million of convertible, I'm sorry, of notes that expire in 2025, the 9% notes. And those we can pay at par at any time. And we have in 2023 a couple of maturities coming as well that we can pay early as well. So we do have a significant amount of debt that we can pay back. And yes, the objective is to reduce our total gross debt in line with net debt.
spk10: Thanks very much. Our next question will come from Dan Cutts with Morgan Stanley.
spk11: Please go ahead.
spk03: Hey, thanks. Good afternoon. Good afternoon. Hi, Dan. So I just wanted to ask, and sorry if I missed, if you guys have made some comments and put some info out on this, but just wondering if you can talk about kind of the macro supply side of maybe the U.S. and international markets. Just wondering if you have any, you know, appreciate all the detailed color on the idle capacity that neighbors has and the activation cost, but just wondering if you could share any general comments about the supply side, you know, in the markets in which you operate.
spk09: Well, I think in general, probably in terms of rigs that can come back into the market You look at a number potentially of about 150 rigs. The problem with that number, though, is as you get into it toward the back end, at the midway point, I think you end up with a very substantial amount of CapEx. I think the question is going to be presented for people in that position at a certain point, do you actually bring those rigs back, or does it make more sense to try to do something different? But that would be the order of magnitude of the number, something like that.
spk03: Got it. Great. That's really helpful. And then just wanted to ask what you guys, what you guys are, your latest thinking was about recession risk is just kind of how you think that would translate into activity and pricing implications if we did go into a recession and maybe if you could parse out what your views might be and the U.S. versus global markets, given that those cycles are kind of at different points, or the recovery in those markets is at different points?
spk09: Thanks. Well, obviously, the big elephant in the room is the macro environment in terms of recession, and interest rates don't help as well. I think, obviously, being short on term in the U.S. is a somewhat of a negative for us, but we're pretty confident in the constructive environment today. I think OPEC Plus is going to do what it can to maintain a strong commodity environment. And I think when you look at our overall portfolio in terms of neighbors and our overall backlog, we're well positioned to withstand anything. If you look through the last cycle, when everyone went through COVID, I think neighbors was more than our two large competitors combined. And so The resiliency and deliberate construction of our portfolio, I think, is a real plus that has not really been appreciated if you look at what we went through. So I have every confidence we can withstand anything that's thrown at us, given that we just did it and we demonstrated it to you all the past couple years. Great.
spk03: That's really helpful. Thanks a lot, guys. Quick addition to that.
spk05: We do think, and I think Tony and I have discussed this multiple times within ourselves, and we're trying to do plans for next year. But we do think that whether there's a recession or not, the impact on energy consumption is not going to be as dramatic as we've seen in the past, and certainly not in the fact that supply is well behind demand at this point on a really medium and long-term basis. So I think clients have realized that, and we see signs of panicking a little bit all over the globe where clients are realizing they're behind the curve and they're trying to catch up now. So we do think that a recession is certainly just a probability for that, but we do think that the oil and gas sector will be a little bit benefited by the fact that it's so far behind and so much underinvestment in the past decade.
spk03: Great.
spk10: Thanks again.
spk11: Our next question will come from Derek Podhazer with Barclays. Please go ahead.
spk08: Hey, good afternoon. So I wanted to ask about pricing trajectory and different catalysts. So reaching 40,000 leading edge on market tightness. Then you talked about the required capex for your next eight and the eight after that. What brings the market up to the mid 40s and then to the high 40s? Do we need to see all those rigs be reactivated or do we need to start talking about your non- high spec rigs to be upgraded and that helped push the day rate higher. And then we talked about new boats. I think just an extra color around the pricing trajectory, what moves it would be helpful just to help frame the debate, why adding capacity won't lead to pricing degradation. Cause I think that's a lot of the, what people are viewing the other sector right now. So some help around there would be, would be great.
spk09: Well, I think, I think first of all, you know, the, when you look at the leading edge pricing, you got to look at it by region. And, uh, By region, the Northeast and East Texas are the strongest, I'd say, with North Dakota as well. West Texas, there's a little bit of churn there, so it's not as fast, but the gap between all of them is very narrow at this point, which is a very good sign. That's point one. Point two, as William just observed, I mean, we're at 86% utilization right now, so there is no more capacity. And if you look at where operators have been talking right now, obviously plans are kind of early right now for next year, but I think And there's a bit of a dance going on with many customers as well. But I think the party line would be flat to modest increases at a minimum. And that would be another 50 rigs at a minimum, looking at it that way. And therefore, when that happens, that will add additional pressure on the rates as well. And you also have to note that we're pretty far away from replacement cost pricing, which is what everyone would worry about. Replacement cost pricing Assuming a rig is $30 million roughly, you're still looking at the mid-40s. So we're still far away from that. And until you get to replacement cost pricing, there will be – there's still room for moving of the spot rate up toward that. So I think there's still a fair amount of runway in front of us. And I think the question is, what's going to happen to ruin the party? But the party, I think right now, if you talk around the move to – focused on capital discipline. Virtually every customer we've talked to is moving that direction. So the status quo and this high utilization, I don't see easily getting disrupted, and I only see upside in terms of the modest increases in front of us.
spk08: That's helpful. I appreciate the comments. I just want to flip over to international and just talk about your national rate count. Just looking at the deck, it says it's at 56% utilization rate. Obviously, Saudi Arabia, Latin America, very strong demand points. You're reactivating regs. You're resigning up regs. Is there an opportunity to move some regs around from underperforming regions into countries that have higher demand? Saudi Arabia, the Middle East, and Latin America. Just what moves that 56% up, and what are the levers you can pull? And then secondarily, what would be the capital required to do that?
spk09: Right. So... Unfortunately, when you talk of international, it's not a homogeneous market. So rigs in one country by type don't necessarily easily translate to another country. So there's some friction moving stuff between countries. But we have done it. In fact, we've actually moved some rigs in the U.S. down to Latin America because the operators down there wanted to have world-class operations similar to the Sheldon element up here. And therefore, we sold on the concept of upgrading their technology. And so that That's in play. That actually will continue as we look forward. We see some more opportunities along those lines. The opportunity set we think is pretty large right now. You mentioned away from Saudi Arabia, which, as you know, the recount will go up, as I mentioned in my remarks, and there's a chance later in the year of an additional award to get back into a cadence of five per year for Saudi Aramco. In addition to that, I think we see Mexico, Argentina, Kuwait, the UAE, Algeria, and India. And you combine all that together with where we are and what you show us, we see right now visibility for at least a 10% increase in the rig count for us next year.
spk05: And we can move about 10 rigs between countries. Obviously, we need the right opportunity, the right client. But about 10 rigs can easily be moved between countries. And we're looking for opportunities to place those rigs right now.
spk09: The other issue here is to bear in mind that the international market in some ways is about five years behind the U.S. market. And existing rigs even, there's opportunities with existing rigs for increased profitability by encouraging operators to think about upgrading them because if they move to the latest technology, we think it's a good cost-benefit return for them. And we actually have developed some packages where We've come up with ways of really cost-effectively upgrading rigs to be more state-of-the-art kinds of rigs with more of the AT technology you hear about in the U.S. to make it available internationally, which typically a large portion of the international market is not there yet. So there is that opportunity away from rig count by just upgrading rigs to increase profitability, which is another focus for us. And in addition to that, we're also focusing on NDS. NDS has been very successful in the U.S. And we've made some inroads internationally, but we have a long way to go at international. And you see what the results have been with us in the US. And therefore, we have a lot of expectation that we could do something similar internationally as well. So all that is additional upside, not necessarily from absolute change in rate count, but actually just better return from what we're doing. But they're meaningful. And to reiterate on the results today, you've got to add our NDS number and our building margin numbers, you get the number like 13, almost 13.6 a day margin per week, which is really quite good.
spk08: Very helpful. Appreciate all the color. I'll turn it back.
spk11: Our next question will come from Arun Jayaram with J.P. Morgan. Please go ahead.
spk01: Good afternoon, Tony. I was wondering if you could give us some more insights On the Sanad contract renewals, you announced 24 rigs on four-year terms at current market rates. Give us a sense of how does that – how do the new rates compare to kind of legacy rates and what kind of impact as we sharpen our pencils on 23 and 24, our models?
spk09: You're always looking to pick a way. Obviously, out of respect for, we can't talk about a single operator, a single customer's rate, so I'm not going to go down that path here. What I'll say is the following, that the rates there combined with the new bills, combined with what I just mentioned in terms of activity, if you put that all through the process, at the end of the day, we think when you look at margin internationally, we're on a path of $16,000 to $17,000 all in the world. That is the whole for 75 rigs today, plus what the incremental rigs will be. So I think that's the way to think about it. So you're looking at a very good, healthy increase in margin for international looking forward to 2023.
spk05: By the way, 75% of our rigs in Saudi Arabia have either been recently renewed or just signed the new deployed rigs that we just deploying a built-in kingdom, right? So over 75% of the fleet has been recently extended for four or six years.
spk01: Interesting. Seems like they're planning to raise their productive capacity.
spk09: And just remember on top of that, you have clear visibility for increasing margin per rig because the new bills come in at the rate of five per year. And those new bills are EBITDA per rig of $10 million. So if you do the math, you can see that there's a good, healthy, planned increase over many years in front of us, which I think is an unparalleled opportunity set compared to what you see in the marketplace today.
spk10: And this is now, the program is active now.
spk01: Great. And just my follow-up, kind of running through your free cash flow outlook for 23 of 400 million, is it fair to say CapEx could trend, call it 4,450, something in that range? Would that be fair to support a billion plus in EBITDA next year?
spk05: Listen, we are finalizing our budget, and we're not ready to share those numbers just yet. All I can say is it's going to be somewhere above where we were in 2023 because, number one, we have more rigs, and number two, the expenditure in Saudi Arabia will be a little bit higher. That's all I can say.
spk01: And maybe just a follow-up there. How do you think about your maintenance capex per operating rig in the lower 48 today?
spk05: About a million bucks.
spk01: A million? Okay. Great.
spk10: Thanks a lot.
spk11: Our next question will come from David Smith with Pickering Energy Partners. Please go ahead.
spk10: Hey, good afternoon.
spk02: Thank you for taking my question. Most of them have been asked already. I did want to circle back to the commentary on your international rigs. I wanted to make sure I heard right. I think I heard your international rig count could move up you know, 10%, I also think I heard you could add 10 idle rigs. So I just want to make sure if I'm understanding correctly, and I'm not asking for, you know, final guidance, but if I paraphrase, I think I heard, you know, we could see 10 idle international rigs deployed by year end 23, and then we'd have the SANA add new builds above that.
spk05: Now, Tony just mentioned that a recount, average recount next year could go up by 10%. That's what he said. And that's a global number. the 10 idle rigs that I mentioned is we have potential to move idle rigs between markets to accommodate some of that expansion. And up to 10 rigs could be easily moved and it would fit in any market, right? That's all that we were saying. And the SANA increases are included in that 10%. Okay, perfect. They're not fully included. We expect an increase in Saudi Arabia average year-on-year roughly four rigs. That doesn't include potential more awards from Aramco that we expect to receive for another five years, five rigs. And some of those could be deployed in the second half of 2023. That's not included in the number that we gave you.
spk02: Very clear. Thank you. And quick follow up on sticking with the international fleet, that $16,000 to $17,000 a day margin outlook. I wanted to check, is that kind of a year-end target for 2030, or was that an average?
spk10: An average, an average. For the year. For the year. That's great. Hey, congratulations on the quarter and the strong outlook. Thank you. Thank you.
spk11: Again, if you would like to join the question queue, you may press star, then 1. Our next question here will come from Keith Mackey with RBC Capital Markets. Please go ahead.
spk07: Hey, good afternoon, and thanks for taking my questions. I just wanted to ask about the potential timeline for getting the remaining, call it around 17 rigs in the U.S. back into the fleet. So to get your full fleet of 111 high-spec rigs into the fleet, what is roughly the cadence you might expect based on the demand inquiries you're seeing? And I know you mentioned it takes about three months or so to get a rig ready to go back into the field.
spk09: Yeah, I think we're thinking about three to four quarter is right now the rough number.
spk05: We think we'll exit somewhere in the 99, 100 range this year. So that just implies another 11 next year. Yep. And again, we are trying to increase our rig count at a measured pace. I mean, we are prioritizing price over market share, and we will continue to do that. Price is number one right now. And, you know, obviously, if we try to rush in 11 rigs in the first half of next year, you know, we could get into issues of increased costs and service quality, et cetera. So... we would expect it to be small during next year, the addition of rigs.
spk07: Got it. No, that's helpful. Can you maybe just give us a bit more color on the level of inquiries you're seeing and based on the rigs you've got left, what percentage of inquiries you may actually be able to satisfy given what you're seeing from customers?
spk09: Travis, you want to comment?
spk06: Yeah, I think right now, as William said, I mean, again, price is certainly going to be the catalyst for how and when we decide to deploy a rig. But, you know, I would say about half the inquiries we could easily satisfy. But, again, it's going to be a function of the geography and the price.
spk10: Perfect. Thanks very much.
spk11: This concludes our question and answer session. I'd like to turn the call back over to William Conroy for any closing remarks.
spk04: Thank you all for joining us this afternoon. If you have any additional questions or want to follow up, please contact us.
spk10: Joe, we'll end the call there. Thanks very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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