Nabors Industries Ltd.

Good afternoon, and welcome to the Neighbors Industries fourth quarter 2022 earnings conference call. All participants will be in a listen-only mode, and should you need any assistance during the call, 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 your question, please press star, and then two. Please note that this event is being recorded today. I would now like to turn the conference over to William Conroy, Vice President of Corporate Development and Investor Relations. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining Naver's fourth 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 those 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. While 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 present our results. We made several notable accomplishments during 2022, and the year culminated on a high note with an impressive fourth quarter performance. Each of the operating segments in our portfolio, again, performed well. Adjusted EBITDA in the fourth quarter totaled $230 million. This marks the third consecutive quarter of sequential EBITDA growth above 20%. Consolidated revenue increased 10% sequentially. Our global average rig count for the fourth quarter increased by 3.4 rigs. This growth was driven by increases in both U.S. and international markets. Drilling solutions EBITDA accelerated and exceeded $30 million. Combined, our advanced drilling solutions and rig technology segments accounted for over 16% of total EBITDA. This contribution is more than double their share back in 2020. In the fourth quarter, we again reduced net debt. Our net debt stands below $2.1 billion. I am pleased to report we again made progress on our five keys to excellence. These critical objectives comprising the investment thesis for neighbors include maintaining 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 finally, our commitment to sustainability and the energy transition. Let me update each of these, starting with our performance in the U.S. We averaged 95 rigs in the fourth quarter, up three from the third. Daily rig margins in the lower 48 stepped up very materially in the quarter. Our average daily margin grew by more than 30% to $14,600. When including the contribution from NDS, our margin is even higher. I'll discuss this in a few moments. As both the industry and neighbors' rig counts rebounded in recent years, we purposely kept our contract durations short. This strategy has enabled us to realize pricing and margins that increasingly reflect the outstanding value we consistently deliver. We have added term to our lower 48 backlog when we believe it is value enhancing. The lower 48 market remains concentrated on the most capable rigs and premier field performance. Neighbor's differentiated approach to this market includes best in class rig technology and the industry's broadest portfolio of advanced complementary solutions. Our vision of the rig as a platform for drilling and the delivery of related services has gained significant market traction. The value we generate from our technologies leads the industry. We will cover this in more detail in a few minutes. Now I'll discuss our international business. Daily margins in this segment increased in the fourth quarter, reaching $14,900. Profitability improved in most of our markets. In Saudi Arabia, the better results reflect improved pricing on the recent contract renewals. Also in Saudi Arabia, Saned deployed the second in-kingdom new bill rate in late December. At the same time, Saned reactivated an additional existing rate. Saned expects to deploy three additional new bills during the remainder of the year. Each new bill will be contracted for a six-year initial term, followed by a four-year renewal. Further, the new bills generate a full cash-on-cash return on the new bill CapEx, maintenance CapEx, and allocated G&A within the initial contract term. We expect additional awards at a cadence of five per year. Now, let's discuss our technology and innovation. Our focus areas include automation, digitalization, and robotization. Here at Neighbors, we continually strive to push the envelope in terms of innovation and advanced technology. During the fourth quarter, We set a major industry milestone by deploying a first of its kind robotics module on an existing rake. Razor, as the module is known, will be a game changer on two important fronts. First, performance. Robotization brings a step change improvement in consistent precision and control. Next, safety. Razor removes people from the most hazardous area of the rake, the red zone. And one last important point to make. Razor is modular, so it can be retrofitted onto existing drilling rigs, whether neighbors or a third party. In the fourth quarter, drilling solutions EBITDA increased sequentially by 18%. Growth's margin increased in the fourth quarter to a record 52.8%. This high margin, high free cash flow business grew by more than 50% year on year. This is the type of growth we expect from a technology-centric business. We expect similar growth in 2023. Let me illustrate the value NDS generates. The combined average daily margin in the lower 48 from our drilling and drilling solutions to businesses was $17,372 in the fourth quarter. Of that, NDS contributed nearly $2,800 per day. That combined figure increased by 28% versus the third quarter. The typical neighbor's rig in the lower 48 runs about six and a half NDS services. This penetration increased again in the fourth quarter. We have seen a consistent quarterly increase in the services count, reflecting strong market adoption of the portfolio. Among automation and digital services, we saw a near doubling of smart plan installations and broad growth across the performance tools portfolio, including Rocket, Revit, and Smart Drill. In the fourth quarter, NDS revenue on U.S. third-party rigs grew by 10%, versus the previous quarter. This market segment is a key focus area for NDS, and we continue to increase penetration there. Next, let me update our progress to improve our capital structure. In 2022, we reduced net debt by $186 million. This improvement was driven primarily by excellent free cash flow resulting from the strong profitability of our operations, excellent working capital performance, and disciplined capital spending. We expect even greater improvement in 2023. I'll finish this part of the discussion with remarks on sustainability and the energy transition. As I've said previously, our three focus areas include reducing our own environmental footprint, capitalizing on adjacent opportunities, and investing strategically in leading-edge companies with clear adjacencies to our core activity. Today, I will highlight several specific technology initiatives which are currently underway. First is our PowerTap module. This connects rigs to the grid. We have recently deployed 14 of these units, including multiple units on third-party rigs. Second, our SmartPower advisory and control system optimizes utilization of the engines and reduces emissions. This solution is currently installed on more than 75 rigs. The Nano 2 diesel fuel additive improves engine performance and reduces emissions. We have already successfully treated more than 10 million gallons of diesel to date. I am very enthusiastic about Power Flow, our energy storage system. This technology enables us to incorporate innovative storage solutions into our engine management systems. This technology uses supercapacitors in place of lithium batteries. Our first unit is currently deployed on one of our rigs in the Bakken. We have expectations for very strong growth from these initiatives in 2023. Margins in this portfolio should be highly accretive to the company average over time. Now, I will spend a few moments on the macro environment. With the spot and future prices for WTI in the current range, we believe the outlook for continued increases in drilling activity in the lower 48 is still constructive. We expect these increases to materialize as we move throughout the year. Several factors in the current macro environment could impact our outlook. Foremost among these is the possibility of a recession, which reduces the demand for oil. In the U.S., labor availability has begun to improve in part from the easing of the pace of rig additions. As for the broader supply chain, inflation has declined in key areas, namely metals and metal sub-assemblies. That said, lead times for certain components remain extended. Our vertical integration and global supply chain continue to enable us to satisfy demands of customers. Notwithstanding these factors, energy commodity markets remain constructive. giving us confidence in our outlook through 2023. Next, I will spend a few moments on day rates. Our lower 48 results demonstrate the unprecedented robust pricing environment. Average daily revenue in lower 48 increased by more than $3,500 sequentially, or 12% up to $32,700. We have recently signed contracts with revenue per day above $40,000, and that's before adding NDS content. We have a material portion of the fleet remaining to reprice to the current market. Therefore, we expect daily revenue and margins to continue to climb. We and the lower 48 industry have inventories of high-spec rigs which can be reactivated. Importantly, the cost to reactivate these rigs is significant. For our idle rigs, we see total reactivation spending of more than $2 million for the next seven or so units. For the following eight, that price tag moves up to about $6 million. We believe the lower 48 drillers have a limited appetite to incur this level of expense speculatively. This puts a lid on the ready supply of additional rigs. In the international market, we see steady increases in activity across many of our major geographies. This increase in demand supports generally higher day rates and margin expansion. Once again, we surveyed the largest lower 48 clients at the end of the fourth quarter. This group accounted for approximately 34% of the working rig count. Our survey, adjusted for one outlier in a special situation, indicates essentially net flat activity for the group through the end of the first quarter. We believe this trend primarily reflects some weakness in natural gas prices. Despite the resulting market churn, we have been able to shift return rigs from gas to oil drilling. Further, inquiries for additional rigs in the Permian Basin have been increasing. These positive signals, along with refreshed budgets and better availability of casing, suggest potential growth in 2023. Operators in several of our existing international markets are indicating increases in their activity. We see potential opportunities to add rigs in multiple markets, both in the Middle East and Latin America. And we continue adding new builds in Saudi Arabia. SANA recently received awards for five more new builds, bringing the total so far to 10. These rigs are impactful. Of the initial five which were previously awarded, we expect to deploy the three remaining rigs at one per quarter beginning this quarter. The second five should roll out beginning as early as the end of 2023. We estimate each new build will generate annual EBITDA of approximately $10 million. With the first 10 awards in hand, Satted is on the way to realizing EBITDA of more than $100 million per year from the new bill program. Let me wrap up my remarks with the following. We expect activity across our markets to increase this year. With our advanced portfolio of rigs, services, and equipment, Neighbors is ideally positioned to capitalize on this environment. In summary, Neighbors remains poised to deliver improving financial results, increasing free cash flow, and greater returns to our investors. Now, let me turn the call over to William, who will discuss our financial results and guidance.