Nabors Industries Ltd.

Good day and welcome to the Neighbors Industries first quarter 2023 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 then one. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to William Conroy, Vice President of Corporate Development and Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you for joining NABOR's first quarter 2023 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 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 our forward expectations, they may constitute forward looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward looking statements are subject to certain risks and uncertainties as disclosed by neighbors from time to time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may vary materially from those indicated or implied by such forward-looking statements. Also, during the call, we may discuss certain non-GAAP financial measures, such as net debt, adjusted operating income, adjusted EBITDA, and adjusted free cash flow. All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA, as that term is defined on our website and in our earnings release. Likewise, unless the context clearly indicates otherwise, references to cash flow mean adjusted free cash flow as that non-GAAP measure is defined in our earnings release. We have posted to the investor relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. With that, I will turn the call over to Tony to begin.

Good afternoon. Thank you for joining us as we present our results and outlook. Our segments continue to perform well in the face of a challenging environment in the lower 48. Sequential growth in the drilling businesses drove the increase in EBITDA. For the first quarter, adjusted EBITDA totaled $240 million. This result was in line with our outlook for the segments on last quarter's call. Our global average rig count for the first quarter declined by one rig. Growth in the international segment was offset by a reduction in the US lower 48. EBITDA and drilling solutions once again grew sequentially, reaching $32 million. Combined, our advanced drilling solutions and rig technologies segments accounted for 15% of total EBITDA. In the first quarter, we again generated free cash flow. We achieved this performance even with semi-annual interest payments on most of our debt and seasonally high cash outflows as we start the year. Next, I will update the progress we made on our five keys to excellence. Our success executing these strategies drives value creation across our stakeholder base. The five elements include enhancing our leading performance and technology in the U.S., expanding our international business with innovative solutions, advancing technology and innovation with increasing financial results, improving our capital structure, and our commitment to sustainability and the energy transition. Let me update each of these, starting with our performance in the U.S. Daily rig margins in our lower 48 operation expanded in the first quarter. This measure reached $16,700, up from $14,600 in the previous quarter. This sequential growth 14% reflects strong day rates in the quarter, which increased the fleet's average daily margin. This performance does not reflect the growing lower 48 margin from NDS. Combined, that margin is significantly higher. I'll discuss this in more detail in a few moments. Now I'll discuss our international business. Daily margins in this segment increased in the first quarter, reaching $15,200. Profitability improved in several international markets, including most notably Saudi Arabia. I'll spend a few moments providing an update on the new build rig program in Saudi Arabia. The first two rigs deployed in the second half of 2022. They are performing well, which is encouraging for the broader new build program. Sanad expects to deploy three additional new builds over the remainder of this year. These rigs have attractive returns with six-year initial contract terms. We expect construction of the previously awarded second Torrential 5 rigs to commence in the coming months. Next, let me discuss our technology and innovation. The key focuses of our initiatives in these areas include automation, digitalization, and robotization. The initial deployment of our revolutionary Razor module has been successful. Recall that Razor is our robotic Rig 4 module which can be retrofitted on any existing rig. Razor advances the standard for consistent drilling performance and control. As important, Razor improves rig floor safety by removing rig hands from the red zone and from the ZERIC. In our drilling solutions business, quarterly EBITDA increased sequentially to nearly $32 million. NDS's growth in the first quarter was led by managed pressure drilling and performance software. Let me detail the value NDS generates in the lower 48 markets. The combined average daily margin in the lower 48 from our drilling and drilling solutions businesses was almost $19,900 in the first quarter. Of that, NDS contributed just over $3,200 per day. That combined figure increased by 15% versus the fourth quarter. In the first quarter, the typical neighbor's rig in the lower 48 ran more than six NDS services. Additional penetration of the NDS portfolio represents a large opportunity. This increase is an important component of our NDS growth strategy. Our focus on automation and digital services is generating results in the market. In the first quarter, we saw growth in rig cloud instrumentation installs on both neighbors and third party rigs, including a nearly 30% increase in smart plan and broad growth across the smart suite portfolio, as well as Revit. In the first quarter, NDS revenue on U.S. third-party rigs grew by 10% versus the previous quarter. This performance matched the growth rate in the fourth quarter. Growth on third-party rigs is a key target area for NDS. These results demonstrate the broad appeal of the NDS portfolio across E&P clients and other drilling contractors alike. Recently, we announced an alliance between NDS and Corva. This collaboration will deliver a unique automated drilling solution that will create value to EMP companies and drilling contractors by improving performance outcomes. Next, let me update our progress to improve our capital structure. We made several notable accomplishments in this area in the first quarter. In the first quarter, we generated free cash flow of 37 million as compared to negative 39 million in the first quarter of last year. We also completed issuance of convertible notes followed by redemption of high coupon notes, which were due in 2025. I'll finish this part of the discussion with remarks on sustainability and the energy transition. Our three focus areas include improving our own environmental footprint, capitalizing on related opportunities, and investing in adjacent leading-edge companies. Today, I will update several impactful technologies, which are focused on reducing our own environmental footprint, as well as on third-party rigs. First is our power tap module, which connects rigs to the grid. We now have 15 of these units deployed, including multiple units on third-party rigs. Second, our smart power advisory and control system optimizes utilization of the engines and reduces emissions. This solution is currently installed on all of our rigs in the lower 48. Third, the Nano 2 diesel fuel additive improves engine performance and reduces emissions. We have already successfully treated more than 17 million gallons of diesel to date. Quarterly revenue from this portfolio increased by 68% versus the prior quarter. Clients indicate strong interest in our solutions that reduce fuel consumption and emissions. We are now in field testing for a new technology which uses hydrogen economically generated at the well site to reduce fuel consumption. We expect this product to become commercial later this year. Although still a relatively small part of our business, our clean energy initiatives are growing at a fast pace. Now, I will spend a few moments on the macro environment. The recent volatility in commodity prices, particularly natural gas, has impacted activity levels. However, we believe that the current range of spot and future prices for WTI and Brent should continue to be supportive of oil-directed drilling activity in the lower 48. Natural gas remains more challenged. While challenges may persist through next year, we believe the pipeline of several large LNG projects expected to come online the next two years will support a burgeoning export gas market. Several factors in the current macro environment could impact our markets. On the negative side, demand destruction from higher interest rates and the possibility of a recession looms. On the positive side, there is the potential for an acceleration of economic activity in China. Next, I will spend a few moments on day rates. Our first quarter results for the lower 48 reflect the pricing environment we saw through 2022. More recently, although day rates for our highest spec rigs remain at historically high levels, we have experienced some softening in the predominantly gas basins. Notwithstanding this interim pressure, we expect average daily revenue in the lower 48 to be essentially flat with the first quarter. In the current environment, we believe prioritizing revenue and margins is prudent. As such, we remain focused on realizing the value that our rigs and services deliver to clients. In the international market, we continue to see prospects for increases in activity across many of our major geographies. This increase in demand supports generally higher day rates and margin expansion in both the Middle East and Latin America. Once again, we surveyed the largest lower 48 clients at the end of the first quarter. This group accounted for approximately 34% of the working rate count. Our survey indicates a modest near-term dip in activity, followed by an increase in the second half of the year. We believe this outlook primarily reflects the decline in natural gas prices balanced by constructive oil prices. Operators in several of our existing international markets are planning increases in their activity levels. We see potential opportunities to add rigs in multiple markets, both in the Middle East and Latin America. And we will continue adding new build rigs in Saudi Arabia. We estimate each new build will generate annual EBITDA of approximately $10 million. With the first 10 awards in hand, SANA is on the way to realizing EBITDA of more than $100 million per year from the new bill program. Let me now wrap up my remarks with the following. The near-term commodity price volatility may give way to an improving market outlook as we look through and beyond 2023. We expect activity across our markets to increase over the second half of the year. Our advanced services and solutions fill the need for automation, digitalization, and improved sustainability. we see excellent prospects for growth across this portfolio. In summary, Neighbors remains poised to deliver year-over-year improvements in 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.