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spk00: And welcome to the Neighbors Industries Limited Q2 2023 Earnings Teleconference. 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 on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to William Conroy, Vice President of Corporate Development and Investor Relations. Please go ahead.
spk06: Good morning, everyone. Thank you for joining Naver's second 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.
spk10: Good morning. Thank you for joining us today as we present our results and outlook. Our results demonstrate the value of our diversified business portfolio as the environment in the lower 48 remain challenging. Importantly, we continue to generate free cash flow and reduce net debt. For the second quarter, adjusted EBITDA totaled $235 million, a slight reduction as compared to the prior quarter. This result principally reflects the decline in lower 48 drilling activity across both gas and oil basins. Total results for the other segments were in line with our outlook last quarter. Our global average rig count for the second quarter declined by 11 rigs. all of which was attributable to the lower 48. In this macro environment, EBITDA and drilling solutions was up in line with our target. Combined, our advanced drilling solutions and rig technologies segments accounted for 17% of total EBITDA. The EBITDA contribution from these two operations was more than $39 million, up 6% sequentially. This growth demonstrates continued client adoption of our technology. Notwithstanding the headwinds in the second quarter, we generated free cash flow. We achieved this performance even as milestone payments on the new bill rigs in Saudi Arabia were greater than expected. 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 performance and technology in the U.S., expanding our international business, advancing technology and innovation with increasing financial results, improving our capital structure, and our commitments 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 improved over the first quarter. We continue to realize sequentially higher daily revenue, reflecting our disciplined approach to pricing. Our reported lower 48 daily rig margin reflects the excellent financial performance of the rigs. On top of that, our drilling solutions portfolio generates significant margins. I'll discuss this in more detail in a few moments. Now I'll discuss our international drilling business. Daily margins in this segment increased in the second quarter by more than $1,000. Profitability improved in several international markets, primarily in the Middle East. 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 continue to perform well. The third new build deployed during the second quarter, so we should see a full impact in the current quarter. Senate expects to deploy two additional new bills over the remainder of 2023. With their attractive financial returns and six-year initial contracts, these rigs have a growing positive impact on our international results. Looking ahead, construction of the previously awarded second tranche of five rigs is underway, and initial deployment should commence around the end of the year. I'll finish with my remarks on the international business with the recent contract awards. In a tender in Algeria, we were awarded four rigs. These units are already in the country. We also received an award in Colombia, which will enable us to put a rig back to work there. These deployments of existing idle assets with attractive economics are material wins. We are looking forward to putting them to work. Next, let me discuss our technology and innovation. In our drilling solutions business, quarterly EBITDA increased sequentially to nearly 33 million, an all-time record. NDS growth in the second quarter was led by performance software. Now, I will detail the value that NDS generates in the lower 48 market. The average daily margin in the lower 48 from our drilling and drilling solutions businesses combined was over $20,400 in the second quarter. Of that amount, NDS contributed more than $3,500 per day. That NDS total increased by 10% versus the first quarter. In the second quarter, the typical neighbors rig in the lower 48 ran nearly seven NDS services. We saw an increase in installations of our smart slide directional steering system and our smart nav directional guidance software. Installations of our smart plan well construction engine also grew. In the second quarter, NDS revenue on third-party rigs accelerated, going by 18% versus the first quarter. A core element of our strategy for NDS targets the third-party market. This allows E&P companies to realize the value of NDS technology across all the rigs they employ. As well, neighbors and third-party drilling contractors both generate economic benefit from these arrangements. Next, let me update our progress to improve our capital structure. We recorded several accomplishments in the second quarter. We generated free cash flow of $27 million. We also completed the redemption of our debt that was due in September. And finally, net debt improved in the quarter. 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. First, I will comment on some neighbors technologies focused on reducing our own emissions as well as those on third-party rigs. We expect these products will make increasing contributions to margins in rig technologies. First is our PowerTap module. This unit connects rigs to the grid. At the end of June, we had 19 modules running. Over a quarter of those were on third-party rigs. And we expect further growth in the third and fourth quarters. Second, the Nano 2 diesel fuel additive improves engine performance and reduces emissions. We have already successfully treated more than 20 million gallons of diesel to date on both drilling rigs and pressure pumping units. In the second quarter alone, that total increased by 18%. Quarterly revenue and EBITDA from our energy transition portfolio once again increased versus the prior quarter. Customer interest in solutions that reduce fuel consumption and emissions remains strong. We also completed additional testing on our new hydrogen injection technology. The goal is to reduce fuel consumption as well as emissions more than proportionally. This system uses hydrogen generated economically at the well site. Testing results are positive. We continue to make progress towards commerciality and the system may have applicability to transportation verticals such as large highway trucks. Next, I would like to mention the second neighbor-sponsored SPAC. Earlier in July, Neighbors Energy Transition Corp. 2, which trades under the symbol NETDU, completed a $305 million initial public offering. The offering was more than five times oversubscribed. This corporate-sponsored SPAC is a critical component of our energy transition strategy. NetDU enables neighbors to participate in larger scale synergistic ET opportunities. Now, I will spend a few moments on the macro environment. The recent volatility in commodity prices and the many macro factors which you all know well have impacted operator economics and activity in the first half. Notwithstanding oil price pullbacks during the quarter, today's oil price is constructive. The outlook for gas is supported by several large LNG projects. These facilities are expected to come on stream over the next two years. As their operations commence, they should drive growth in the export market for gas. Although the stage is set for a promising 2024, some overhanging risks remain. These include continued interest rate increases by the Fed, looming concerns about a recession and the potential for a hard landing, and demand from China. On the positive side, there is the potential for an acceleration of economic activity and tighter global oil inventories. Now I will spend a few moments on day rates. Our second quarter results for the lower 48 reflect the pricing environment we saw through 2022. More recently, in the second quarter, we saw a peaking of rates, particularly in the gas basins. Pricing came under pressure in the second quarter. I want to emphasize current day rates for our highest spec rigs exceed all of the previous market highs. In this environment, we continue to prioritize revenue and margins, not market share. Including the contribution from NDS, our performance against peers remains competitive. In the international market, we see prospects for increases in activity across many of our major geographies. As a group, Operators in these countries remain committed to increasing their productive capacity. This increase in oil field activity supports generally higher day rates and margin expansion, both in the Middle East and Latin America. Once again, we surveyed the largest lower 48 clients at the end of the second quarter. This group accounted for approximately 44% of the working rig count. Our survey indicates the group's year-end rig count will be slightly lower than it was at the end of June. This result reflects a mix of operators suggesting increases in activity, decreases, and holding flat. Notably, a few operators signal they intend to rationalize activity as they complete acquisitions. The greatest portion, more than 40%, look to hold activity flat. Turning to our international markets, several operators are planning increases in their activity levels. Beyond the five recent awards that we announced, we see the prospect for additional awards in our core markets in the Middle East and Latin America. Of course, we also have the five additional rigs in 2024 in Saudi Arabia. As you recall, these generate annual EBITDA of $10 million each. Let me wrap up my remarks with the following. In summary, in the current environment, 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.
spk09: Thank you, Tony, and good morning, everyone. Our results in the second quarter reflected the trends in our global drilling markets. Our international segment was solid, while our technology businesses also delivered sequential growth. These results helped offset the softening rig markets we had anticipated in the Lower 48 and Columbia. We expected lower drilling activity in the Lower 48 gas basins, but we must admit that the reductions in oil-related drilling we experienced were not anticipated. At the current level of oil prices, we would have expected to see increased drilling in oil basins. Instead, we saw reductions in oil rig count. Interest rate increases by the Fed and several bank failures during the quarter resulted in increased cost of capital. The increased cost of financing led most of our smaller customers to curtail activity. But larger companies also canceled plans for expansion. These activity reductions were likely the result of concerns about potential recessions in the US and in China and their impact on future oil demand. Despite the pause in the lower 48, our operation in that market continued to generate superior economics with record margins and substantial cash flow generation. In the third quarter, drilling activity for the market has continued to weaken in the lower 48. We are now forecasting sequential decreases in average rig counts. But after a tough first half in the U.S., we are now starting to see signs that the market is bottoming with encouraging data points of incremental activity for the fourth quarter. On another positive note, we anticipate further strength in international markets with early signs of growth developing into awards for incremental rigs. Drilling solutions and rig technologies are also expected to increase sequentially. Revenue from operations for the second quarter was $767 million, compared to $779 million in the first quarter, down 1.5%. Revenue in our U.S. drilling segment fell by 10%, primarily due to rig count reductions in the lower 48 markets. This was largely offset by sequentially higher revenue in all of our other segments. Lower 48 revenue decreased by 10.8%, as the current market conditions affected volume and pressure pricing in several regions. Despite these headwinds, daily revenue increased to $36,750, an increase of $300 over the prior quarter. Revenue from our international segment increased by $17.6 million to $338 million, or 5.5% for the quarter. The improvement in our international drilling revenue was predominantly driven by the Middle East and Latin America. During the quarter, we deployed incremental rigs in Saudi Arabia and Argentina. Activity in Colombia partially offset these gains. As we anticipated, three rigs were idled in that country during the second and early third quarter. One of these to return to work for another client during the month of August. Revenue in our drilling solution segment continued to grow in the second quarter, despite the drilling activity headwinds in the lower 48s. Third-party revenue increased 18% sequentially, accelerating over the growth rate in the first quarter and validating our focus on this market. International revenue also increased as we expanded our footprint in Latin America and the Middle East. In the rigged technology segment, total revenue grew, driven by international sales of capital equipment and spare parts. Total adjusted EBITDA for the quarter was $235 million, $5 million lower than the first quarter, a 2.1% decline. US drilling EBITDA of $141 million was down by 15 million, or 9.6%, driven primarily by the activity reductions in the lower 48 market. Lower 48 drilling. decreased by $14.5 million, or 10.9%, compared to the prior quarter. Our average rig count in the lower 48 decreased by 11.7 rigs to 81.6, instead of the 8 rig decrease that we expected. Daily rig margins came in at $16,900, up by slightly more than $200 in the second quarter. We exited the second quarter with 78 operating rigs. As mentioned, leading-edge pricing has peaked, and we are seeing reductions in various markets. Given the high cost of moving between basins, pricing has segmented geographically, with the gas markets giving back some of the recent pricing gains. For the third quarter, we project our lower 48 margin to approach $16,000 per day, reflecting some pricing erosion and increased compensation costs. as we expect to carry excess labor in certain regional markets. We also anticipate a further reduction of seven to eight rigs in the third quarter. On a net basis, EBITDA from Alaska and the U.S. offshore markets remained reasonably steady in the second quarter. However, in the third quarter, the combined EBITDA of these two markets should decrease approximately $7 million primarily reflecting about 30 days of downtime on our M400 rig in the Gulf of Mexico for a top drive upgrade and the certification of several drilling components. Our international drilling segment delivered EBITDA of $98 million, an increase of $10 million. International rig count improved by about one rig, with the startup of the third standard new build in the second quarter and the startup of a unit redeployed from the U.S. to Argentina. These increases were partially upset by the release of rigs in Colombia. Average daily gross margin came in at $16,276, an improvement of $1,050 over the prior quarter. We expect international average rig count in the third quarter to increase one to two rigs on a four-quarter contribution from the third Nubil startup in Saudi Arabia and the expected startup of a rig in the UAE. We anticipate deploying the fourth Saudi Nubil rig in the third quarter, while the fifth Nubil is scheduled to start before the end of the year. We project third quarter international daily margins between 16,000 and 16,200. Drilling Solutions EBITDA continued on its upward trajectory, delivering $32.8 million, up roughly 3% from the first quarter. Gross margin for NDS held steady at 52%. We continue to see increased penetration of our advanced solutions, particularly on international rigs, with the largest contributions to growth coming from performance software and our digitalization offerings. We expect third quarter EBITDA for drilling solutions to increase again by approximately 3% over the second quarter level. NDS gross margin per day for the lower 48 increased to just over $3,500, a $310 increase compared to the first quarter. This improvement took our combined drilling rig and solutions daily gross margin to $20,407, a sequential increase of over $500 per day. RIC Technologies generated EBITDA of $6.4 million, a 29.4% increase versus the first quarter. The sequential increase was primarily driven by higher capital equipment sales and aftermarket parts revenue. Our energy transition business also contributed to the growth. For the third quarter, we expect RIC Technologies EBITDA to increase by about $3 million. Now turning to liquidity and cash generation. Free cash flow for the second quarter reached $27 million. Free cash flow was impacted by somewhat lower than expected adjusted EBITDA and higher than planned capital spending. Spending for the new bills rigged in Saudi Arabia accounted for this variance as our supplier reached progress milestones earlier than we expected. It is worth highlighting that while our SANA JV, as expected, consumed cash during the quarter, free cash flow for the remainder of our business reached almost 60 million. This incremental cash flow supported the redemption in June of approximately $52 million of notes due in September of 2023. At the same time, our revolving credit facility remained undrawn at the end of the second quarter. Net debt at the end of the quarter decreased to $2.07 billion. We expect third quarter free cash flow to reach approximately $80 million. Capital expenditures in the second quarter were $152 million, $12 million higher than we anticipated. This amount included investments supporting the SANA New Build program of $66 million. For the third quarter, we expect capital expenditures of approximately $125 million, including $48 million for SANA New Build. For the full year, we are targeting $480 million, of which 180 million support the SANA new-built rigs. Our target for 2023 reflects capex reductions both in the lower 48 in Colombia and incremental expenditures for the four rigs recently awarded in Algeria. Despite the softness in the lower 48 market and to a lesser extent in Colombia, we still expect to generate solid adjusted free cash flow for the full year and to continue reducing our net debt. For 2023, we are currently targeting free cash flow between $300 and $350 million. With that, I will turn the call back to Tony for his concluding remarks.
spk10: Thank you, William. I will now conclude my remarks this morning. First, let me summarize our second quarter. Our adjusted EBITDA reached $235 million. Free cash flow was $27 million. Our lower 48 daily margins reached a quarterly record of 16,890. And when combined with NDS, that measure exceeded $20,000. NDS EBITDA set an all-time record of $33 million, and we reduced net debt. In the U.S., we remain committed to a disciplined approach to both pricing and expense control. With respect to our international segment, we have visibility to growth in our major markets, including the already planned commitments in Saudi Arabia. In NDS, our focus remains on increasing penetration on both neighbor's rigs and third-party units. The international markets are also realizing performance benefits from the NDS portfolio. We are optimistic for future growth in this segment. In RIG Technologies, for all of 2023, we expect a growing contribution, and we have high expectations for RIG Tech's energy transition initiatives. We have demonstrated capital discipline and are committed to continue to do so. We expect this will result in continued improvements in our leverage and capital structure. I'm looking forward to reporting our performance in the coming quarters. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.
spk00: Thank you. 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. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Waqar Syed with ATB Capital Markets. Please go ahead.
spk12: Thank you for taking my question. Tony, William, I believe you mentioned that the rig count at Q2 end was 78 in the U.S. If that's the case, what's the number right now? 75. And so for Q4, you mentioned that you're seeing some incremental demand. Are you able to maybe quantify the level of incremental demand? And what type of customers are generating that incremental demand?
spk10: So, in terms of customers, I mean, the thing that has happened is we've seen a rotation of our customer base again. When we came out of COVID, as you know, there was very strong demand for gas rigs, particularly in the Haynesville area. And that, in fact, our percentage of gas rigs in the company as a whole was a little over 30%, which is a little higher than what the market was. And that's That change, in fact, drove the downturn in the sense that East Texas and South Texas both drove the decline followed by the Marcellus. And with that changing now, our mix of private versus public has, in fact, changed. And the interesting thing is that if you look at December's number versus our June exit number, in terms of the non-private customer base, You'll be surprised to hear in the oil basin, actually, our rig count was actually up. So given that, we think with the change in the private, in the customer base coming out of the privates and people relocating, we're set up in the fourth quarter for an upturn compared to the third quarter. But in terms of specifics yet, I can't give you some specifics other than the fact that the mix has changed, the commodity price is strong, and based on Day-to-day reactions, people feel a little more positive about the fourth quarter, but we're not putting a number yet on the magnitude of the upturn for the fourth quarter.
spk09: So we're getting a huge acceleration in requests for pricing and rigs for the fourth quarter. But, you know, not all of that converts into actual rig counts. So at this point, it's a little bit too early to give you the data points, but we're just feeling good about the fourth quarter.
spk12: Sure. And then from a margin perspective, you know, margin typically kind of lags and, you know, you really get the price discovery activity actually starts to pick up. What's your view on margins and when do you think margins tend to, would likely bottom and perhaps, you know, roughly around what level?
spk10: Well, when you look at pricing, I mean, I think the good news is that pricing has been relatively well behaved, as you can see, and As we mentioned in our prepared remarks, the leading edge rates have been in the low to mid 30s. In fact, we recently signed several contracts squarely in those ranges just last week. So the comment I'm making is that if you look at the leading edge rates, those are actually above our revenue per day numbers in the second half of 2022. And so, which everyone was very excited about. So we think, you know, If that all holds, then you should see, you know, pretty good traction in terms of the margins holding up as we're moving forward. And yeah, so that's what I would say.
spk09: So now make a comment, because you mentioned price discovery as the rate count increases. I think price discovery has already been quite prevalent in our fleet already, Remember, we didn't have as much term as we did in the past. So we've been seven months now living in this environment of lowering and decreasing rig counts. And pricing has held up pretty steady in the oil basins, Wakar. So what you're seeing now is a fair reflection of what has already happened in the gas basins. And we do feel there's still some pain to absorb as more contracts roll into slightly lower day rates that we have today. But, you know, you saw what we forecast for the fourth quarter, for the third quarter, I'm sorry. And a part of that is cost. But, you know, there will be some pricing deterioration in the third quarter for the fleet as an average. But it's not as much as you would expect.
spk12: Fair enough. And just last question, Algeria rigs, what's the timing of the new contract for four rigs getting on revenue?
spk02: Early 2024, we'll start deploying those rigs. Great. Well, thank you very much. Thank you, Waqar.
spk13: Our next question comes from Kurt Halid with Benchmark. Please go ahead.
spk02: Hey, good morning, everybody. Good morning, Kurt.
spk08: So I was going to maybe start off on the international front, right? You referenced four rigs in Algeria. Obviously, you have a lot of incremental updated color on the Saudi deployments. I guess it's safe to assume that those Algeria rigs will start to, you know, start on their projects in the fourth quarter? Or is that more of a 2024 event?
spk10: Just trying to get a sense as to what the... Yeah, I think it's 2024, the first quarter of 2024 right now. That's what it's looking like. And I think, you know, if you look through the prepared remarks, obviously, you have some really great visibility in terms of the international account. I mean, just working from our second quarter average of 77 roughly, when you add in the fact that there's two more Saudi rigs going online this year, and then five looks like next year because of the acceleration of deliveries. So that gives you seven. Four in Algeria, that's 11. We have two locked up in combination of South America and Latin America and the Middle East. So that's 13. And then we have some identified opportunities that for at least the other half a dozen that we're now chasing. So, you know, but in our hand is 13 rigs on top of the 77, which obviously will bleed in over time in 2024. But I think that underpins some of our confidence in our feeling good about 2024. The takeaway I have from this quarter, basically, is that you saw two good things. You saw that our margins in the US, in terms of the amount of margin, demonstrates the quality and the power of our US position in the quality of the fleet and what we can do. NDS hit an all-time record in a market which was experiencing pushback. And then you see the beginnings of underpinning for a lot of side of internationals. That's the three takeaways from the quarter's numbers, I would say.
spk08: That's great color, Tony. So just follow up on the pre-cash flow dynamic, obviously slightly lower than what you were expecting coming out of the second quarter, assuming out of the first quarter. So when you think about the progression from here, William, how much of the the free cash flow increment, because it looks like you're going to have to do about $150 million or so of free cash flow in the fourth quarter to kind of get to that $300 million range. How much of that is going to come from working capital?
spk09: From working capital, Not as much as we thought, because the fourth quarter is now looking a little bit better than we thought. But yeah, some of it is coming from working capital, Kurt. Some of that is coming from incremental results, and some of that is coming from the fact we don't really pay that much interest in the fourth quarter. So yeah, we are targeting around 150 for the fourth quarter at this point. What we're seeing on the free cash, though, there's a little bit of uncertainty in the CapEx. we were used to our supplier in the Middle East, in Sanad, missing the milestones, and therefore we were estimating that we would have a certain number for Sanad for the year and for this quarter, in fact. Surprisingly, our supplier has been now hitting the milestones, and it seems they've got their act together, which is a good thing because we get a rate quicker, but we do have someone starting on the CapEx. We thought we would take our CapEx from about 390 range. I'm sorry, 490 range to somewhere in the 440, 450 range. Because of SANA, probably there's a $20 million swing there that we think we'll see this year. Now, that means the rigs are coming quicker, though, so that's a good thing, like I mentioned. Algeria, the Algeria contract, we're bringing some idle rigs back into the market, but that requires some CapEx as well. And Tony mentioned about six rigs plus of opportunity that we have. And again, this is not a tender. This is something the clients are coming to us and are asking us to do. So it's really a negotiated deal with very high return on capital. We haven't decided yet whether we will actually pursue or actually sign those contracts. But if we do, you know, I did include in our forecast for CapEx, what the CAPEX would require to pursue that work. So that's roughly where you see the reduction in free cash flow from somewhere in the 400 range to 300 to 350. Mostly it's CAPEX for additional opportunities and for the that we hadn't really seen in the past quarter.
spk08: Well, Greg, I appreciate that incremental color there as well. And then this may be one last quick follow-up here on, you mentioned pricing, you mentioned the range, you know, the low to mid-30s. That seems pretty consistent with what the commentary was, you know, through the course of most of the second quarter. So it doesn't appear like there's really much incremental price degradation. So when you think about, you know, the guidance on your cash margins coming down, Is that then more, you know, the fact that you're keeping people around? Or, you know, how would you attribute that $1,000 a day detriment? Is that more the labor or is it more the pricing?
spk10: There's obviously some churn here. So, for example, I mean, as I mentioned before, you know, amongst the majors and large publics and the non-privates, basically our rig count has been held, but we've actually had to do some relocation. So we've actually relocated four rigs. from other markets to West Texas. And those moves, by the way, were paid for by the cost of the moves were paid for by the operator. But they do invariably result in churn. And then even within West Texas, even though we've been able to maintain count and, you know, operators are really focused on high grading their rigs in this market. And so that also, causes some churn. So yes, there is some breakage in all these numbers, and that's what you're seeing in some of our estimates as well.
spk02: Okay, that's great. Thank you. Thanks, Bert.
spk13: Our next question comes from Dan Coots with Morgan Stanley.
spk00: Please go ahead.
spk04: Hey, thanks. Good morning. Good morning, Dan. So I'm looking at kind of the first half adjusted EBITDA results and the third quarter guide, I think if my math's right, that kind of would put you at somewhere in the ballpark of $700 million of adjusted EBITDA through the third quarter. I think in the past you guys had kind of laid out a $1 billion target for this year. If there's some growth in the fourth quarter, it seems like you guys might still get close to that number, but just wondering, you know, if you could help us at all with, you know, how you would frame any updates to that target in a full year?
spk10: I'll take the first part of it, which is NDS. Somebody asked us about NDS. And so, as you know, we were out there with a target of 150 for the year for NDS. And at this point, I would say that is probably unlikely given all the, you know, the pushback of what's happened given the first two quarters and still what's going to continue in the third quarter. But I'm reluctant to say a new number. And the reason for that is actually some good news, which is we're seeing really positive traction in NDS, particularly international penetration. And in the U.S., we've had really great third-party adoption. In fact, our third-party number has gone up 18% quarter on quarter. And you also saw some tactical decisions we made with collaboration with some other people like Corva and Halliburton. And all those things are militating in terms of Hopefully, NDS, which was designed to offset decline and recount, actually bearing that out. And so that would be the offset to the overall market. So 150 is unlikely, but we're reluctant to give you what the number is yet because we have these offsetting things underway that all look positive. So, but we, it is unlikely to hit the 150. So with that, I'll let William talk about the macro $1 billion number you're talking about.
spk09: So $300 million in the fourth quarter is also unlikely. However, although we have seen a sharp reduction in rig count in the lower 48, and probably 10 to 15 rigs short of where we thought we could be at this point, we are being caught a little bit by surprise on the international market, not only by the awards, but by recent activity levels, pricing increases, And so we are pretty happy with what we're seeing on the drilling side on the international. And some of that downdraft that we're seeing now in the lower 48 is going to be upset by the international markets. So at this point, I mean, what I can tell you is I don't see a pathway to $300 million, but I do see a pathway for a fairly robust fourth quarter.
spk04: Got it. That all makes a ton of sense. That's really helpful. And then... I guess maybe just to put a finer point on this, because you've kind of already given us all the components we need, but going back to the third quarter lower 48 activity guide, so you guys said that you exited the second quarter at 78, you're at 75 today, and the guide is for an average of 74 to 76. That kind of implies to me that maybe the bottom that you're contemplating would still be, would still have a seven handle, would, you know, kind of still be in the low 70s would be the trough, but basically the crux of the question is, where do you see the lower 48 rig count troughing in the guidance that you put out?
spk09: That's a Tony question.
spk10: Yeah, so... Putting absolute numbers, I'm really reluctant to do that. I mean, I think the range speaks for itself, and I think all the other comments we made. So I don't want to really give a specific number, but I think the range is what we're comfortable with. And as you saw, we're at 75 now. We exit the quarter a little bit higher, and you look at that number. So, yes, there could be a little bit more downside, but I think the range looks good right now.
spk09: And we think, given what's going on with our clients, the conversations with our clients, the price of oil right now, and the trajectory of production, I think the whole market is getting pretty close to a bottom if it's not already there.
spk10: Yeah, and you saw that in the prepared remarks with the survey and everything. And all this is, in effect, lagging the recent oil price moves. And so when you layer that on top of things, I think that's what gives us some confidence in the rebound in the fourth quarter.
spk04: Got it. Understood. All makes sense. Thanks a lot. I'll turn it back.
spk02: Thank you, Dan.
spk00: And if you'd like to ask a question, please press start in one at this time. Our next question comes from Keith Mackey with RBC Capital Markets. Please go ahead.
spk05: Hi, good morning. First wanted to start on the international day margin. So they've come up nicely in the last several quarters. The Q3 guide looks like it's, you know, flat, flattish from Q2, but what is the right way to think about the international day margins from here? Is it really take that $16,000 and layer on the incremental impact of the SANAD rigs coming in at what you've talked about previously as a $10 million per year EBITDA rig number, or is there some other nuances we should be thinking about in that day margin as well?
spk09: So, Keith, that's a very good question, actually. We do expect to have a large number of Saudi rigs with above average margin per day active in 2024, right? And progressively from here to year end and then over 2024. So as we add those rigs, we would expect our margins to go up. Now, obviously, new rigs coming in come with costs, shakedown periods, and things like that. So it's not like an automatic that you can just turn the switch and get those higher margins on day one. But that is a trend you will be seeing. And the other rigs that we're talking about are also in a pretty good range of margin per day. So if anything, we see some upward traction from here to year end in terms of our margins in the international markets. and certainly increasing some more in 2024.
spk05: Okay, that's helpful. And William, just for my clarification, the incremental Saudi rigs you're talking about, are there additional Saudi rigs on top of the SANAD rigs coming in?
spk09: For now, there's more tenders, and obviously we could participate in those. But we haven't really pushed very hard to penetrate... those other pockets of the Saudi market. The unconventional market specifically, there's a lot of tenders out there. So there's nothing in our forecast today for winds in that particular region. I think that would be quite capital intensive if we were to pursue those markets. But yeah, there's incremental activity in the Saudi that we haven't really put into our forecast at this point.
spk05: Understood. Thank you. And Tony, in your prepared remarks, you talked a little bit about the impact of recent customer consolidation causing some softness in industry demand for rigs. Can you just talk a little bit about how you think that dynamic will play out going forward? Do you think there will be an outsized amount of customer consolidation relative to driller consolidation, and do you think that will cause any particular impacts on your bargaining power, so to speak, going forward, or is it really just going to be a one-off dynamic?
spk10: Well, this is the perennial March. I think customer consolidation will continue given the pressure that they all face to be capital efficient and minimize or maximize their use of cash. And so I think that that will continue at a pace probably more so than on the oil service side. And the bargaining power has always been uneven and will continue to be. The consolidation also breeds the fact that once these companies get larger, they also look for efficiencies. They also look for high grain, their operations, all things like that, which all drives them to higher quality expectations for their providers. And I think that actually plays into our hands. And so our mission is to help them achieve that new consolidation using us as a platform. So we try to turn it into a benefit rather than just a liability.
spk02: Awesome.
spk05: Thanks very much.
spk02: Thank you.
spk00: Our next question comes from Aaron Jaram with JP Morgan. Please go ahead.
spk11: Good morning, gentlemen. Tony, I was wondering if you could discuss some of the competitive dynamics in the Middle East and just generally how are you seeing things kind of play out from a potential supply standpoint? standpoint as you participate in some of this tender activity?
spk10: I missed the question. What was the question? The competitive landscape. Oh, sure. The competitive landscape. Yes. So, obviously, the past 10 years, you've seen a real rise in the role of the Chinese drilling contractors in the marketplace. They are Their role historically was segmented to the more commodity drilling, but they've actually gotten better as well. So they have become a player. And you also see the rise of local national companies, either affiliated with NOCs or just locally owned or owned by sovereign funds. And so that has affected the landscape. It has become, in that sense, more competitive. And I think neighbors being there already, I think we've been a, in a great position to continue to compete against all those forces, but obviously it has gotten more competitive. And, you know, our mission is to differentiate ourselves against all those people, which I think one of the reasons why MDS has become so attractive is people really want the technology aspect of what we're providing, and that is a true difference against all those people. Interestingly, virtually everyone I just mentioned to you is actually a neighbor's customer, you know, directly either through CanRig or indirectly through NDS. In other words, we're actually helping them provide services on their rig, or we're actually providing parts and things like that, either capital equipment or other things. So it's kind of an interesting dynamic. But I think that's why Neighbors, I think, is unique in that international marketplace with all those competitors. I think other people competing head-to-head with those people will have more challenges than what we have today.
spk11: Great. Just to follow up, Tony, about a month ago, you announced an agreement kind of with Halliburton on the automation side. I was wondering if you could maybe elaborate on that agreement, what it means for neighbors. It looks like you're deploying some of this technology in Iraq, so I'd love to get your thoughts on the implications of that.
spk10: Sure. Well, like I mentioned before, is that growth of the third-party marketplace is something that's really important to us, as well as offering our clients more streamlined solutions both on our rigs and third-party rigs. That transaction, like the corporate transaction, was part of that. And I'll let Subodh here, who actually negotiated it, give his additional comments on it.
spk01: Yes, Tony, thank you for that. So one of the key things as part of a third-party strategy is to partner with the OFS customers who are working with LSTK kind of projects. Because they, as Tony alluded, They are typically using low-cost drilling contractors who do not have technology. And our solution of providing automation and digital solutions helps them both maximize the drilling efficiency and also get visibility of how the rigs are performing so that they can drive better outcomes for themselves and for manage their air fees better. So our approach with Halliburton and with a few other OFS customers that we are working with is to see how we can empower them with both automation and digital workflows to drive that AFE management by lowering the drilling dysfunctions and maximizing efficiency. So it has been a great partnership with Halliburton and I think we will continue to add more of these partnerships over the next six to nine months.
spk02: Thanks a lot.
spk10: And by the way, those partnerships don't just include OSS companies. They actually include other drilling contractors as well who are interested in taking advantage of the same benefits I spoke about, which again is the reason why I think compared to other players in the international arena, We are a differentiated offering compared to other people just going in there and trying to compete head-to-head against local people. I think that basic strategy is subject to a lot of pushback compared to what we're trying to do.
spk02: Great. Thanks, Tony.
spk00: Our next question comes from John Daniel with Daniel Energy Partners. Please go ahead.
spk03: Hey, guys. Good morning. Thank you for including me. My first question relates to the inquiries that you're getting for Q4. Can you characterize whether that's well-to-well work, short-term contracts, long-term contracts, any color on the duration of the work that would be behind it?
spk07: I'll let Travis comment on it. Yeah, John. Good morning, Travis. Yeah, mostly I would say medium to longer term. I mean, there's a lot of short-term requests as well, so obviously we're going to pick our pick the ones that make the most sense for the business, and we're going to put those rigs to work with those partners.
spk03: Okay. This will probably be the dumbest question of the day, but it's natural when the commodity price drops that everybody wants a price concession, and one of the first things people look at is the day rate. I'm just curious if you could characterize the request for price concessions within just the straight rig market, if you will, versus the NDS and the difference between you know, how they see the technology, the value, if that made any sense.
spk07: Yeah, Travis. Yeah, John, I'll just stay on the subject. I mean, obviously, yeah, we're having some price discussions with our customers, but, you know, when we look at our offering on our super specs, I mean, our rig platform on our NDS go hand in hand. I mean, that's what drives the top quartile outcome to the high performance that we get on our rigs. So, You know, we have those conversations. It's not necessarily a discrete rig day rate discussion or an NDS discussion. It's hand-in-hand. We've been very successful in terms of holding price and showing that value. Let me give you an example, John. You know, in the last quarter alone, we've increased over 10% and as high as 20 in some of our basins in terms of footage per day. So when you think about well delivery for our customers, you know, we are driving, you great outcomes for them, and that's high value to our customers. So we stand on pretty solid ground in terms of the pricing that we get for our rigs.
spk03: Okay. That's very helpful. Thank you.
spk07: Yeah, thanks, John.
spk10: And John, you never ask a stupid question. In fact, you're the one guy, every time I read what you write, I learn something. So I appreciate all your musings.
spk02: Thank you. We're trying.
spk00: This concludes our question and answer session. I would like to turn the conference back over to William Conroy for any closing remarks.
spk06: Thank you all for joining us this morning. If you have any additional questions or would like to follow up, please contact us. And with that, Sarah, we'll end the call there. Thank you very much.
spk00: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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