Nabors Industries Ltd.

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.

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.

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.