Good day, and welcome to the Nabors Industries First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to introduce William Conroy, Vice President, Corporate Development and Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you for joining Nabors First Quarter 2024 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 Nabors 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 nabors.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 Nabors 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 today as we present our results and outlook. Total adjusted EBITDA exceeded our expectations in the first quarter. Daily margins in the U.S. Lower 48 remain strong, and our 2 technology segments performed well. I would like to start my detailed remarks with comments on our international markets. The strength of the International expansion continues to surprise us. It's been over a decade since I've seen an environment as robust as this one. We have a unique opportunity to strengthen our international footprint. On our previous conference call, I mentioned we had scheduled the deployment of 7 international rigs in 2024, 3 in Saudi Arabia and 4 in Algeria. In the first quarter, we started 2 of the rigs in Algeria, and so far in the second quarter, we started the third Algeria unit. That's the update on our previously expected deployments. In addition, we have also been successful with recent negotiations for 3 rigs in Argentina. We expect 2 of those to go to work in 2024. That leaves a total of 6 more rigs slated to start up over the remainder of 2024. The third Argentina rig should commence operations in early 2025. I would like to point out that all 3 of these awards in Argentina have long-term contracts with favorable pricing and high rates of return. Additionally, we have been shortlisted for 3 rigs to go to work in the Middle East. These rigs would also have multiyear term contracts with favorable economics. In the Lower 48, industry activity has been disappointing. We had hoped for a moderate increase during the first quarter. From beginning to end, the Lower 48 industry land rig count declined by 4 rigs. The average Lower 48 industry count was essentially flat. Nonetheless, leading-edge…

Thank you, Tony, and good afternoon, everyone. During the first quarter, our global markets continued to diverge with a strong expansion driving international markets, while the U.S. maintained its flat-to-downward trend. Our international rig count improved as we deployed rigs in Saudi Arabia and Algeria. At the same time, we were awarded 3 rigs in Argentina and another tender in the MENA region, pending finalization of the technical review. We were successful commercially in an additional 3 rigs. The U.S. market is somewhat disappointed with fewer rigs added than we targeted, but pricing was higher than we anticipated. And despite the weakening industry rig count in the Lower 48 market, Drilling Solutions and Rig Technologies beat our forecast. Revenue from operations for the first quarter was $734 million compared to $726 million in the prior quarter, a 1.1% improvement. U.S. Drilling revenue increased by 2.3% to $272 million, primarily driven by additional activity in Alaska. Lower 48 drilling and offshore drilling also contributed to the increase. Our average rig count in the Lower 48 was 71.9, an increase of 1.6 rigs sequentially. Average daily revenue held at approximately $35,500. Revenue from our International Drilling segment was $349 million, a 1.9% improvement over fourth quarter results. This increase was driven by a newbuild start-up in the fourth quarter and operational improvements in Saudi Arabia as well as deployments of the first 2 of 4 rigs awarded in Algeria. Revenue from Nabors Drilling Solutions declined sequentially by $1.5 million due to lower activity in the U.S. Lower 48 market. Despite flat average industry rig count in the U.S., we grew NDS sales on Nabors' rigs by 3.6%. We also expanded our presence in international markets by almost 2%. The Rig Technologies' revenue decreased by $9.1 million or 15.4% following strong seasonal year-end…

Thank you, William. I will now conclude my remarks this afternoon. As we look ahead, we see significant opportunities. From today, we have 6 rig start-ups over the remainder of 2024. More are on tap for 2025. This group should contribute significant incremental EBITDA over their multiyear contracts. To detail the remaining deployments, as of today, we have 10 in Saudi Arabia with 3 in 2024, followed by 7 over 2025 and 2026; 3 rigs in Argentina with 2 in 2024 and 1 in 2025; and 1 more in Algeria in 2024. Altogether, these add up to 14 pending deployments. On top of these 14, we have the prospect for an additional 3 in 2025. This magnitude represents a rare opportunity, one that we are committed to capturing. Our investment in this environment now provides the foundation for increased free cash flow and greater financial returns in the future. Looking ahead, we are evaluating additional opportunities in Latin America, the Middle East and elsewhere in the Eastern Hemisphere. Each of these opportunities will contribute significant free cash flow. As I've said before, we are able to use existing rigs to capitalize on this environment. In tandem with these rigs, we see very attractive prospects to materially expand the NDS business with limited incremental investment. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.

[Operator Instructions] The first question today comes from Dan Kutz with Morgan Stanley.

I just wanted to come back to the free cash flow comments. And I appreciate that this year, you're kind of at the full run rate for the SANAD newbuild program. There's a lot of investment required for the wave of deployments that you have -- of rig deployments that you have coming in. You also mentioned higher maintenance CapEx. But I was just wondering if you can help us think through some of the other components that might impact free cash flow conversion this year outside of the CapEx guidance that you gave us, whether it's working capital expectations, cash taxes. Even just -- if I look over the last 5 years, I think your average net free cash flow conversion is in the kind of 30%, 35% range. Should we be thinking about significantly below that this year? But is that a potentially achievable target in the coming years? Just anything you could share to help us think through the free cash line and free cash conversion.

Dan, that's a good question. I think a lot of people are hoping for some answers on the free cash flow for 2024. So as you know, we had to wait a little bit because we had a few or several important tenders to be decided, and certainly needle moving in both EBITDA and CapEx. So we hesitated to give something until we have more visibility on those tenders. But what I can do is, tell you a little bit the main components of free cash flow for the full year. And the most important is EBITDA. And so we do think that the rigs in the U.S. Lower 48 will fall, some 6 rigs, versus the prior year. We were hopeful to retain the same average rig count in 2024 as we had in 2023, but that just didn't happen. The market just moved down instead of going up as we thought. So that has some significant impact. And in addition, we do think that as contracts roll into the leading-edge pricing, which has stabilized, fortunately, but as they roll into those new leading-edge prices, we're going to see maybe an erosion of $600 year-on-year. And if you look at that, that's just math, that gives you somewhere in the range of $50 million reduction year-on-year in terms of the U.S. Fortunately, in terms of Lower 48, I'm sorry. But in terms of Alaska and the offshore market, we're going to see an increase of about $5 million year-on-year. So that's a $45 million reduction for the U.S. Internationally, we hope to increase by roughly $50 million, and that's partially due to these new awards, but also the Saudi Arabia increase in activity. So drilling overall on a global scale is going to be about $5 million higher than…

It does. And I think it probably answered a lot of potential subsequent questions as well. So thanks for the super helpful color there. Maybe just a question on international contracts rolling. And just -- I'm trying to think through outside of SANAD and outside of the idle rigs that you're redeploying for the rest of the international fleet that's working right now. I'm basically driving at -- is 2024 or some year in the future, a year where a big percentage of those rigs roll and would have the opportunity to kind of mark to leading-edge in those international markets -- are there years that you call out as being, I guess, significantly above or below what would be like a normal contract roll? Just for argument's sake, the average international contract is 4 years, then 25% of the rigs would roll a year. Would you point to this year or any of the coming years as being above or below what the normal contract roll periods would be?

Looking forward for the next year, we're looking about 20% actually of the rigs rolling right now. And I think the good news is with that number, that given the market and given the amount of tenders out there, I think in terms of repricing, it does offer the prospect of maybe moving up leading-edge pricing because all these contracts do require capital and all the capital is going to be at market prices and some of these projects are significant amounts of capital. So I think the whole sector is actually being pushed internationally up to market pricing, and that's good for us. So that -- but right now, that would be a number I would refer to about, up to -- reprice about 20% of the fleet, yes.

Next question comes from Keith MacKey with RBC Capital Markets.

Thanks for the color on the EBITDA and free cash flow, definitely super helpful. First question is just in Argentina, so you've got the 3 new rigs you're sending over there. Can you just discuss what you're seeing in that market generally? Where are rig counts trending and activity levels trending? And what is the spec of rig you're sending down to Argentina?

Well, I think Argentina has been a great success for us because we've exported our technology in the U.S. today. And right now, the rigs that are going down are what we call the F-rigs, which are 1,500-horsepower rigs with a higher hook load than a normal 1,500-horsepower rig. And the performance there has been outstanding. And so that has gained us a great credibility in the marketplace there. I think the good thing about the Argentina awards is the fact that the next 3 are going to be redeployed out of the U.S. So that obviously shrinks the asset base here and shows that we have other advantages, other ways to redeploy that capital. And the second point is these contracts actually are going to have a significant component in U.S. dollars, which is also a big change in terms of where we are to make us even more optimistic about the market down there. So in terms of the Argentina contracts in general, I think the backlog for those -- just those 3 contracts would be about -- revenue backlog about $230 million, just to give you a frame of reference. And as I said, I think the performance that we've demonstrated down there, we've now oriented the home marketplace to NDS as well, which has really been a good driver for us. So it's not just the rig, but also our software applications and managed pressure drilling and casing running integrated into the rig are actually gaining a lot of traction there. And I think we have really good market positions on both of those in the country. And that's a real success for -- real conversion from this [indiscernible] way that the market looked at a drilling contractor, and that's what's driving some of the move to shifting stuff to Nabors.

Awesome. I appreciate the comments there. Just sticking with the international markets. So the guidance for daily margin in Q2 is about $15,700 per day. I think you made a comment about getting that to $17,000 by end of the year. Can you just give us a bit of a bridge in terms of how you get there?

So Keith, as I'm sure you've learned by following our results. When you have a significant burst of deployments, you have to automatically be a little bit cautious on what sort of guidance you put out there for the margin because there's always shake down periods and things like that, and that hurt the margins a little bit. So we are trying to be a little bit cautious. We do have some more deployments coming and some recent deployments. A lot of rigs are being added to our fleet in the first and second quarter. So that's part of that. But there is also the fact that we renewed contracts in Saudi Arabia recently. And as part of that commitment, we have to do some recertifications of multiple components in the rig. And that takes a couple of weeks away from each of those rigs in terms of revenue generation. So we are being in this in the first half of the year. We do have some things that are going to disappear in the second half as all those deployments are completed in Saudi Arabia and Algeria. And at the same time, the rigs in Saudi Arabia do have significantly higher margin potential than our legacy rigs. They tend to be near the top of margin generation, particularly the new rigs that we're deploying as part of our agreement with Saudi Aramco. So those are the main drivers. So we do have a little bit of extra cost in the first half. And secondly, the rigs coming in, in the second -- for the full year, they're going to be fully impacting our results in the second part of the year, do have higher profitability than our legacy rates.

The next question comes from Kurt Hallead with Benchmark.

I appreciate all that color and detail on the EBITDA and the free cash flow. So I guess, look, the international markets, right, are clearly strong. And you have a lot of opportunities as you look out into '25 and '26. I'm just trying to reconcile something you guys said about $50-plus million of incremental EBITDA. Again, this is more like going out in the 2025 than what you just said for 2024. So can you just kind of help out in that context? You've got 5 new Saudi rigs, and those 5 rigs can add $50 million to EBITDA, and then you got another handful of rigs outside Saudi that could add another X million of EBITDA. Can you just kind of help connect those dots?

Let me just do some gross calculus here, put this way. So the Argentina rigs plus the Algeria rigs represent about $300 million in backlog. And just by way of background, those -- the investments there and those rigs have a rounded payback of about a 2-year payback, okay, on those rigs. Then when you layer on top of that, the Saudi rigs, which have a backlog of about $1.1 billion and the short list, assuming we got the short list that's $230 million, that represents the backlog. The entire package of all those rigs combined, when they're all on board, would be an EBITDA run rate of at least $125 million by the end of 2025. That's why we're so excited.

That's great. And that $125 million obviously on top of your base of whatever you're going to do in 2024. Okay.

Correct. Obviously, obviously, it depends that the market stays stable and all the stuff is truly incremental. But yes, that's -- all these things are incremental. So yes.

Okay. Great. And then -- so in the context of the prospects of taking idle rigs and moving them internationally, how many -- just in aggregate, right? Take beyond even what you already know you're potentially going to be moving, but how many idle U.S. rigs are feasible options to be upgraded into international?

I think -- the kind of numbers that we're talking about, I mean, I think if you listen to what I just said, our payback on adapting these rigs is less than 2.5-year payback to move a rig into the international, these type of rigs. And I think we have another 10 of those available. So it depends, of course, on the market. It depends on -- every market is different and every market has different POP requires, which drive those costs higher. But generally, we have about 10 more rigs that fit easily into the international marketplace from the U.S.

Okay. That's great. And again, it gets to the question, Tony, which was then beyond those 10, it would then require -- I would assume, it will require some element of newbuild, right? And number one, I'm not sure...

No, no, no. I'm just giving you the numbers of the low-hanging fruit. I think we have a bunch of iron out there and the pending -- one that we're in process, hopefully of concluding right now, the 3 that I'm talking about, those rigs are actually in country, so that makes it even easier for those. So yes, we have additional assets internationally as well, not just in the U.S., but U.S., it depends on the opportunity. Some -- if a deep gas with heavy BOP stuff, then you need an existing international rig. If it's something more like a version of the unconventional like in Argentina, then we could take one of our prime U.S. rigs and move it down there without a lot of incremental expense. So you can't just -- it's not one size fits all kind of concept. It's more complicated than that.

And by the way, it's not that the rest of the rigs could not be transferred. The reason why we say 10 is because the remainder of the fleet is more -- is more adapted and has been adapted to U.S. drilling. So we wouldn't want to transfer those at this point, but the other ones can also perform very well in the U.S. but have some characteristics that make them more adaptive and easier to move to international markets.

That's great. Appreciate all that. Now, one follow-up. So there's been a lot of discussion about the prospect of incremental rigs needed in the U.S. to satisfy the LNG export capacity coming on in 2025. And then there's been a lot of discussion here of late about incremental gas demand needed for the data center build out. You guys got any rough numbers as to what the incremental rig demand could be from those 2 factors?

I would say at this point, it's pure speculation. I mean we believe in the thesis that the export market is real on LNG. We believe in the macro thesis about the drivers for gas globally. And in particular, for growth in non-OECD countries. And particularly in terms of gas, in particular, for AI, I mean, if you look at the electricity production in the U.S. for the past roughly 15 years, I think it's been relatively flat, and that's because we've been able to rely on efficiencies in use of electricity to offset the demand. But with this new AI stuff that's coming out, it's so intensive that I think the only clear answer is actually for baseload power is, in fact, gas. You show the announcement [indiscernible] Amazon, I think, on the data centers that they're doing, and these data centers are going to be huge consumers. And therefore, we think -- as I said, these are all the reasons why we really strongly believe in it. And we've been disappointed that it hasn't happened earlier. But we think as you go through this year, I think it should become more visible. And obviously, we're well positioned to handle that. Our gas mix has obviously moved dramatically from where we were back in -- beginning of last year to today. And that market today is probably -- the Haynesville and the Northeast are the 2 most challenged markets in terms of Lower 48 right now, in terms of activity. And -- but for the reasons you're identifying, I think the prospects are bright going forward.

Even with all the transfers that we have made and are making of rigs out of the U.S., we still have a significant number of rigs that we could ramp up in the U.S. with very limited costs and very short lead times.

The next question comes from Derek Podhaizer with Barclays.

I just was hoping you guys could refresh us on your exposure in the Saudi Arabia market, specifically gas versus oil and more specifically, the unconventional gas, given this looks like an area of growth in the Kingdom. So just maybe some more comments around your growth prospects in that unconventional gas play that's being built out there.

Okay. Well, today, we have roughly 80% of our rigs are in gas. And of that 80%, about -- just going to count in my head here, about 20% of the 80% is in the unconventional today of what we have. And that -- the unconventional -- obviously, all the newbuilds that are being built are all can be [indiscernible]. It's up to Aramco where they want to put them. So far, they haven't moved many of them to be unconventional because they have so many other needs right now, but obviously, we can easily handle that. So of the footprint for us today, 80% is in gas and the market as a whole, I think the numbers for onshore today, conventional is 84 gas, unconventional is 22 and exploration is 37, oil is 70. So it gives you an idea of what -- how the market breaks down right now.

Let me make a comment, though, on the 20%, most of those could be redeployed to gas activity. We really do have the strongest fleet in terms of gas capabilities and deep high-pressure wells in the Kingdom.

That makes sense. So no issues as far as being able to move your existing equipment over there into unconventional fields, if that's where the demand pulls you, those rigs are ready to go and just -- [indiscernible] could be slotted either conventional or unconventional?

Absolutely. Absolutely.

Okay. Great. That's helpful. And then a question for you, William. On the $590 million of CapEx, could there be any upside surprise to that? Does that feel contained at this point? Or how should we think about potential moving pieces that could push this higher outside of maintenance CapEx with activity? But anything on the horizon that's behind the scenes that could surprise to the upside?

Obviously, international basket, like I was referring to is robust still. I think at the end of the third quarter, I told people there were about 55 opportunities in the marketplace that we are looking at, sorting through. And at the end of the fourth quarter, that number was around 53, a little bit decline. Today, that number is 30. So there's still 30 out there. And obviously, we sort through them and we'll see if anything really fits. And like the last person that asked the question, obviously, we have some equipment that could be really deployed attractively. But right now, our hands are pretty full of what we got. But we'll still be evaluating that. But the good news is that, that pipeline does show the robustness of the market, and that number outstanding demonstrates how broad it is. And as I said in my remarks, I think the Canrig award is another example of that showing how deep this recovery is in the international upcycle is.

And in terms of the pricing on the CapEx, I think the fact that we manufacture a lot of those components, those have relatively long lead times. We are pretty much set for the pricing this year. We are not that concerned about pricing increases on CapEx components at this point.

This concludes our question-and-answer session. I would like to turn the conference back over to William Conroy for any closing remarks.

Thank you, everyone, for joining us today. If you have any questions, please follow up with us. Betsy, we'll wrap up the call there. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.