Nabors Industries Ltd Q3 FY2023 Earnings Call

Good afternoon everyone. Thank you for joining Nabors' third 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 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, as we present our results and outlook. Activity in our major global markets was essentially in line with our expectations. Rig count in the lower 48 declined in the third quarter. It appears to have reached the bottom. Leading-edge pricing seems to have stabilized; however, lower drilling activity in the U.S. impacted results in our Nabors drilling solutions and rig technologies segments. The new build of rigs in Saudi Arabia was a source of disappointment as reflected in our third quarter results. Specifically, the issues included delivery delays by our local supplier, field performance challenges with certain of the new build rate components, and higher startup costs as we addressed these challenges. The impact to EBITDA in the third quarter was approximately $5 million. We have now addressed the existing quality issues. We expect our supplier's performance to improve rapidly as their local manufacturing experience increases. On the positive side, our lower 48 margins remain at historically high levels and international rig markets provide us with multiple opportunities at attractive pricing. For the third quarter, adjusted EBITDA totaled $210 million. This result principally reflects the known decline in lower 48 drilling activity, as well as the shortfalls in Saudi Arabia. Our global average rig count for the third quarter declined by eight rigs, all of which was attributable to the U.S. Our drilling solutions and Rig technology segments together accounted for 18% of total EBITDA. This contribution is approximately double the proportion immediately before COVID. Next, let me make some comments on each of our five priorities. First, performance in the U.S. Daily rig margins in our lower 48 operation were in line with our expectations. Pricing in this market reflects the reduction in industry utilization this year. Please note that our margin performance in the third quarter was higher than any quarter prior to 2023. Our reported lower 48 daily rig margin reflects the financial results of just our drilling rig. On top of that, the Nabors Drilling Solutions portfolio generates significant additional margin. I'll discuss this in more detail in a few moments. Now, I'll discuss our international drilling business. In the quarter, we stood up new build rigs in Saudi Arabia and in the UAE. These units are the first two of the 13 pending international startups that I detailed last quarter. Profitability improved substantially in several international markets, primarily in Latin America. Let me add a few more comments concerning the new build program in Saudi Arabia. The fourth rig deployed in the third quarter, the fifth was also expected to start in the third quarter. Although construction of the rig has been completed, its start date has been pushed to the beginning of next year. The aforementioned supplier issues caused this delay. This timing mismatch between the capital outlays and the commencement of EBITDA had a negative impact on free cash flow in the quarter. The second tranche of five rigs is currently under construction in the kingdom. We currently expect the first of this group to spud in the first quarter of next year. Two of the remaining four rigs should be deployed by the third quarter of 2024. The last two rigs of that tranche are expected to spud in early 2025. Saudi Arabia recently awarded the third tranche of five new builds, and we expect to deploy the first of these rigs around mid-year 2025. In general, the outlook for international business, including Saudi Arabia, remains quite positive. Coming out of the third quarter, we have 11 deployments expected through the end of 2024. Beyond these, we see improving prospects for additional rigs across a number of markets. These include Kuwait, Algeria, Oman in the Middle East, and Argentina, Colombia, and Latin America. Next, let me discuss our technology and innovation. Growth in NDS's international business actually accelerated in the third quarter. Managed pressure drilling and casing running drove this growth. NDS’s U.S. business was impacted by reductions in overall rig activity. Third-party revenue offset some of these reductions. Next, 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 $19,000 in the third quarter. Of that, NDS contributed approximately $3,400 per day. This significant incremental margin contribution comes with limited capital spending, thanks to the low capital intensity of the NDS portfolio. The returns on capital are the highest in our company. In the third quarter, penetration of NDS services held steady on Nabors rigs in the lower 48 at nearly seven per rig. Once again, we saw an increase in installations of our Smart Slides directional steering system and our smartNAV directional guidance software. Our volume of casing running jobs also grew sequentially. Our NDS portfolio remains robust. We have seen increasing interest both domestically and internationally in including our software solutions on third-party rigs. Next, let me offer an update on our capital structure. Our free cash flow generation and debt reduction were challenged in the quarter. Most of the items impacting our liquidity were one-offs or resulted from shifts in expected timing between quarters. We are addressing the impact of the issues in Saudi Arabia that I mentioned in order to recapture our momentum. The entire company remains focused on increasing free cash flow and reducing net debt. I can assure you these goals remain our top priorities. I'll finish this part of the discussion with remarks on sustainability and the energy transition. Our energy transition initiatives, as you know, focus on making a difference in Nabors' own emissions profile and exporting solutions to other verticals. These technology solutions already contribute visible margins. The first of these is our PowerTap module. This unit connects rigs to the grid. At the end of September, we had 23 modules running, and more than 20% of those were on third-party rigs. We have commitments in hand to add two units in the fourth quarter. Notably, one of these is our first PowerTap unit incorporating a frequency converter for the international market. This allows our rigs working in certain markets to tap into the local grid. We believe this is an industry first. In addition to the unit now deploying, we expect three more international deployments by early 2024. Second is the nanO2 diesel fuel additive, which improves engine performance and reduces emissions. We have treated more than 22 million gallons of diesel to date on both drilling rigs and pressure pumping units. In the third quarter alone, that increased by 10%. Quarterly revenue and EBITDA from our energy transition portfolio, once again, increased versus the prior quarter. We see a path to further growth across the client base, both on Nabors and third-party rigs, as well as in other verticals. Now, I will spend a few moments on the macro environment. Notwithstanding the volatile environment as well as the decline in rig count in the quarter, commodity prices remain constructive for operator economics. Compared to our last earnings conference call, oil prices are up more than $10 a barrel. We believe this oil price environment is very positive for international markets. We are still of the view that several large LNG projects along the Gulf Coast will support drilling activity for gas, especially in the Haynesville. These commodity prices form a favorable backdrop for operator economics. However, the combination of operator capital discipline and consolidation could temper the scale-up in U.S. activity that we have normally seen at these higher prices. Recently, we have noted two announced mergers involving U.S. majors. These transactions indicate their confidence in the future of the U.S. hydrocarbon business. As I mentioned, given this backdrop, international prospects, particularly those driven by national oil companies, remain favorable. Our balanced geographical portfolio positions us well to capture U.S. growth in 2024 and capitalize on these international opportunities. Some overhanging risks nevertheless remain. These include sustained higher interest rates, if not additional increases by the Fed, and looming geopolitical concerns across several geographies. Next, I'll spend a few moments on the rig pricing environment. Our third quarter results for the lower 48 reflect stabilization of leading-edge market prices. As I have emphasized in the past, these current rates for our highest spec rigs exceed all of the pre-'23 market highs. Our focus in the lower 48 market remains profitability while continuing to serve our valued customers. As such, we continue to demonstrate the worth of our technology portfolio with NDS. As I mentioned, in the international market, we still have visibility to 11 additional rigs through 2024. This growth should provide substantial uplift potential. Given the commodity price backdrop, we believe there is room for additional unit additions in the Middle East and Latin America. As rig utilization across these markets improves, we expect rig pricing to increase further as well. Once again, we surveyed the largest lower 48 clients at the end of the third quarter. Our survey covers 17 operators, which will account for approximately 45% of the working rigs at the end of the quarter. The survey indicates this group will add about 6% to its rig count through early 2024. This increase is spread across nearly 50% of the surveyed operators. We are encouraged by the distribution of this planned increase. With the expected international additions, we would increase our international rig count by 15% by the end of next year. Let me wrap up my remarks with the following. We expect our financial performance to improve materially in the fourth quarter as we remain committed to increasing cash flow, reducing net debt, and providing greater returns to our investors. Now let me turn the call over to William, who will discuss our financial results and guidance.

Thank you, Tony, and good afternoon everyone. Our third quarter financial results reflected primarily the expected reduction in lower 48 activity with an associated leading-edge pricing decrease. As anticipated, our US offshore results fell as we completed planned annual maintenance and critical components for our largest rig. I will also point out that results in Saudi Arabia, despite their quarter and quarter activity increase, fell materially short of expectation. Results were mainly affected by the disappointing performance and quality assurance by the supplier of our new builds. Standard experienced delays in delivery and commissioning of their new build rigs, which cost them significant revenue, and we only partially anticipated. These delays were compounded by unexpected downtime in newly delivered rig components by the same manufacturer. We are now forecasting additional lost margins in the fourth quarter from these issues. The drilling activity reduction in the lower 48 also impacted our NDS results more than we expected, driven by higher than anticipated rig count reductions in the general market. On the positive side, we continue to experience tailwinds in most international drilling rig markets, particularly in Latin America. Revenue from operations for the third quarter at $734 million declined by $33 million or 4% as compared to the second quarter. Revenue for our US segment at $276 million fell by $38.4 million or 12%. This decrease reflected an eight-rig sequential reduction in lower 48 rig count. Revenue per day of $35,700 fell by $1,054 from the second quarter level. US offshore revenue was $6.5 million lower sequentially as our largest platform rig completed its planned maintenance for major components. In addition, a second rig was placed on standby rate by our customer through the end of the year. Our international segment reached $345 million at a $7 million or 2% improvement over the prior quarter. This expansion was driven by an additional new build rig deployed in Saudi Arabia, as well as strong increases in Argentina and Mexico. These positive outcomes offset the end of contracts in Kuwait and Colombia. Nonetheless, the magnitude of the increase was disappointing due to the aforementioned delays and quality assurance issues on the new builds. These issues cost Nabors a total of $5 million in foregone revenue during the quarter. Nabors' drilling solutions and rig technologies were both affected by the reduction in U.S. rig count during the third quarter. The combined revenue impact for the two segments was approximately $6 million sequentially. Revenue in our drilling solutions segment declined by 5% to $72.8 million, reflecting the lower drilling activity in the lower 48 market. There were, however, a couple of bright spots to highlight. Despite the headwinds in the broad U.S. drilling rig market, NDS revenue continued to grow with third parties, compared to the second quarter, NDS increased its third-party revenue by 8%. International revenue also continued to expand, increasing by 8% sequentially. Total adjusted EBITDA for the quarter was $210 million, $25 million lower than the second quarter, a 10.6% decline. Nearly all of this decline was in the U.S. drilling segment, which reported EBITDA of $117.4 million, down by $24.1 million or 17% sequentially. This was driven by the activity reductions in the lower 48 market. Lower 48 drilling rig EBITDA decreased by $18.2 million or 15.3% compared to the prior quarter. Average rig count of 74 declined by 10%. Average daily rig margin of almost $15,900 was in line with expectation and represented a reduction of about $1,035 per day or 6%. Operating expenses were in line with the prior quarter. We believe leading-edge prices as well as costs have stabilized. For the fourth quarter, we project our average daily rate gross margin between $15,000 and $15,200, driven by the repricing of renewals as rigs roll to new contracts. We're targeting flat operating costs. During the third quarter, our rig count went as low as 70 rigs, and exited the quarter at 71. On a net basis, Alaska and the U.S. offshore businesses performed better than we anticipated. In the third quarter, the combined EBITDA of these two operations was $16.5 million, a decrease of $5.9 million. This reduction reflected planned downtime for the top drive upgrade and recertification on our M400 rig in the Gulf of Mexico. Combined EBITDA for Alaska and U.S. offshore should improve by $1.5 million in the fourth quarter with a full quarter of M400 operations, partly offset by planned maintenance on two rigs in Alaska. International EBITDA decreased by $2.2 million or 2.2% to $96.2 million. Average rig count and average daily gross margin were lighter than expected, largely driven by the new build challenges in Saudi Arabia. In addition to the material foregone revenue, we still had to absorb compensation and other costs on these non-performing rigs. For the quarter, average rig count remains at 77, average daily gross margin came in approximately at $15,800. The supplier issues affected our international daily margin by about $700. We project international average rig count in the fourth quarter to increase by one to two rigs driven by redeployments in Latin America, and for average daily gross margins, we are targeting between $16,200 and $16,300. Drilling solutions posted adjusted EBITDA of $30.4 million in the third quarter, down $2.3 million. This was primarily driven by the declining Nabors lower 48 rig count. Although international and third-party revenue did well during the quarter, some of our third-party target clients reduced their activity, which cut our opportunities for additional expansion in this market segment. We expect fourth quarter EBITDA for drilling solutions to increase by approximately 10% over the third quarter level as we continue to grow in international markets and add third-party activity in the U.S. NDS gross margin per day for the lower 48 was $3,388. Our combined drilling rig and solutions daily gross margin closed at $19,243. Rig technologies generated EBITDA of $7.2 million, a 12.7% increase versus the second quarter. This improvement was primarily driven by higher margin aftermarket sales and services, as well as higher penetration of our energy transition technologies. We expect rig technology EBITDA in the fourth quarter to expand by approximately 20%, reflecting expected year-end sales of rig components and additional increases in energy transition revenue. Now turning to liquidity and cash generation. Free cash flow for the third quarter at just under breakeven fell below our target, mainly due to higher capital expenditures of $33 million, which reflected the accelerated timing of investments in Saudi Arabia and the U.S. This should result in lower than previously expected CapEx in the fourth quarter. In addition, our accounts receivable balance and other working capital items were some $40 million higher than we expected. In addition to this working capital impact, lower EBITDA than planned negatively impacted free cash flow. In the fourth quarter, we expect overall CapEx to decrease significantly and the Q3 working capital impact to reverse itself. We expect free cash flow for the full year of 2023 to be between $225 million and $250 million as compared to our previous expectation of generating between $300 million and $350 million. The reduction includes $40 million of incremental CapEx during the second half. Our Algerian deployment has been moved up. We expect to spend approximately $20 million in CapEx before year-end. In preparation for the four-rig multi-year contract, we also decided to spend $10 million on purchasing a rented base in Argentina's Vaca Muerta Basin. The opportunity to purchase this critical facility presented itself after unsuccessful attempts in previous years to lock in our major operation space for the long term. Finally, also SANAD new build CapEx in the third quarter was essentially an acceleration from the fourth quarter. We now expect about $10 million of 2024 CapEx to move into late 2023. Capital expenditures in the third quarter were $157 million, $4 million higher than per quarter. This amount includes investments for the SANAD new build program of $52 million. For the fourth quarter, we expect capital expenditures of approximately $95 million, including $35 million for SANAD new build. For the full year, we are targeting $520 million, of which $190 million are for SANAD new build rigs. In conclusion, the third quarter EBITDA and free cash flow were unfavorably affected by one-off events, as well as items that shifted between quarters. Excluding these items, the underlying results for our international segment continue to progress and we expect further acceleration ahead. Just as importantly, the trends in the lower 48 proceeded as we had forecast, and I believe we have seen a bottom in rig count and pricing. We also anticipate that U.S. drilling, NDS, and Rig Tech will benefit from a meaningful uptick in activity in 2024 driven by an expected recovery in gas drilling. Increased EBITDA in 2024 versus the prior year, as well as sustained capital discipline, should result in higher free cash flow next year than what we now forecast for the full year 2023. We will continue to allocate this cash generation to debt reduction throughout 2024. With that, I will turn the call back to Tony for his concluding remarks.

Thank you, William. I will now conclude my remarks this afternoon. Notwithstanding challenging market conditions in the U.S., we expect a material improvement in our consolidated financial results for the fourth quarter. In the lower 48, we expect to grow our rig count this quarter from its current level. As we look to put rigs back to work, we remain committed to our pricing discipline and expense control. Our international segment has excellent visibility to significant growth through 2024 and beyond, and additional opportunities are already emerging across our major markets. The international portion of our NDS segment is also growing as those clients realize performance benefits from the NDS solutions portfolio. In the U.S., we continue to focus on increasing penetration on our own rigs as well as on third-party units. We are encouraged by early signs of an acceleration in rig technologies, especially for capital equipment in the international markets. On top of that, we have high expectations for rig tech's energy transition initiatives. We remain committed to our goals of free cash flow generation and net debt reduction. We expect to report improvements in both metrics this quarter. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.

The first question comes from Derek Podhaizer with Barclays.

Just wanted to ask you about the 14 warm stack rigs you highlighted in the press release. You mentioned these things are ready to go. Just maybe give us more color around your expectations on when those should be deployed, the cadence of deployment, maybe the customer type, the basin. Just help us with those 14 rigs as you look at them through 2024.

Sure. Well in terms of customer types, obviously we've seen a bit of a shift from the private to the public from where we were a year ago, and I think that shift is going to continue given other developments. In terms of basins right now, I think the most attractive right now is South Texas due to a combination of interest and rig availability. West Texas, there's been some redeployments of existing equipment there and there's no operator churn. But at the same time, we're seeing slight increases. And based on our survey, we see a pickup in early 2024 with budgets reloading. East Texas and Northeast we alluded to, those are gas driven. And right now, we see some stability. In fact, we think pricing, which had been disconnected from oil, is actually firming up. That gap between oil and gas is actually narrowing. So that's another area. And then finally, North Dakota, as you get into winter, that activity's going to be pushed into next year more. But there's some recent stuff now, but then later in the year. So pretty much in each of those markets. Northeast, I'm not so sure where you see much in the northeast for us right now.

I guess how many of those 14 do you think you can add back by the end of 2024?

It depends on customer demand, Derek. I mean, it's a bit early to be hazarding that, but if the demand is there, we'll be ready.

Just a follow-up, I just wanted to ask about the 2024 CapEx budget. Any help you can give us as far as color, maybe some bookends, how we should think about it between the US international, SANAD, technology, anything just to give us some preliminary guidelines here.

I think, SANAD will be similar to this year, maybe slightly higher. Because the supplier is going to get better and probably deliver those rigs a little bit more reliably than they have in the past. We'll have a significantly higher rig count. And as you know, the maintenance CapEx is directly correlated to the number of rigs. So that will go up. So those are the areas where we see, on the other hand, we won't be buying a base in Argentina. And some of the things we have absorbed in places like Algeria will not repeat. So, we will see, I would expect to see CapEx higher than this year, but we haven't yet finalized our budget exercise. And as you know, CapEx is a competition between different geographies. So, we are shooting to have a number that's going to be constructive in terms of free cash flow generation next year, but we're not ready yet to share that with our investors.

And the next question comes from Arun Jayaram with JP Morgan.

Good afternoon. Tony, I just wanted to go through some of the call, the challenges you talked about in Saudi Arabia in the quarter. How has this impacted the future timing of the new build schedule? Is this going to be kind of compartmentalized to this year or does it have kind of a knock-on effect? And I know you gave us a bit of color around four startups next year and five beyond that?

Correct. First, let me provide some context. The new build program in Saudi Arabia is quite unique compared to Nabors' usual operations. Aramco has committed to us over a ten-year period to build these 50 rigs, five each year. This initiative aligns with Vision 2030, and they wanted to source manufacturing locally, awarding the sourcing contract to a joint venture with OV. Unlike Nabors' typical arrangements, this joint venture lacked the necessary infrastructure, requiring a new facility to be built, which involved ramping up operations from scratch without any existing inventory. All of this was happening alongside the start of the new build programs. We are fully committed to fulfilling Aramco's requirements and making this work. We have a long-standing relationship with NLV and respect them, but this project is substantial and introduces significant challenges. Aramco has precise acceptance testing protocols, and due to the startup nature of this manufacturing operation, the acceptance testing for the rigs takes about two to three months, not to mention other emerging issues. This situation has placed considerable pressure on our timelines, but despite these challenges, we have made significant progress this year in getting rigs operational. We have positive visibility for the upcoming year with four additional rigs scheduled and the beginnings of the second phase. The rig from the first phase will be pushed to the first quarter, and while this rig is ready, we must ensure that the foundational rigs operate correctly before moving forward. It is essential for everyone involved to ensure all processes align properly, and this investment of time is necessary. This situation also incurs extra costs; when acceptance testing is prolonged, we face increased crew expenses for rigs that are awaiting readiness. Additionally, the announcement of the third tranche set to begin in 2025 shows Aramco's commitment, especially since they are making this announcement before the second tranche is even completed. Everyone is eager to see this work advance, and we are aligned with our partners in that regard. With regards to the financial impact, the four rigs added to our payroll next year, combined with the upcoming additions, are projected to generate between $50 million to $60 million in incremental EBITDA.

Yes. Well, so anyway, the magnitude as you can see is very large and therefore that gives us great visibility. And when you add that to the 11 rigs that you know about in other markets, I think international is really poised for a really great upturn here. And we can talk a little bit more about that context. But hopefully, that answers your questions about Saudi Arabia. If you have any other ones, I'll be happy to follow up with questions.

I would say there's nothing like that in the sector or there's ever been that much planned growth committed to in the land drilling sector, ever at this kind of numbers. It really is unparalleled, and then as I said, and then you have away from Saudi Arabia, you have other things that are going on in the macro environment.

The next question comes from John Daniel with Daniel Energy Partners.

Tony, just sort of a big picture question for you, but let's assume Middle East tensions, the situation escalates, and energy security fears ramp even higher. How quickly can you just ramp your international business, not country-specific, but just broadly speaking, how quickly could you ramp it further?

I would say very, very quickly actually that that's the benefit of having the integrated infrastructure that we have. And so, we actually have a bunch of assets around the world in various places that form the outlines of something, and adding them and refurbishing them and bringing them out. The stuff is what we do every day. And that is just a question of the opportunity. So, if that comes up, whether it's enhanced energy security here in the U.S. or in other markets that need it, I think that that is really the power of the company that we have today. And that's actually what makes us different than everybody else, John. So, that is really the strength of the company and I think we're all positioned to meet that.

And I guess sticking with the energy security theme, are you seeing any change in behavior with people looking for longer-term contracts on equipment just to know they've got it? Or is it too early?

It's too early to tell. However, we have received inquiries from the Middle East, particularly from companies that could be seen as local competitors. These companies usually focus on the shallower parts of the market or operate in regions where a national oil company has significant control. Recently, we have had many inquiries from these firms about equipment and sizing. This aligns with the broader international trends mentioned by William. For example, outside of Saudi Arabia, there are a number of countries including Kuwait, Algeria, Oman, India, Abu Dhabi, Papua New Guinea, Argentina, Mexico, Colombia, and Venezuela that currently have tenders out for more than 50 rigs. This scale of activity is unprecedented. The primary reason for this development seems to be driven by an urge to enhance production capacity. Additionally, geopolitical events are reshaping oil and gas flows, especially in areas like North Africa, where increasing production has become a priority. Furthermore, the rising internal energy consumption in major oil and gas countries is contributing to this demand. When considering the lack of investment over the past five years, it adds up to significant activity in the market. While I can't guarantee that all these tenders will result in rig awards, the sheer volume indicates why many in the industry are reaching out to us for top drives and upgrades. This is what is fueling the current activity.

The next question comes from Dan Kutz with Morgan Stanley.

So, I wanted to ask on lower 48 activity, it looks like you guys have kind of stated in a pretty consistent market share range recently, which is a little bit lower than maybe we saw in some past years, but that seems consistent with your strategy and what you're saying about defending, being disciplined in your bidding, managing costs, and trying to defend margins as much as possible. But I wanted to ask, is there a scenario where you could gain some market share and still achieve all the other stated goals? Or do you think that we're kind of at a fairly steady state from that perspective? And it's just going to be more the macro backdrop that will be the biggest driver of your lower 48 rig count. Thank you.

Well, obviously, we do like to grow, and but we like to grow profitably. And so, there's always that balance. And what we've tried to prioritize in our thinking is focusing on customers that also have a similar view to us as the adoption of technology, because as the rig count or our rig margins one thing, but the added benefit of NDS margins on these rigs also is a material enhancer, not just of absolute margin, but also of return on capital. Because the NDS quality of that EBITDA is much higher than also the base drilling business where the cash conversion rate is almost 80% of the EBITDA, the cash conversion. So that's where the priority is. And we think that as customers begin to get the story of NDS more and more and learn about the product line, that offers great expansion opportunities to help drive the rig sales and it also helps to drive the use of NDS on third party rigs. And you saw in this quarter something quite interesting, which was even though our rig count dropped, NDS actually grew in third party business, which is interesting in and of itself, which proves the concept that what we're trying to unlock with this stuff is something that actually has a broader applicability away from just Nabors rigs. So, the answer is yes, I do believe as the market matures, as the big players take a bigger position in the U.S. market and they are more technology-focused, that there isn't an opportunity to gain market share. So, one example of that is the focus on with the consolidation has occurred. I think one of the things people will be focused on is improving EOR, not just drilling wells faster. As the industry's done a great job drilling wells very, very quickly. And at a certain point there's going to be a lot of diminishing returns. So, I think some of the metrics are, may go to looking at EOR per lateral foot drilled, and you've actually seen some of the big guys talk about that increasing lateral length as much as five miles and that kind of stuff benefits Nabors, because we've pre-invested in that move. We built the M 1000 rig, which was the successor to the X-ray a couple of years ago, has a million-pound hook load that's perfectly designed for these longer lateral lengths. We also introduced to the market a new top drive that has the pious torque available that can actually handle a five-mile lateral. So, the company's positioned itself to capture that moment. And I think when as the market moves in that direction that all these bets we've made in the past couple of years as the market moves in that direction, I think it would help us also with share. So, that's a pretty long-winded answer, but I hope this response is to what you wanted.

No, that's great. It was a long-winded question, so, thank you. And then, I guess just another one on the international space. So, if I back out the SANAD rates that are working today, you guys are somewhere in the low, mid-seventies. And if I look back to kind of the pre-pandemic period, when the SANAD program hadn't kicked off, you guys, international activity was another dozen, two dozen above where your ex-NOD activity is now. Well, what I'm basically trying to frame or understand is like, what do you think the potential is in the international space just to kind of get back to the level of investment and activity that's required to kind of get back to a normal production level? And then on top of that, you have all of these capacity growth targets that a lot of the Middle East players have put out there. But I guess, I'm just trying to understand if there's a historical period that you would point to that you think could be the opportunity for international activity upside outside of SANAD. And again, I appreciate you guys have given us a ton of color on your visibility over the next two years, but I'm just trying to understand what like the ultimate opportunity could be for international rig redeployments if, aside from the substantial SANAD opportunity.

Well, I gave you a pretty big list of those opportunities and it is really going to be a question of our prioritizing where we want to allocate capital, what’s best served is, what a way I would put it. And as we think about that, some of the other logic I've talked about, which is technology and NDS also applies to international in terms of which opportunities we choose to pursue. So, it’s going to be a balance in terms of allocation of capital and what we want to pursue in terms of how fast we want to grow. But I think right now you're seeing an environment where there's not going to be a dearth of opportunities. The question is what are the returns on capital are good enough to meet what our hurdle rates and what are they such that it makes 101 equal three when we pursue that opportunity. And I'll let William add anything to that.

I believe there are significant growth opportunities for us in Latin America, especially in Argentina and Colombia, where we already hold a leading position. In Mexico, we are under pressure from Pix to increase our rig presence in the platform rig market. While I hesitate to mention Venezuela due to uncertainties surrounding sanctions and client activity, we currently have four rigs ready there, anticipating a potential resumption of operations by foreign players. Kazakhstan's market has contracted, but we are prepared for its eventual recovery. In Kuwait, we have important tenders and are well-positioned in that market. Recently, we secured a significant contract in Algeria for four rigs, which is a major achievement for us, and we are also exploring further expansion in North Africa. These are the main areas where we expect to see growth for Nabors. However, we need to be mindful that we can't pursue all available opportunities, so we must be selective and focus on regions where we can integrate technology with our rigs. Additionally, we plan to develop a sensible CapEx program for next year that aligns with our free cash flow goals.

The next question is a follow-up from Derek Podhaizer with Barclays.

I just wanted to follow up on the 11 rigs highlighted internationally to be deployed by the end of next year. Is that a net number or, I'm just wondering how we should think about that. Will we see some offsets, maybe some rig releases in other regions? I know you highlighted Kuwait and Colombia as areas of softness currently. Just thinking about if that 11 is completely incremental or we should think of the 11 minus something.

Listen, the 11 is stuff that we have in hand already, but we have others that we have a very high probability of getting. So, the 11 could be higher right now. It's true that in some places, it could be some releases somewhere. But again, we have very long-term contracts all over the place, so right now we're not expecting to see reductions in other places.

Got it. Okay. Very helpful. And then just, I know capital allocation strategy talked about it being towards debt reduction repayment, but considering just how constructive you are on NDS, I'm just curious how we should think about M&A opportunities, whether it's a Tuck-in or Bolt-on as far as technology or anybody else out there that can fold right into the Nabors solution. Just thinking about M&A opportunities and NDS how we should think about that.

I appreciate your observation, and it's something we've been aware of for some time. We've been exploring and adding some minor software components that haven't received much attention. These additions complement our product lines and contribute to our internal growth through small acquisitions. Additionally, we've pursued partnerships, such as with Cova, where we see potential for collaboration that could significantly enhance our capabilities. The market is relatively small, with only around 700 to 1,500 target rigs internationally, unlike giants like Microsoft and Apple with millions of customers. To optimize our technology, it makes sense to collaborate with established players to improve efficiencies. We're committed to this strategy and are actively exploring more opportunities beyond acquisitions.

I think we also deal with Halliburton, I think is going to be accretive to Nabors drilling solutions. And of course, one of the big objectives that we have is to try to convince some of our peers to take our technology rather than redeveloping, reinventing the wheel themselves. And we have been having some success on that.

Thank you all for joining us this afternoon. If you have any additional questions or would like to follow up, please contact us. And with that, Keith, we'll end the call there. Thank you very much.

Thank you. And as mentioned, the call has concluded. Thank you for attending today's presentation, and you may now disconnect your lines.