Earnings Call Transcript - NBR Q1 2022

Operator, Operator

Good day. And welcome to the Nabors First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mr. William Conroy, Vice President of Investor Relations. Please go ahead, sir.

William Conroy, Vice President of Investor Relations

Good afternoon, everyone. Thank you for joining Nabors' first quarter 2022 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, is Siggi Meissner, President of our Energy Transition and Industrial Automation Organization, and 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 in 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.

Anthony Petrello, Chairman, President, and CEO

Good afternoon. Thank you for joining us as we review our results for the first quarter of 2022. This afternoon, we will follow our usual format. I will begin with some overview comments. Then I will detail the progress we made on our five key initiatives and follow with a discussion of the market. William will comment on our financial results. I will make some concluding remarks, and we will open up for your questions. Our performance in the first quarter marked solid progress on each of our five key initiatives. Our strategies are paying dividends. At the same time, we benefited from the increasingly constructive markets for our services. Adjusted EBITDA in the first quarter was $131 million. Our operational execution remains strong, especially in our key markets. Our results reflect minor impacts from disruptions in our operations in Russia, as well as ongoing challenges to the supply chain. Our global average rig count for the first quarter increased by 10 rigs. This rig count growth was mainly driven by an increase in our U.S. drilling activity. Revenue momentum in our Drilling Solutions segment remained strong, increasing by nearly 5% sequentially. EBITDA in this technology leader reached the $20 million mark, its highest level since the start of the pandemic. In the first quarter, we made significant progress to reduce net debt. For the quarter, EBITDA, less CapEx, totaled $47 million. Typical working capital leads in the first quarter were exacerbated by supply chain constraints, inventory, and the growth in the business. Net debt improved by $55 million in the first quarter, driven by exercises of our warrants issued in 2021. Next, as I have outlined for the past few quarters, I will highlight our progress on the five key drivers that we believe support the investment thesis on Nabors. These drivers include our leading technology and performance in the U.S. market, expansion of our international business, improving results for our technology and innovation, improving our capital structure and reduced leverage, and our commitment to sustainability and the energy transition. Let me update each of these, starting with our performance in the U.S. The early rig margins in the Lower 48 improved yet again. We exited the quarter with 87 rigs running. In the first quarter, our daily margin increased by $533 and was just under $7,700. The continued growth in our margins demonstrates the market's demand for our value proposition and our ability to price the value. I'm convinced that this leadership is driven by the quality of our assets and the level of our execution. But let's be clear, the technology leadership we bring to the market through Nabors drilling solutions is equally important in helping our rigs deliver best-in-class drilling performance. We remain committed to delivering the industry's best performance and most advanced technology while leading in safety and sustainability. Let's discuss our international business. We performed well and our financial results in this segment were consistent with our outlook. Operational execution in the field was excellent. The SANAD first kingdom newbuild rig, which was anticipated before the end of the first quarter, is now expected to deploy in May. The rest of the five new builds, which have been awarded, should come at a rate of approximately one per quarter. Given the terms of the JV agreement, we estimate each of these new rigs will generate annual EBITDA of approximately $10 million. With the JV's long-term plan for 50 new build units over 10 years, the prospects for significant future growth are outstanding. Now, let's discuss our technology and innovation. We believe the development and deployment of advanced technology are key to Nabors' future success. Our focus areas include automation, digitalization, and robotization. Again, in the first quarter, our market position improved. Quarterly EBITDA in our Drilling Solutions segment increased to $20 million. We used the combined daily margins in the Lower 48 from both our Drilling and Drilling Solutions businesses to evaluate our business on an apples-to-apples basis versus peers. In the first quarter, Drilling Solutions added more than $2,100 per day. With this contribution, our combined daily rig margin figure amounts to more than $9,800 per day. One of the core elements of NDS strategy is to target the third-party rig market. This approach to the business expands our addressable market well beyond Nabors' own rates. We have made progress on our goal to expand penetration of the NDS portfolio into this third-party universe. Last quarter, third-party customers accounted for more than 20% of NDS's Lower 48 revenue. I'll wrap up my comments on technology with a brief update on our fully automated rig R801. This rig runs our smart suite of performance automation tools, as well as integrated casing running. We are in the process of using lessons learned from this rig and applying them across the rest of our fleet. We have identified certain automation modules on the rig that can be exported in component form to replicate the functionality of R801. We are now ready to install one of these automation modules on one of our Permian rigs. We expect that over time, these automation modules will be deployed on most of our existing high-spec rig fleet. In addition, we also intend to make them available on third-party rigs. In this way, we intend to exploit these new technologies without the need for a new rig build cycle and broaden the knowledge and acceptance of these solutions. Now let's discuss our delevering efforts and the steps we've completed to derisk our capital structure. In the first quarter, we made significant progress to reduce net debt. In particular, the exercise of our warrants contributed to a reduction of net debt exceeding $120 million and a commensurate increase in equity, recognizing our improved near-term debt maturity profile, as well as the completion of our new revolving credit facility in February. One of the major debt rating agencies raised its issue-level ratings across our notes. I'll finish this discussion with remarks on our key value driver of ESG and the energy transition. Building on our industry-leading TRIR performance in 2021, we are looking to improve on that further in 2022. Less visible in the TRIR statistic is the significant progress in the severity of the incidents reported. And our incident severity rate improved by 44% in 2021. We expect to further advance in 2022. Both of these measures demonstrate the positive emphasis we place on employee safety. On the environmental front, in our Lower 48 field operations in 2022, we are targeting a further 7.5% improvement in greenhouse gas emissions intensity on top of the 10% we delivered in 2021. We made additional progress across our initiatives supporting the energy transition as well. We further built out the organization, adding support for our carbon capture and hydrogen injection technologies. We hope to have commercial products available this year. Most recently, we announced an investment in another advanced geothermal company, GA Drilling. This addition to our existing portfolio enhances our position to help drive next-generation geothermal technology. Since then, we also invested in a company focused on monitoring and measuring GHG and other emissions. To reiterate, our approach to the transition comprises three pillars: reduce our own environmental footprint by applying new technologies and best practices, capitalize on opportunities in areas adjacent to our core activity using our global footprint and existing expertise, and invest in companies, both adjacent to Nabors and in other verticals, and accelerate their achievement of scale. As you can see, we are making significant progress on each of these fronts. Now I will spend a few moments on the macro environment. The first quarter began with WTI just above $75 in late February. Since the outset of the war in Ukraine, the price has been more volatile. The quarter closed with WTI just over $100. Crude oil prices remained above the pre-war level, let alone above the $60 mark we highlighted in our December analyst meeting. Since that meeting, the forward market has improved as well. The futures price of WTI 24 months out from now stands 20% higher than its price 24 months out from December of last year. In this range, oil prices provide returns that would incentivize operators to increase their drilling activity above our previous expectations. In response to improving operator economics, drilling activity in the industry was materially higher in the quarter. Nabors' quarterly average rig count increased by 12% in the first quarter. Once again, we surveyed the largest Lower 48 clients at the end of the first quarter. This group accounts for nearly 30% of the working rig count. Our survey indicates an increase in activity of more than 15% for this group by the end of the year. Nearly every operator among these 15 clients plans to increase activity. The pricing environment remains bullish. Our average daily revenue exceeded $23,000 in the first quarter, which was up nearly $300 or 6% sequentially. Our own leading-edge day rates are in the high 20s. With the potential activity increase indicated by our survey, we see pricing continue to increase as industry utilization climbs over the balance of the year. Turning next to Technology & MDS. The first quarter's EBITDA exceeded the exceptionally strong performance of the previous quarter. This continued growth reflects the strong value proposition of the portfolio, with 82% of our Lower 48 rigs being in five or more NDS services; this metric is up by 8 percentage points versus the previous quarter and represents record-high penetration. Among specific services, we saw notable growth in the penetration of SmartDRILL and RigCLOUD and our related analytics. Demonstrating our focus on third-party rig opportunities, NDS revenue from third-party contractors grew more than 10% sequentially. In our international markets, strong commodity prices and expected production increases are driving oilfield activity higher. For Nabors, we expect to head rigs in several markets. In particular, we have visibility to the center new builds in Saudi Arabia, with the first deployment expected next month. In addition, in Saudi Arabia, we will be deploying a flagship rig from our M1200 series, which will incorporate our most modern technologies. Tendering activity has picked up across other markets in the Middle East, notably in the Gulf countries. This growth will likely require higher-capability rigs, which should be favorable for pricing and present an opportunity for rig rates. We are also optimistic for additional rigs in Latin America. Clients there are planning increases in activity, and we have the rigs and relationships to support those plans. Let me wrap up this macro discussion with updates on several other areas: Russia, covenant interest rates, labor availability, and the global supply chain. In light of the conflict in Ukraine, we remain concerned for the welfare of citizens there and throughout the region. We currently operate three drilling rigs in Russia under contracts that require us to continue performing for a period. While maintaining compliance with all applicable sanctions, we are refraining from making additional investments and from introducing new technologies into the country. Recent events in the credit markets, coupled with the resurgence of COVID in China, still loom as potential risks to global energy demand. We remain vigilant to the impact these factors could have on the forward outlook. For labor, the tight market we experienced through the end of last year has eased somewhat. Timely staffing for additional rigs remains challenging. We addressed compensation levels to remain competitive, and those steps have been successful. Notwithstanding the increase in costs, profitability has continued to improve. Finally, let me address inflation at the supply chain. We have seen higher costs across our supply chain, including materials and logistics. We have been able to offset a significant portion of the pressures on our supply chain with our internal manufacturing infrastructure. We and the industry continue to experience significantly stretched lead times. This challenge has forced us to increase our inventories to ensure we can deliver without disruptions and ensure great components and spare parts to our customers and internally to Nabors. We remain committed to maintaining our operational tempo. To sum up, we are seeing indications for continued drilling activity increases globally. Our latest survey of the larger Lower 48 operators indicates a slightly higher 2022 exit rig count than expected just a quarter ago. This reflects that notwithstanding some hype, at least for now, operator plans appear to remain largely based on the pre-war commodity outlook. We see opportunities emerging in our larger international markets. We are also seeing a significant increase in gas prices in many countries, reassessing their hydrocarbon needs focused on natural gas. These factors could spur additional activity as well. Inflation and supply chain constraints remain present. At Nabors, we have demonstrated our ability to grow our business while improving our financial results and our capital structure. I fully expect this performance to continue in the coming quarters. Now let me turn the call over to William, who will discuss our financial results and guidance.

William Restrepo, CFO

Thank you, Tony. The net loss from continuing operations for the first quarter was $184 million or $22.51 per share. This compares to a loss in the prior quarter of $114 million or $14.60 per share. In the first quarter, the conflict in Ukraine led to a significant devaluation of the Russian currency and to restrictions in operations. These challenges resulted in a reduction in our adjusted EBITDA of approximately $2 million and charges to other expenses of close to $3 million for a combined impact after tax of $5 million or $0.61 per share. The first quarter results also include a non-cash charge of $72 million or $8.63 per share related to mark-to-market treatment of Nabors warrants. Because the warrants initially included an incentive shares feature, the number of warrants is not always equal to the number of shares obtained through a warrant exercise. Because of this disparity, accounting rules record that we mark-to-market the warrants based on their fair value at the end of the quarter. The quarterly gains or losses resulting primarily from the fluctuations in our common share price will add some volatility to our earnings, as long as the warrants remain outstanding. However, this income or expense will have a more cash impact, and the net cumulative effect on our equity will be reversed at the end of the life of the warrant. Revenue from operations for the first quarter was $569 million, a 5% sequential improvement, more than offsetting a 2% reduction in available days from the fourth quarter. In general, our results continue to trend from the fourth quarter, namely strong overall reading results, particularly in the Lower 48 market. Revenue from U.S. Drilling and Drilling Solutions was up significantly, reflecting improving pricing and higher rig count. The Lower 48 market for drilling rigs was notably affected by price changes. While rig count increased by 12%, revenue was up 16%, as average day rates for the fleet continue to improve. Higher activity in international markets also drove revenue increases for our International segment. Total adjusted EBITDA of $131 million decreased by $1.1 million or 0.9%. The fewer days available in the quarter versus the fourth quarter affected our operational EBITDA by approximately $3.7 million compared to the fourth quarter. Russian headwinds further reduced our EBITDA by approximately $2 million. These reductions were almost offset by longer-term trends in our results. U.S. Drilling EBITDA of $74.3 million was up by $5 million or 7% compared to the prior quarter. This improvement was driven by our Lower 48 EBITDA, which rose by $8 million, a 19% improvement sequentially. Our average rig count in the Lower 48 increased in the first quarter to 83.4 rigs, up approximately 9 rigs from the fourth quarter average. Daily rig margin came in at $7,694, up $533. This improvement resulted from a $1,291 increase in revenue per day, $900 of which were from higher average day rates for the fleet. These pricing increases were partly offset by higher labor expenses and costs related to startups. Rig count continues to move up on the strong commodity price, and pricing continues to improve with higher utilization for high-spec rigs, now approximately 80%. During the quarter, we saw leading-edge pricing in the high 20s for our rigs alone without layering on any of our NDS offerings. As our fleet reprices to market, we expect this favorable rate trend to continue. For the second quarter, we project our Lower 48 average daily margin to continue expanding and reach approximately $8,500 per day. Given the current level of customer interest and existing commitments, we forecast an increase of six to seven rigs in the second quarter versus the first quarter average. On a net basis, EBITDA from our other markets within the U.S. Drilling segment decreased by a few million dollars despite the addition of one rig in Alaska. The reduction reflected primarily lower deferred revenue on one of our offshore contracts. In the second quarter, the combined EBITDA of these two markets should improve by $1 million to $2 million on higher day rates in Alaska. International EBITDA of $71.2 million in the first quarter decreased sequentially by almost $2 million, driven primarily by our operations in Russia. Despite the Russia impact, international daily margin at $13,134 remained in line with the prior quarter, driven by solid results in the Middle East and strong performance in our South American markets. Rig count at 72 rigs increased by just over half a rig over the fourth quarter average. The current rig count in the international segment is 73%. We expect recent increases in the second quarter to improve by nearly two to three rigs versus the first quarter average primarily from deployments of the first SANAD rig in the Kingdom, as well as an advanced 1200 Series rig in Saudi Arabia. We expect further rig additions in Saudi Arabia and Latin America coming in the following quarters. For the second quarter, daily margin is targeted between $12,700 and $13,000 with performance in Russia remaining challenged. Drilling Solutions delivered EBITDA of $20 million, up from $19.6 million in the first quarter. Gross margin for NDS was nearly 49% for the quarter. We continue to see increased penetration, particularly in third-party rigs, with the largest contributions coming from performance software in the U.S. Activity in the Lower 48 generally improved, taking our combined drilling rig and drilling solutions daily gross margin to $9,818. This includes a $2,100 per day contribution from our rapidly growing solutions segment. The combined gross margin for Lower 48 Drilling & Solutions reached $73.7 million or approximately 36% of revenue. We expect second quarter EBITDA for the Drilling Solutions segment to increase by more than 5%. Rig Technologies reported negative EBITDA of $1 million in the first quarter due mainly to a delay of shipments into the second quarter and a significant reduction in Russia. For the second quarter, the segment should deliver a couple of million in EBITDA on improved capital equipment and aftermarket sales. Now turning to our liquidity and cash generation. Net debt improved by $55 million, largely due to exercises of warrants with equity issued in exchange for outstanding notes. These warrant exercises reduced the face value amount of notes outstanding by $131 million. After accounting for deferred financing costs and the equity component of our retired convertible notes, we reduced our recorded balance sheet debt for notes by $121 million. During the quarter, we also incurred approximately $4 million in costs related to the extension of our credit facility. Free cash flow totaled negative $40.8 million in the first quarter. As expected, the quarter was challenging in terms of cash flow generation since we normally pay several material annual items, including property taxes and employee bonuses. These payments will not recur during the remainder of the year. In addition, the growth of the business and longer lead times for our inventory items led to a substantial increase in working capital of approximately $48 million from accounts receivable and inventories. Although we expected the revenue increase and its negative impact on accounts receivable, we also expect a lower DSO than what we actually achieved. In addition, inventories expanded as a result of higher expected activity in the quarters to come, as well as the need to compensate for significantly longer lead times. Some of these inventory increases were also related to Canrig shipments that were delayed into the second quarter. Capital expenses for the quarter totaled $84 million. This included $33 million to fund the new build program for our joint venture in Saudi Arabia. Looking ahead, we expect second quarter CapEx to land between $110 million and $120 million, including approximately $45 million for SANAD and Kingdom new builds. For the full year, we estimate capital spending will remain within our prior guidance of $380 million, of which $150 million support the SANAD new build rigs. We are targeting breakeven free cash flow for the second quarter, reflecting the higher EBITDA and lower cash interest expense, the absence of material annual payments, and lower outflows from working capital buildup. We are committed to delivering well above $100 million of free cash flow in 2022. We remain focused on addressing our liquidity and leverage. In the first quarter, we took significant steps in improving our debt maturity profile. We closed on a new revolving credit facility maturing in 2026 with a principal amount of $350 million. The new facility replaced our previous revolver maturing in 2023. With the closing of our credit facility, we have also increased our senior priority guaranteed note capacity to over $400 million. Together with the remaining capacity on our priority guaranteed notes, we have nearly $1 billion available for future debt refinancing using our combined guaranteed note layers. With those actions, we are well positioned in terms of liquidity and debt maturity profile with only $260 million in notes maturing before the end of 2024.

Anthony Petrello, Chairman, President, and CEO

Thank you, William. I will now conclude my remarks this afternoon with the following. With Nabors’ leadership in the development and deployment of advanced drilling technologies, we are well positioned for the current environment. Operators prioritize automation and digitalization. Our industry-leading solutions in those areas enable them to achieve their goals. More recently, an additional priority has emerged, namely the need to improve environmental impacts; we are developing a pipeline of technology, both at the well site and beyond to enable clients to achieve their environmental targets through responsible hydrocarbon production. Ultimately, those solutions may grow into significant businesses. All of this is occurring as we continue to improve our capital structure and materially delever. Our focus and progress on our five key value drivers are producing significant benefits across our stakeholder base. We are very encouraged by the growing adoption of our advanced automation, both in the U.S. and in our international markets, and we're confident there's more to come. I hope you share my excitement for the future. I look forward to sharing our progress with you. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.

Operator, Operator

Thank you. We will now start the question-and-answer session. The first question will be from Karl Blunden with Goldman Sachs. Please go ahead.

Karl Blunden, Analyst

Hi, good afternoon. Thanks for the time. Just had a first question on the utilization rates that have been picking up very nicely, particularly in the U.S. Lower 48 high-spec area. Could you give us a sense of where you think that might be able to max out? What kind of utilization can you support? And then what happens from there when we get to that type level? Is it additional CapEx, a spike in day rates, maybe some of the non-high-spec rigs getting some business? Just be curious about your thoughts.

Anthony Petrello, Chairman, President, and CEO

Sure. So, as we said from the survey, you saw that we indicated there is an increase of about 15% expected by the market in general. That's about 100 rigs for the remainder of the year. And looking at Nabors, I think we can look at an exit rate maybe of a rig count exceeding 100, which would mean adding a bunch of rigs now. For Nabors, we have 23 additional super-spec rigs in various stages. The first five can be brought out with very little capital, then the next 11 will require capital of less than $1 million. And then the remaining seven will require more significant capital investment as we delve deeper. So we have some firepower there to get that rig count above 100 by the end of the year. And that’s our plan right now. In terms of new builds, obviously, the market pricing doesn’t support new builds yet. I think the new build price is going to be obviously higher given the cost inflation that has occurred in the meantime as well. So I don’t think we're anywhere near new builds. But the pricing environment is robust, as we’ve said, it applies to all markets. And it’s moved faster than any time we’ve ever seen in my 30 years at Nabors - we’ve never seen it move this fast.

Karl Blunden, Analyst

That's very helpful. And the activation costs, in particular. With regard to the warrants, you pointed out $131 million of deleveraging in 1Q. I know that the warrant website has some information, but I wonder if you could comment on how warrant exercises have trended so far this quarter, just given the expiration of the incentive shares, for example, and the strong stock price movement. And maybe more broadly, when you think about addressing your near-term debt, just be interested in your priorities around doing that with warrants exercise, which will come as the stock is strong versus potentially just kind of waiting for free cash flow or even doing some new guaranteed bonds?

Anthony Petrello, Chairman, President, and CEO

That's a mouthful. So I think in terms of the warrant, I think the warrant has served its purpose in terms of generating a non-dilutive form of pay down of debt, which was what it was designed to do. Now we issued a notice that we terminated the right of the bondholders to use bonds to exercise the warrant. We did that because we wanted the benefit to stay with the shareholders, and we thought the extra benefit was too much to give to bondholders frankly, above their face amount. So we don't want to do that anymore. So the bonds as they currently are outstanding, they're only exercisable for cash, and that...

Siggi Meissner, President of Energy Transition and Industrial Automation

Yes, only exercisable for cash. And we will see and have seen some cash exercises roll in. And obviously, at the price of 168, that's attractive right now as a means of going forward. In terms of additional financings, I'll let William talk to that. But as I said, the warrant transaction served its purpose.

William Restrepo, CFO

Yes, I think when we remove the incentive shares that basically took the bonds out of the equation. We formally eliminated the convertible bonds. We still could use the 25%, but it's just not financially advantageous because the bonds don't have really a big discount anymore. So we expect all the future exercises to happen for cash. A couple of million dollars have come in this quarter, somewhere in that range. In terms of using those warrants in the future, I mean, that's certainly possible. Obviously, with a strike price at 167, it provides an interesting way to continue deleveraging. But we haven't decided if that's the best step or if we issue more equity in the future or if we issue other types of notes in the future. We'll continue evaluating the market. We think there's potential for more high yield in the future. Again, we will continue evaluating all the options. In today's market, where our share price stands, where coupons are today, and our yields, we have a lot of options compared to sometime in the past.

Karl Blunden, Analyst

Thanks for all that. Appreciate it.

Operator, Operator

The next question will come from Dan Kutz with Morgan Stanley. Please go ahead.

Dan Kutz, Analyst

Hey, thanks. So I just wanted to ask if we're kind of thinking about how Lower 48 margins trend beyond the second quarter. Just kind of at a high level, is the prior cycle peak kind of where you think that we can get to? Can we get above that level? I think it was around $10,000 a day. And obviously, I appreciate that the inflation dynamics are changing the cost and revenue per day calculus, but just wondering if there's anything you can do to help us think about where you could see margins going?

Anthony Petrello, Chairman, President, and CEO

Sure. So as we said in the prepared remarks, the base rate right now is in the high 20s, let's say, 28 already. And if you add on the add-ons that would lead to a normal rate, that's another roughly $3,800 on top of that. So at those numbers, I think, as you said, from Nabors, that's a pretty attractive number from where we stand today. And as we said, for the second quarter, it’s $8,500. And I think we've made clear - one of the good things about what we've seen happen is the fact that in December, when we did the Analyst Day, you'll recall, we laid out a plan to get to $800 million of EBITDA. And so the way we think about it is that plan, which some people had some head scratching about back in December, I think it only supports and reinforces our conviction that we're going to get there. And that plan leans on a $10,000 a day margin per rig, and that's what we see happening by the end of the year. We'll be well poised to do that.

Dan Kutz, Analyst

Thanks a lot.

William Restrepo, CFO

Longer term, if you look at where our rates - leading edge day rates are today, and if we assume our fleet rolls into those rates and we execute on all of our contracts, that would imply a margin of $15,000 per day at some point. Obviously, we need to execute, and we need sufficient time for contracts to roll into those kinds of day rates. We do have some long-term contracts still in place that are not anywhere close to those rates. So it will take some time to get there, but that certainly is the potential.

Anthony Petrello, Chairman, President, and CEO

And the other thing, just to remember, is all the stuff that we talked about, we're talking about drilling doesn't include NDS, which you have to add that margin on top of it. In this quarter, that was about $2,200 a day. So on an apples-to-apples basis, when you compare us to other people, you always have to have the NDS margin on top of it because we break it out.

Dan Kutz, Analyst

That's all really helpful. Thank you. And then, yes, maybe on the point of - you said that you have some longer-term contracts that will take a while to roll and that there's still a lot of the fleet that is on contracts that was, like you said, reading edge spot rates are $5,000 above the 1Q average. So can you just help us think through the timeline for when the majority of the fleet will be able to reprice at higher levels? Or anything that you can do to help us think through that progression?

Anthony Petrello, Chairman, President, and CEO

In the U.S., the majority will be poised to reprice, taking advantage of what's happening now. That's what I would say. Internationally, on the other hand, the international market shows a term market. And there, the average duration is 1 year to 1.5 years out. And the only thing I could say there is that if you look at our rigs away from Saudi Arabia, by the end of the year, half of those rigs are going to be in a position to have price re-openers. So there is great potential not only in the U.S. but also internationally to capture the pricing movement as we head there. Obviously, it depends on the international markets heating up the way they have in the U.S., but given the macro, you can judge that as well as I can; all signs are pointing in that direction.

Dan Kutz, Analyst

Really helpful. Thanks, again. I'll turn it back.

Operator, Operator

The next question will come from Taylor Zurcher with Tudor, Pickering & Holt. Please go ahead.

Taylor Zurcher, Analyst

Hey, Tony and William, thanks for taking my question. Tony, I actually wanted to follow up on your prior response there on some of the international contract re-openers you have outside of SANAD over the balance of the year. So in the U.S., I mean, I agree with you, pricing momentum has really gone through the roof and surprised at least me to the upside and trying to think about the case for a similar outcome internationally with the caveats being that as capacity utilization internationally is not as great, and the labor dynamic is much different internationally as well. So I'm just curious for more color as those contracts reopen and you have the ability to reset pricing. I mean what's going to be the driver of pricing improvement from the existing pricing rate for those international contracts? Is it labor tightness? Is it supply-demand tightness or something else?

Anthony Petrello, Chairman, President, and CEO

I think it’s supply-demand tightness in general. I mean there are labor issues as well there. I mean, cost inflation is not unique to the U.S.; it applies internationally, particularly given the travel situations we've all been dealing with. But I think it's supply/demand. If you look at the activity away from Saudi, I think the markets that in that region have some tendering possibilities would be Kuwait and Oman in particular. The rigs out there - one of the things that will drive pricing as well is that some of those projects are going to require rigs that actually don’t exist today in the sense that some of the configurations require such high specs that you're going to require replacement capital to go on those projects. And that's going to uplift not only the new projects but the existing rigs as well. So, I think that's one of the dynamics that work here. So as those contracts open up and there is a need for additional equipment, that need is going to have to compete with existing rigs that meet those specs, as well as new rigs that require higher capital, which in turn will drive the whole pricing scenario up. So that's the upside, I think.

William Restrepo, CFO

The one thing that Tony pointed out is the Middle East, but the reality is the international market is not homogeneous. It's a bunch of different markets with different drivers. And most of the markets we are focusing on are experiencing tightness in rigs. I give you examples like Argentina, where there is heightened demand requiring higher spec rigs and they just aren’t any in the country. In Colombia, we're seeing expansion of drilling activity by Ecopetrol and others. And then in Mexico, we are seeing some rebirth on land activity that again requires some fairly high spec rigs. So all of that is happening in multiple countries where the supply of rigs is just not there. So we are seeing a little bit of tension on the pricing and on the positive sense. The pricing power seems to be solidly in the hands of the tolling companies today, even in the international markets.

Taylor Zurcher, Analyst

Yeah, good to hear. And on the margin front, it sounds like there'll be some Russia-related headwinds for international in Q2. I was hoping you could just help us think about if that's going to be a lingering impact over the back half of the year, if it's just too soon to say. And then if I compared your forecast to the 2023 forecast at the Analyst Day, you're well on your way to exceeding the U.S. piece of the forecast. The international piece with the Russia impact in the near term. Just a little bit unclear to me if you can get to the margin guidance you gave for 2023. So just curious if you still feel comfortable about that with respect to...

Anthony Petrello, Chairman, President, and CEO

I'll let William answer that. But before he does, I just want to make a comment on our quarter. Our internal number was 132 actually. And you saw what the numbers were we delivered, and that obviously was impacted by Russia for a couple of million dollars. We also had Saudi slipped into another quarter, and we also had some cost inflation that showed that we were able to absorb the cost inflation and still make progression on the margin. And on top of it, Canrig had an order, and bring this up because it relates to international. Canrig had an order which slipped to the next quarter, and that order was for an international project. It’s typical when the problems with international that there can be many factors that are out of your control. In this case, the client did some changes to their schedule. And even though the Canrig was ready to deliver the equipment, they wanted to defer because the back end of the project wasn't ready. But in the context, I want to just give you an idea that those were all one-time things. So with that, I'll let William follow through on the roll forward to 2023.

William Restrepo, CFO

So yes, good comments from Tony. We are very happy with the quarter. The U.S. was very strong. International was very strong with the exception of Russia. The only hiccup I would say, would be rig technologies with the Canrig delays and shipments. And even with the Russia issues, we have kind of absorbed that fairly well. It’s not a huge amount, but it does factor into the international margins. So we think that the second quarter, we will see a little bit of impact from Russia still. Things have stabilized there. We're running off some of those contracts. So we are forecasting similarly to the first quarter, but obviously, we're being cautious. And then in Saudi Arabia, we're deploying two brand new rigs that are highly competent, highly advanced and will have a material impact, but there could be some start-up costs. So we put a little bit of caution in our guidance for the second quarter. Throughout the remainder of the year, Russia will not even be a factor. You will not see it; it will disappear. And I think Saudi will continue to grow materially over the next three quarters. So we feel very comfortable with the guidance that we gave for 2023. If anything, I feel very positive that we will do better than that guidance not only in the U.S. but international as well.

Taylor Zurcher, Analyst

All right, good to hear. Thank you.

Operator, Operator

The next question will come from Derek Podhaizer with Barclays. Please go ahead.

Derek Podhaizer, Analyst

Hey. Good morning, guys. So we're believers in a multiyear up cycle, and we talked about exiting the year with over 100 rigs for 2022. You move into '23, '24, you can quickly kind of sell out of your 111 super-spec rigs. So I just wanted to ask beyond that 111, can you talk about the different options that you have, like upgrading some of the - about the 60 legacy rigs you have, maybe for renewable economics or even an acquisition of a smaller rig operator? Just one of the levers and how you view that if we become sold out over the next couple of years?

Anthony Petrello, Chairman, President, and CEO

Yeah. I think we have an installed base of about 45 rigs that are candidates for an upgrade. We already have upgraded about five or six of those rigs to what we call the M750, and we have a formula for that. The upgrade cost of that platform, even in an escalated environment, will be no more than 50% the cost of a new rig, and we have 40 of them available. So we have at our disposal a pretty large inventory of additional rigs to work from to draw down on it. And that will obviously be one of the choices. The second choice, obviously, would be to do new builds on our M1000s, which is the flagship. I think it’s the best rig in the marketplace today, no question about it, and that would be the second option to do a new build there. In terms of acquisitions, yes, we always look at acquisitions. There, you have to measure what you get. You have to measure the homogeneity of the fleet, etc., but we always keep our eye out for that as a possibility.

William Restrepo, CFO

But to be clear, we haven't forecasted our CapEx, building any M1000s or upgrading any of those other rigs. That's not part of our guidance or results or for CapEx today.

Derek Podhaizer, Analyst

Right. That makes sense. I was speaking more about beyond that into the next few years. I appreciate the color there. Switching over to the new energy angle geothermal. Obviously, you guys are very active in the investments along with some of your other drilling peers. Just can you spend some time on what's the - what's with geothermal, what's the goal? How these investments can materialize in their earnings potential for Nabors - if you just think about over the next 5 to 10 years, what's the outlook there? It seems like this is a natural crossover industry for the drillers and you guys are on the leading edge of it. So just love to get some more expanded color and thoughts around how you see this materializing into potential earnings power?

Anthony Petrello, Chairman, President, and CEO

So when I first joined Nabors 30 years ago, we actually had a pretty big segment that did geothermal, including in places like Japan and then later Costa Rica and parts of Africa as well, obviously, in California. So we've always been active in it historically. And obviously, the push against geothermal is this image play. Our proposition is that with technology, is there a way to make it be something that's scalable that you can do in multiple places and then use our footprint to exploit that. And that’s what drove the combination of investments we've made, and we've identified these four companies, which we think in the marketplace today have the best chance of unlocking one of those scalable solutions, and that's what we're doing. Geothermal is the only source out there that’s both baseload and renewable. And we think if one can do what we're talking about, it could be a huge game-changer. The companies we bought all approach this from a different vantage point, Nabors was chosen enough for just money on these things. We’re part and parcel of the R&D that's going on with each of the companies to make the technologies come to market faster and more robustly in the marketplace.

William Restrepo, CFO

Yeah. I think we're very excited about it. I mean, we just - we think the companies on their own are good investments, but the reality is that we're going to be partnering with these companies and the amount of geothermal wells if we're successful in developing this technology is going to be staggering. I envision sometime in the next 5 years or so, where a quarter of our business could be coming from some of these energy transition initiatives, including geothermal.

Derek Podhaizer, Analyst

That’s helpful. Appreciate the color. Thanks.

Operator, Operator

The next question will come from Arun Jayaram with JPMorgan. Please go ahead.

Arun Jayaram, Analyst

Hey, good afternoon. Tony, I was wondering if you could discuss kind of your contracting strategy at this point in the cycle. It still feels a bit early cycle. But talk to us on what you're thinking about in terms of locking in term versus spot. And also, as you are capturing higher and higher margins, could you talk a little bit about the level of customer churn you're seeing today and maybe compare and contrast that to different cycles that we've been through?

Anthony Petrello, Chairman, President, and CEO

Sure. So during the downturn, obviously, with the exit of some of the large publics, the supermajors out of the market, the private players stepped up. And today, the private sector plays a big role in the marketplace, as you know. We’ve tried to satisfy both groups of demand. I think it’s fair to say, though, over the last six months, if you analyze our customer base, you’ll see a shift that has already occurred of about 10% from the private portion of our customer base back to the public. And that represents something that's probably going to continue in terms of a trend in large part because of the nature of the contracts. Those are the publics who usually have longer-term contracts but more importantly, they are embracers of technology. And so the value proposition for Nabors to use the stuff that we bring to the table and make a big difference applies. And so I think you'll see that in our strategy going forward, and you'll see that shift at work. In terms of specifically term contracts, obviously, we went short during the downturn because we wanted to be poised for the upturn and have the freedom to reprice. And I think we're in that mode now. And as I said, the pricing has moved pretty robustly. And it is true that right now, given where we are today, as well as where operators now see the forward curve looking, which is equally important over the next 18 months, there has been dialogue with operators about trying to capture and lock in some term. We are part of those discussions, but I'm not going to give you my strategy as to percentages or anything, but obviously, we’ll start looking at it right now.

Arun Jayaram, Analyst

Great. And just a follow-up, is internationally, Tony, post the Russia-Ukraine conflict, the question we're getting is, how is the world going to make up for some of the barrels from Russia, which, as you know, could be impacted by lower production? And then just the market those barrels are more problematic today. But can you give us any sense of any areas within your global footprint where you're starting to see some acceleration in terms of equity? You're pulling projects forward?

Anthony Petrello, Chairman, President, and CEO

Well, obviously, here is the logical first choice in terms of making things happen. But I think there's a few hurdles, one of which is to preserve the financial discipline by the operators and to see who's going to actually back these programs to provide for long-term progress so people can make sure they make a return on their money. I mean we've seen in the past 60 days, the whole world's perception of everything has radically shifted. Mr. Putin has done in 60 days what people in the industry have been able to do, which is convince people that the renewables are not yet ready to take over base load demand anywhere. And so that’s set in. But the question is, how long is that mindset going to continue? And I think there’s going to be a reluctance on a lot of people to invest on merely a promise right now. So I think there are areas where there is capacity to ramp up. Obviously, the number one area from the U.S. is Saudi Arabia, and Aramco has been committed to increase their production capacity by 1 million barrels. They’re also making a big commitment on the unconventional away from our new builds; there's actual interest in there and adding to their unconventional rig activity, and they have the ability to add and provide a lot of incremental gas. So I think that opportunity exists out there. The question is who’s going to put pen to paper and actually do the long-term commitments that we can all invest in, and the operator can be sure he has a proper take-off contract etc., to do it all. That's really the question.

Arun Jayaram, Analyst

Thank you very much.

Operator, Operator

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

William Conroy, Vice President of Investor Relations

Thank you all for joining us this afternoon. If you have any additional questions or wish to follow up, please contact us. We'll end the call there. Thank you very much.

Operator, Operator

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