Earnings Call Transcript - NBR Q2 2023

Operator, Operator

Good day, and welcome to the Nabors Industries Ltd. Q2 2023 Earnings Teleconference. 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 William Conroy, Vice President of Corporate Development and Investor Relations. Please go ahead.

William Conroy, Vice President of Corporate Development and Investor Relations

Good morning everyone. Thank you for joining Nabors’ second quarter 2023 earnings conference call. Today, we will follow our customary format with Tony Petrello, our Chairman, President and Chief Executive Officer; and William Restrepo, our Chief Financial Officer, providing their perspectives on the quarter's results along with insights into our markets and how we expect 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.

Tony Petrello, Chairman, President and CEO

Good morning. Thank you for joining us today as we present our results and outlook. Our results demonstrate the value of our diversified business portfolio as the environment and Lower 48 remain challenging. Importantly, we continue to generate free cash flow and reduce net debt. For the second quarter, adjusted EBITDA totaled $235 million, a slight reduction compared to the prior quarter. This result principally reflects the decline in Lower 48 drilling activity across both gas and oil basins. Total results for the other segments were in line with our outlook last quarter. Our global average rig count for the second quarter declined by 11 rigs, all of which was attributable to Lower 48. In this macro environment, EBITDA in Drilling Solutions was up in line with our target. Combined, our Advanced Drilling Solutions and Rig Technologies segments accounted for 17% of total EBITDA. The EBITDA contribution from these two operations was more than $39 million, up 6% sequentially. This growth demonstrates continued client adoption of our technology. Notwithstanding the headwinds in the second quarter, we generated free cash flow. We achieved this performance even as milestone payments on the new build rigs in Saudi Arabia were greater than expected. Next, I will update the progress we made on our five keys to excellence. Our success executing these strategies drives value creation across our stakeholder base. The five elements include enhancing our performance and technology in the US, expanding our international business, advancing technology and innovation with increasing financial results, improving our capital structure, and our commitments to sustainability and the energy transition. Let me update each of these, starting with our performance in the US. Daily rig margins in our Lower 48 operation improved over the first quarter. We continue to realize sequentially higher daily revenue, reflecting our disciplined approach to pricing. Our reported Lower 48 daily rig margin reflects the excellent financial performance of the rigs. On top of that, our Drilling Solutions portfolio generates significant margins. I'll discuss this in more detail in a few moments. Now, I'll discuss our international drilling business. Daily margins in this segment increased in the second quarter by more than $1,000. Profitability improved in several international markets, primarily in the Middle East. I'll spend a few moments providing an update on the new build rig program in Saudi Arabia. The first two rigs deployed in the second half of 2022 continue to perform well. The third new build deployed during the second quarter, so we should see a full impact in the current quarter. We expect to deploy two additional new builds over the remainder of 2023. With their attractive financial returns and six-year initial contracts, these rigs have a growing positive impact on our international results. Looking ahead, construction of the previously awarded second tranche of five rigs is underway, and initial deployment should commence around the end of the year. I'll finish my remarks on the international business with the recent contract awards. In a tender in Algeria, we were awarded four rigs. These units are already in the country. We also received an award in Colombia, which will enable us to put a rig back to work there. These deployments of existing idle assets with attractive economics are material wins. We are looking forward to putting them to work. Next, let me discuss our technology and innovation. In our Drilling Solutions business, quarterly EBITDA increased sequentially to nearly $33 million, an all-time record. NDS growth in the second quarter was led by performance software. Now, I would detail the value that NDS generates in the Lower 48 market. The average daily margin in the Lower 48 from our Drilling and Drilling Solutions businesses combined was over $20,400 in the second quarter. Of that amount, NDS contributed more than $3,500 per day. That NDS total increased by 10% versus the first quarter. In the second quarter, the typical Nabors rig in the Lower 48 ran nearly seven NDS services. We saw an increase in installations of our SmartSLIDE, directional steering system, and our SmartNAV directional guidance software, installations of our SmartPLAN well construction engine also grew. In the second quarter, NDS revenue on third-party rigs accelerated, growing by 18% versus the first quarter. A core element of our strategy for NDS targets the third-party market. This allows E&P companies to realize the value of NDS technology across all the rigs they employ. As well, Nabors and third-party drilling contractors both generate economic benefits from these arrangements. Next, let me update our progress to improve our capital structure. We recorded several accomplishments in the second quarter. We generated free cash flow of $27 million. We also completed the redemption of our debt that was due in September. And finally, net debt improved in the quarter. I'll finish this part of the discussion with remarks on sustainability and the energy transition. Our three focus areas include improving our own environmental footprint, capitalizing on related opportunities, and investing in adjacent leading-edge companies. First, I will comment on some Nabors technologies focused on reducing our own emissions, as well as those on third-party rigs. We expect these products will make increasing contributions to margins in Rig Technologies. First is our PowerTAP module. This unit connects rigs to the grid. At the end of June, we had 19 modules running; over one-quarter of those were on third-party rigs. And we expect further growth in the third and fourth quarters. Second, the nanO2 diesel fuel additive improves engine performance and reduces emissions. We have already successfully treated more than 20 million gallons of diesel today on both drilling rigs and pressure pumping units. In the second quarter alone, that total increased by 18%. Quarterly revenue and EBITDA from our energy transition portfolio once again increased versus the prior quarter. Customer interest in solutions that reduce fuel consumption and emissions remain strong. We also completed additional testing on our new hydrogen injection technology. The goal is to reduce fuel consumption, as well as emissions more than proportionately. This system uses hydrogen generated economically at the well site, and testing results are positive. We continue to make progress towards commercialization, and the system may have applicability to transportation verticals, such as large highway trucks. Next, I would like to mention the second Nabors sponsor, SPAC. Earlier in July, Nabors Energy Transition Corp. II, which trades under the symbol NETDU, completed a $305 million initial public offering. The offering was more than five times oversubscribed. This corporate-sponsored SPAC is a critical component of our energy transition strategy. NETDU enables Nabors to participate in larger-scale synergistic AT opportunities. Now I will spend a few moments on the macro environment. The recent volatility in commodity prices and the many macro factors, which you all know well, have impacted operator economics and activity in the first half. Notwithstanding, oil price pullbacks during the quarter, today’s oil price is constructive. The outlook for gas is supported by several large LNG projects. These facilities are expected to come on stream over the next two years, and as their operations commence, they should drive growth in the export market for gas. Although, the stage is set for a promising 2024, some overhanging risks remain. These include continued interest rate increases by the Fed, looming concerns about a recession, and the potential for a hard landing and demand from China. On the positive side, there is the potential for an acceleration of economic activity and tighter global oil inventories. Now, I will spend a few moments on day rates. Our second quarter results with Lower 48 reflect the pricing environment we saw through 2022. More recently, in the second quarter, we saw a peaking of rates, particularly in the gas basins. Pricing came under pressure in the second quarter. I want to emphasize current day rates for our highest-spec rigs exceed all of the previous market highs. In this environment, we continue to prioritize revenue and margins, not market share, including the contribution from MDS; our performance against peers remains competitive. In the international market, we see prospects for increases in activity across many of our major geographies. As a group, operators in these countries remain committed to increasing their productive capacity. This increase in oilfield activity supports generally higher day rates and margin expansion, both in the Middle East and Latin America. Once again, we surveyed the largest Lower 48 clients at the end of the second quarter. This group accounted for approximately 44% of the working rig count. Our survey indicates the group's year-end rig count will be slightly lower than it was at the end of June. This result reflects a mix of operators suggesting increases in activity, decreases, and holding flat. Notably, a few operators signal they intend to rationalize activity as they complete acquisitions. The greatest portion, more than 40%, look to hold activity flat. Turning to our international markets. Several operators are planning increases in their activity levels. Beyond the five recent awards that we announced, we see the prospect for additional awards in our core markets in the Middle East and Latin America. Of course, we also have the five additional rigs in 2024 in Saudi Arabia. As you recall, these generate annual EBITDA of $10 million each. Let me wrap up my remarks with the following. In summary, in the current environment, Nabors remains poised to deliver year-over-year improvements in financial results, increasing free cash flow, and greater returns to our investors. Now, let me turn the call over to William, who will discuss our financial results and guidance.

William Restrepo, Chief Financial Officer

Thank you, Tony, and good morning, everyone. Our results in the second quarter reflected the trends in our global drilling markets. Our international segment was solid while our technology businesses also delivered sequential growth. These results helped offset the softening rig markets we had anticipated in the Lower 48 and Colombia. We expected lower drilling activity in the Lower 48 gas basins, but we must admit that the reductions in oil-related drilling we experienced were not anticipated. At the current level of oil prices, we would have expected to see increased drilling in all basins. Instead, we saw reductions in oil rig count. Interest rate increases by the Fed and several bank failures during the quarter resulted in increased costs of capital. The increased cost of financing led most of our smaller customers to curtail activity, but larger companies also cancel plans for expansion. These activity reductions were likely the result of concerns about potential recessions in the U.S. and in China and their impact on future oil demand. Despite the pause in the Lower 48, our operation in that market continues to generate superior economics with record margins and substantial cash flow generation. In the third quarter, drilling activity for the market has continued to weaken in the Lower 48. We are now forecasting sequential decreases in average rig count. But after a tough first half in the U.S., we are now starting to see signs that the market is bottoming with encouraging data points of incremental activity for the fourth quarter. On another positive note, we anticipate further strength in international markets, with early signs of growth developing into awards for incremental rigs. Drilling Solutions and Rig Technologies are also expected to grow sequentially. The revenue from operations for the second quarter was $767 million compared to $779 million in the first quarter, down 1.5%. The revenue in our U.S. Drilling segment fell by 10%, primarily due to rig count reductions in the Lower 48 market. This was largely offset by sequentially higher revenue in all of our other segments. Lower 48 revenue decreased by 10.8% as the current market conditions affected volume and pressure pricing in several regions. Despite these headwinds, daily revenue increased to $36,750, an increase of $300 over the prior quarter. Revenue from our International segment increased by $17.6 million to $338 million or 5.5% for the quarter. The improvement in our international drilling revenue was predominantly driven by the Middle East and Latin America. During the quarter, we deployed incremental rigs in Saudi Arabia and Argentina. Activity in Colombia partially offset these gains. As we anticipated, 3 rigs were idled in that country during the second and early third quarter. One of these to return to work for another client during the month of August. Revenue in our Drilling Solutions segment continued to grow in the second quarter, despite the drilling activity headwinds in the Lower 48. Third-party revenue increased 18% sequentially, accelerating over the growth rate in the first quarter and validating our focus on this market. International revenue also increased as we expanded our footprint in Latin America and the Middle East. In the Rig Technologies segment, total revenue grew driven by international sales of capital equipment and spare parts. Total adjusted EBITDA for the quarter was $235 million, $5 million lower than the first quarter at a 2.1% decline. U.S. Drilling EBITDA of $141 million was down by $15 million or 9.6%, driven primarily by the activity reductions in the Lower 48 market. Lower 48 drilling decreased by $14.5 million or 10.9% compared to the prior quarter. Our average rig count in the Lower 48 decreased by 11.7 rigs to 81.6% instead of the eight rig decrease that we expected. Daily rig margins came in at $16,900, up by slightly more than $200 in the second quarter. We exited the second quarter with 78 operating rigs. As mentioned, leading-edge pricing has peaked, and we are seeing reductions in various markets. Given the high cost of moving between basins, pricing has segmented geographically with the gas markets giving back some of the recent pricing gains. For the third quarter, we project our Lower 48 margin to approach $16,000 per day, reflecting some pricing erosion and increased compensation costs as we expect to carry excess labor in certain regional markets. We also anticipate a further reduction of 7 to 8 rigs in the third quarter. On a net basis, EBITDA from Alaska and the U.S. offshore market remained reasonably steady in the second quarter. However, in the third quarter, the combined EBITDA of these two markets should decrease approximately $7 million, primarily reflecting about 30 days of downtime on our M400 rig in the Gulf of Mexico for a top drive upgrade and the certification of several drilling components. Our international drilling segment delivered EBITDA of $98 million, an increase of $10 million. International rig count improved by about one rig with the start-up of the third standard new build in the second quarter and the start-up of our unit redeployed from the U.S. to Argentina. These increases were partially offset by the release of rigs in Colombia. Average daily gross margin came in at $16,276, an improvement of $1,050 over the prior quarter. We expect international average rig count in the third quarter to increase 1 to 2 rigs on a full quarter contribution from the third new build start-up in Saudi Arabia and the expected start-up of a rig in the UAE. We anticipate deploying the fourth Saudi new build rig in the third quarter, while the fifth new build is scheduled to start before the end of the year. We project third quarter international daily margins between $16,000 and $16,200. Drilling Solutions EBITDA continued on its upward trajectory, delivering $32.8 million, up roughly 3% from the first quarter. Gross margin for NDS held steady at 52%. We continued to see increased penetration of our advanced solutions, particularly in international rigs with the largest contributions to growth coming from performance software and our digitalization offering. We expect third quarter EBITDA for Drilling Solutions to increase again by approximately 3% over the second quarter level. NDS gross margin per day for the Lower 48 increased to just over $3,500, a $310 increase compared to the first quarter. This improvement took our combined drilling rig and Solutions’ daily gross margin to $20,407, a sequential increase of over $500 per day. Rig Technologies generated EBITDA of $6.4 million, a 29.4% increase versus the first quarter. The sequential increase was primarily driven by higher capital equipment sales and aftermarket parts revenue. Our energy transition business also contributed to the growth. For the third quarter, we expect Rig Technologies’ EBITDA to increase by about $3 million. Now turning to liquidity and cash generation. Free cash flow for the second quarter reached $27 million. Free cash flow was impacted by somewhat lower than expected adjusted EBITDA and higher than planned capital spending. Spending for the new build rigs in Saudi Arabia accounted for this variance as our supplier reached progress milestones earlier than we expected. It is worth highlighting that while our SANAD JV, as expected, consumed cash during the quarter, free cash flow for the remainder of our business reached almost $60 million. This incremental cash flow supported the redemption in June of approximately $52 million of notes due in September of 2023. At the same time, our revolving credit facility remained undrawn at the end of the second quarter. Net debt at the end of the quarter decreased to $2.07 billion. We expect third quarter free cash flow to reach approximately $80 million. Capital expenditures in the second quarter were $152 million, $12 million higher than we anticipated. This amount included investments supporting the SANAD new build program of $66 million. For the third quarter, we expect capital expenditures of approximately $125 million, including $48 million for SANAD new builds. For the full year, we are targeting $480 million, of which $180 million is to support the SANAD new builds rigs. Our target for 2023 reflects CapEx reductions, both in the Lower 48 and Colombia, and incremental expenditures for the four rigs recently awarded in Algeria. Despite the softness in the Lower 48 market and to a lesser extent in Colombia, we still expect to generate solid adjusted free cash flow for the full year and to continue reducing our net debt. For 2023, we are currently targeting free cash flow between $300 million and $350 million. With that, I will turn the call back to Tony for his concluding remarks.

Tony Petrello, Chairman, President and CEO

Thank you, William. I will now conclude my remarks this morning. First, let me summarize our second quarter. Our adjusted EBITDA reached $235 million. Free cash flow was $27 million. Our Lower 48 daily margins reached a quarterly record of $16,090, and when combined with MDS, that measure exceeded $20,000. NDS EBITDA set an all-time record of $33 million, and we reduced net debt. In the US, we remain committed to a disciplined approach to both pricing and expense control. With respect to our International segment, we have visibility to growth in our major markets, including the already planned commitments in Saudi Arabia. In NDS, our focus remains on increasing penetration on both Nabors rigs and third-party units. The international markets are also realizing performance benefits from the NDS portfolio, and we are optimistic for future growth in this segment. In Rig Technologies, for all of 2023, we expect a growing contribution, and we have high expectations for Rig Tech's energy transition initiatives. We have demonstrated capital discipline and are committed to continuing to do so. We expect this will result in continued improvements in our leverage and capital structure. I'm looking forward to reporting our performance in the coming quarters. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Waqar Syed with ATB Capital Markets. Please go ahead.

Waqar Syed, Analyst

Thank you for taking my question. Tony, William, I believe you mentioned that the rig count at Q2 end was 78 in the US. Is that the case? What's the number right now?

William Restrepo, Chief Financial Officer

75 for current.

Waqar Syed, Analyst

75. And so for Q4, you mentioned that you're seeing some incremental demand. Are you able to quantify the level of incremental demand? And what type of customers are generating that incremental demand?

Tony Petrello, Chairman, President and CEO

So in terms of customers, I mean, the thing that has happened is we've seen a rotation of our customer base. Again, when we came out of COVID, as you know, there was very strong demand for gas rigs, particularly in the Haynesville area. And that, in fact, our percentage of gas rigs in the company as a whole was a little over 30%, which is a little higher than what the market was. And that change in fact drove the downturn in the sense that East Texas and South Texas both drove the decline followed by the Marcellus. And with that changing now, our mix of private versus public has in fact changed. And the interesting thing is that if you look at December's number versus our June exit number in terms of the non-private customer base, you'll be surprised here in the oil basin. Actually, our rig count was actually up. So given that, we think with the change in the private customer base coming out of the privates and people relocating, we are set up in the fourth quarter for an upturn compared to the third quarter. But in terms of specifics, then I can't give you some specifics other than the fact that the mix has changed. The commodity price is strong. And based on the reaction, we're feeling a little more positive about the fourth quarter, but we're not putting a number yet on the magnitude of the upturn for the fourth quarter.

William Restrepo, Chief Financial Officer

So we're getting a huge acceleration in requests for pricing and rigs for the fourth quarter. But not all of that converts into actual rig count. So at this point, it's a little bit too early to give you the data points, but we're just feeling good about the fourth quarter.

Waqar Syed, Analyst

Sure. And then from a margin perspective, margin typically kind of lags and you really get the price discovery and activity actually starts to pick up. What's your view on margins? And when do you think margins would likely bottom and perhaps roughly around what level?

Tony Petrello, Chairman, President and CEO

Well, when you look at pricing, I mean, I think the good news is that pricing has been relatively well behaved as you can see. And as we mentioned in our prepared remarks, the leading-edge rates have been in the low to mid-30s. In fact, we recently signed several contracts squarely in those ranges just last week. So the comment I'm making is that, if you look at the leading-edge rates, those are actually above our revenue per day numbers in the second half of 2022, and so, which everyone was very excited about. So we think if that all holds, then you should see pretty good traction in terms of the margins holding up as we're moving forward. And, yes, so that's what I would say.

William Restrepo, Chief Financial Officer

So I'll make a comment because you mentioned price discovery as the rig count increases. I think price discovery has already been quite prevalent in our fleet already because remember, we didn't have as much term as we did in the past. So we've been seven months now living in this environment of lowering and decreasing rig count, and pricing has held up pretty steady in the oil basins that we care about. So what you see now is a fair reflection of what has already happened in the gas basins. And we do feel there is still some pain to absorb as more contracts roll into slightly lower day rates than we have today. But you saw what we forecast for the third quarter. A part of that is cost, but there will be some pricing deterioration in the third quarter for the fleet as an average, but it's not as much as you would expect.

Waqar Syed, Analyst

Fair enough. One last question, what is the timing for the new contract of four rigs in Algeria to start generating revenue?

William Restrepo, Chief Financial Officer

Early 2024, we'll start deploying those rigs.

Waqar Syed, Analyst

Great. Well, thank you very much.

William Restrepo, Chief Financial Officer

Thank you, Waqar.

Operator, Operator

Next question comes from Kurt Hallead with Benchmark. Please go ahead.

Kurt Hallead, Analyst

Hey, good morning everybody.

Tony Petrello, Chairman, President and CEO

Good morning, Kurt.

Kurt Hallead, Analyst

So I just want to maybe start off on the international front, right? You referenced four rigs in Algeria. Obviously, we have a lot of incremental updated color on the Saudi deployments. So, I guess, is it safe to assume that those Algeria rigs will start to start on their projects in the fourth quarter? Or is that more of a 2024 event? Just trying to get a sense as to what the...

Tony Petrello, Chairman, President and CEO

Yes, I think it's looking like the first quarter of 2024 right now. If you review the prepared remarks, you can see we have great visibility regarding the international rig count. Starting from our second quarter average of 77, with two additional Saudi rigs coming online this year and five more anticipated next year due to accelerated deliveries, that totals to seven in Algeria. We have two secured in South America and Latin America, as well as the Middle East, bringing the total to 13. We also have identified opportunities for at least another half dozen rigs that we're pursuing. So, with 13 rigs added to the 77, this should generate positive momentum over time in 2024. This situation supports our confidence and makes us feel good about 2024. The key takeaways from this quarter are that our margins in the U.S. demonstrate the strength of our position and the quality of our fleet. NDS reached an all-time record in a challenging market, and we can see the early signs of international opportunities.

Kurt Hallead, Analyst

That's great insight, Tony. Following up on the free cash flow situation, it's slightly lower than what was anticipated moving from the second quarter to the first quarter. So, William, as you consider the progression from here, how much of the free cash flow increase should we expect? It seems like you will need to generate around $150 million in free cash flow during the fourth quarter to reach that $300 million target. How much of that is expected to come from working capital?

William Restrepo, Chief Financial Officer

The fourth quarter is showing improvement, so we're not relying as much on working capital as we initially thought. Part of the cash flow is coming from working capital, while some is from improved results and minimal interest expenses in the fourth quarter. We're currently targeting around $150 million for free cash flow this quarter. However, there is some uncertainty regarding capital expenditures due to our supplier in the Middle East and SANAD previously missing milestones. Unexpectedly, our supplier has started to meet these milestones, which is positive as it allows us to move faster. We're adjusting our capital expenditure estimate from about $390 million to between $440 million and $450 million, with a possible $20 million variance due to SANAD. This means we'll have rigs sooner, which is beneficial. In Algeria, we're considering bringing some idle rigs back to market, but this will require additional capital expenditure. This is not part of a tender; instead, clients have directly requested this, leading to a negotiated deal with strong returns. We haven't made a final decision on these contracts, but I have factored in the necessary capital expenditure for such opportunities in our forecast. Consequently, the expected free cash flow is projected to decrease from the $400 million range to between $300 million and $350 million, primarily due to capital expenditures for new opportunities and SANAD, which had not been accounted for in the previous quarter.

Kurt Hallead, Analyst

Great. I appreciate that incremental color there as well. And then just maybe one last just quick follow-up here on. You mentioned pricing, you mentioned the range, low to mid-30s. That seems pretty consistent with what the commentary was through the course of most of the second quarter. So it doesn't appear like there's really much incremental price degradation. So when you think about the guidance on your cash margins coming down, has that been more the fact that you're keeping people around, or how would you attribute that $1,000 a day decrement? Is that more of the labor, or is it more the pricing?

Tony Petrello, Chairman, President and CEO

There's clearly some turnover happening. For instance, as I mentioned earlier, our rig count among the major and large public operators has remained stable, but we've had to relocate four rigs from other markets to West Texas. These relocations were funded by the operators, but they inevitably lead to turnover. Additionally, even in West Texas, we've managed to keep the rig count stable, but operators are focusing on optimizing their rigs in this market, which also contributes to turnover. So yes, there is some inconsistency in these figures, and that's reflected in our estimates as well.

Kurt Hallead, Analyst

Okay, that’s great. Thank you.

Tony Petrello, Chairman, President and CEO

Thanks Kurt.

Operator, Operator

Our next question comes from Dan Kutz with Morgan Stanley. Please go ahead.

Dan Kutz, Analyst

Hey. Thanks. Good morning.

Tony Petrello, Chairman, President and CEO

Good morning Dan.

Dan Kutz, Analyst

So, I'm looking at kind of the first half adjusted EBITDA results and the third quarter guide. I think if my math is right, that kind of would put you at somewhere in the ballpark of $700 million of adjusted EBITDA through the third quarter. I think in the past, you guys had kind of laid out a $1 billion target for this year. If there's some growth in the fourth quarter, it seems like you guys might still get close to that number, but just wondering if you could help us at all with how you would frame any updates to that target in the full year?

Tony Petrello, Chairman, President and CEO

I'll address the first part regarding NDS. As you know, we initially targeted $150 million for the year for NDS. However, at this stage, I would say that target seems unlikely due to the challenges we've faced in the first two quarters, and we anticipate those will continue into the third quarter. On a positive note, we're actually seeing strong growth in NDS, especially with international penetration. In the U.S., we've experienced significant third-party adoption, with a quarter-on-quarter increase of 18% in our third-party metrics. Additionally, we've made some strategic decisions in collaboration with partners like Corva and Halliburton. These factors contribute to our hope that NDS, which was intended to compensate for declines in rig counts, will come through. While we’re hesitant to provide a specific revised number now due to the ongoing positive developments, reaching the $150 million target does appear unlikely. With that said, I'll let William discuss the macro $1 billion number you mentioned.

William Restrepo, Chief Financial Officer

$300 million in the fourth quarter is also unlikely. However, although we have seen a sharp reduction in rig count in the Lower 48 and probably 10 to 15 rigs short of where we thought we could be. At this point, we are being caught a little bit by surprise on the international market, not only by the awards but by recent activity levels, pricing increases. And so we are pretty happy with what we're seeing on the drilling side on the international. Some of that downdraft that we're seeing now in the Lower 48 is going to be offset by the international markets. So at this point, I mean, what I can tell you is I don't see a path to $300 million, but I do see a pathway for a fairly robust fourth quarter.

Dan Kutz, Analyst

Understood. That makes a lot of sense and is very helpful. To wrap this up, you have already provided us with the necessary information. Referring back to the third quarter Lower 48 activity guide, you mentioned that you exited the second quarter at 78, and you're currently at 75, with a guide suggesting an average of 74 to 76. This indicates to me that the lowest point you anticipate might still hover in the low 70s. My main question is, where do you expect the Lower 48 rig count to bottom out according to the guidance you've provided?

William Restrepo, Chief Financial Officer

I'll let Tony address that.

Tony Petrello, Chairman, President and CEO

I'm hesitant to provide specific numbers. I believe the range we've discussed speaks for itself, and all my previous comments support that. We are currently at 75, and I expect to end the quarter a bit higher. While there may be some further decline, I feel confident about the current range.

William Restrepo, Chief Financial Officer

And we think, given what's going on with our clients, the conversations with our clients, the price of oil right now and the trajectory of production. I think the whole market is, I think, is getting pretty close to a bottom, if not already there.

Tony Petrello, Chairman, President and CEO

You saw that in the prepared remarks regarding the survey and everything. This reflects the recent oil price changes. When you consider that, I believe it gives us confidence in a rebound in the fourth quarter.

Dan Kutz, Analyst

Got it. Understood. That makes sense. Thanks a lot. I’ll turn it back.

William Restrepo, Chief Financial Officer

Thank you, Dan.

Operator, Operator

Our next question comes from Keith Mackey with RBC Capital Markets. Please go ahead.

Keith Mackey, Analyst

Hi, good morning. First, I wanted to start on the international day margins. So they've come up nicely in the last several quarters. The Q3 guide looks like it's flattish from Q2, but what is the right way to think about the international day margins from here? Is it really take that $16,000 and layer on the incremental impact of the SANAD rigs coming in at what you've talked about previously as a $10 million per year EBITDA rig number, or is there some other nuances we should be thinking about in that day margin as well?

William Restrepo, Chief Financial Officer

So Keith, that's a very good question, actually. We do expect to have a large number of Saudi rigs with above-average margin per day active in 2024. Right, and progressively from here to year-end and then over 2024. So as we add those rigs, we would expect our margins to go up. Now, obviously, new rigs coming in come with costs, shakedown periods, and things like that. So it's not like an automatic that you could just turn the switch and get those higher margins on day one. But that is a trend you will be seeing. And the other rigs that we're talking about are also in a pretty good range of margin per day. So if anything, we see some upward traction from here to year-end in terms of our margins in the international market and certainly increasing some more in 2024.

Keith Mackey, Analyst

Okay. That's helpful. And William, just for my clarification, the incremental Saudi rigs you're talking about, are there additional Saudi rigs on top of the SANAD rigs coming in or that?

William Restrepo, Chief Financial Officer

There's more tenders. And obviously, we could participate in those. But we haven't really pushed very hard to penetrate those other pockets of the Saudi market. The unconventional market, specifically, there's a lot of tenders out there. So there's nothing in our forecast today for wins in that particular region. I think that would be quite capital intensive if we were to pursue those markets. But yeah, there's incremental activity in the Saudi that we haven't really put into our forecast at this point.

Keith Mackey, Analyst

Understood. Thank you. And Tony, in your prepared remarks, you talked a little bit about the impact of recent customer consolidation causing some softness in industry demand for rigs. Can you just talk about a little bit about how you think that dynamic will play out going forward? Do you think there will be an outsized amount of customer consolidation relative to driller consolidation? And do you think that will cause any particular impacts on your bargaining power, so to speak, going forward, or is it really just going to be a one-off dynamic?

Tony Petrello, Chairman, President and CEO

Well, this is the perennial of March. I think customer consolidation will continue, given the pressure that they all face to be capital efficient and minimize or maximize their use of cash. And so I think that will continue at a pace probably more so than on the oil field service side. And the bargaining power has always been uneven and will continue to be. But the consolidation also reads the fact that once these companies get larger, they also look for efficiency; they also look for high-grading their operations, all things like that, which all drive them to higher quality expectations for their providers. And I think that actually plays into our hands. And so our mission is to help them achieve that new consolidation using us as a platform. So we try to turn it into a benefit rather than just the liability.

Keith Mackey, Analyst

Awesome. Thanks very much.

Tony Petrello, Chairman, President and CEO

Thanks, Keith.

Operator, Operator

Our next question comes from Arun Jayaram with JPMorgan. Please go ahead.

Arun Jayaram, Analyst

Hey, good morning, gentlemen. Tony, I was wondering if you could discuss some of the competitive dynamics in the Middle East. And just generally, how are you seeing things kind of play out from a potential supply standpoint as you participate in some of those tender activities?

Tony Petrello, Chairman, President and CEO

I missed the question. What was the question?

Arun Jayaram, Analyst

The competitive landscape.

Tony Petrello, Chairman, President and CEO

Sure. Competitive landscape. Yes. So obviously, the past 10 years, you've seen a real rise in the role of the Chinese drilling contractors in the marketplace there. Their role historically was segmented to more commodity drilling, but they've actually gotten better as well. So they have become a player. And you also see the rise of local national companies either affiliated with NOCs or just locally owned or owned by sovereign funds. And so that has affected the landscape and it has become, in that sense, more competitive. And I think Nabors being there already, I think we've been in a great position to continue to compete against all those forces, but obviously, it has gotten more competitive. And our mission is to differentiate ourselves against all those people, which I think one of the reasons why NDS has become so attractive as people really want the technology aspect of what we're providing, and that is a true difference against all those people. Interestingly, virtually everyone I just mentioned to you is actually a Nabors customer directly through either through Canrig or indirectly through NDS. In other words, we're actually helping them provide services on their rig, or we're actually providing parts and things like that, either capital equipment or other things. So it's kind of an interesting dynamic. But I think that's why Nabors, I think, is unique in that international workplace with all those competitors. I think other people competing head-to-head with those people will have more challenges than what we have today.

Arun Jayaram, Analyst

Great. And just a follow-up. Tony, about a month ago, you announced an agreement with Halliburton on the automation side. I was wondering if you could maybe elaborate on that agreement, what it means for Nabors. It looks like you're deploying some of this technology in interactions. So I'd like to get your thoughts on the implications of that.

Tony Petrello, Chairman, President and CEO

Sure. Well, like I mentioned before, is that growth of the third-party marketplace is something is really important to us as well as offering our clients more streamlined solutions, both in our rigs and third-party rigs. That transaction like the corporate transaction is part of that, and I'll let Subodh here who actually negotiated it give his additional comments on it.

Subodh Saxena, Chief Technology Officer

Thank you, Tony. One of the key aspects of our third-party strategy is to collaborate with OFS customers involved in LSTK projects. These customers often rely on low-cost drilling contractors who lack technology. Our automation and digital solutions enable them to improve drilling efficiency and gain visibility into rig performance, leading to better outcomes and more effective management of their air fees. Our work with Halliburton and other OFS customers focuses on empowering them through automation and digital workflows to enhance AFE management by reducing drilling issues and maximizing efficiencies. Our partnership with Halliburton has been very successful, and we plan to expand these collaborations over the next six to nine months.

Arun Jayaram, Analyst

Thanks a lot.

Tony Petrello, Chairman, President and CEO

And by the way, those partnerships don't just include OFS companies; they actually include other drilling contractors as well who are interested in taking advantage of the same benefits that you spoke about. Which again is the reason why I think compared to other players in the international arena, we are a differentiated offering compared to other people just going in there and trying to compete head-to-head again local people. I think that basic strategy is subject to a lot of pushback compared to what we're trying to do.

Arun Jayaram, Analyst

Great. Thanks Tony.

Operator, Operator

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

John Daniel, Analyst

Hi guys. Good morning. Thank you for including me.

Tony Petrello, Chairman, President and CEO

Good morning, John.

John Daniel, Analyst

My first question is related to the inquiries that you're getting for Q4. Can you characterize whether that's well-to-well work, short-term contracts, long-term contracts? Any color on the duration of the work that would be behind it?

Tony Petrello, Chairman, President and CEO

I'll let Travis comment on it.

Travis Purvis, Senior Vice President

Yeah, John, good morning. It's Travis. Yeah, mostly, I would say, medium to longer term. I mean, there's a lot of short-term requests as well. So, obviously, we're going to pick the ones that make the most sense for the business and we're going to put those rigs to work with those partners.

John Daniel, Analyst

This may be a silly question, but when commodity prices fall, everyone tends to seek price reductions, and one of the first considerations is the day rate. Could you explain how price concession requests differ in the straight rig market compared to NDS, particularly regarding their views on technology and value?

Tony Petrello, Chairman, President and CEO

Yeah, Travis?

Travis Purvis, Senior Vice President

Yes, John, I'll just stay on the subject. I mean, obviously, yeah, we're having some price discussions with our customers. But when we look at our offering and our super specs, I mean, our rig platform and our NDS hand-in-hand. I mean, that's what drives the top quartile outcomes of the high performance that we get on our rigs. So when we have those conversations, it's not necessarily a discrete rig day rate discussion or an NDS discussion. We it's hand in hand.

John Daniel, Analyst

Right.

Travis Purvis, Senior Vice President

We've been very successful in terms of holding price and showing that value. Let me give you an example, John. In the last quarter alone, we've increased over 10% and as high as 20% in some of our basins in terms of footage per day. So when you think about well delivery for our customers, we are driving great outcomes for them, and that's high value to our customers. So we stand on pretty solid ground in terms of the pricing that we get for our rigs.

John Daniel, Analyst

Okay. It's very helpful. Thank you.

Travis Purvis, Senior Vice President

Yeah. Thanks, John.

Tony Petrello, Chairman, President and CEO

And, John, you never asked a stupid question. In fact, you're the one guy, every time I read what you write, I learn something. So I appreciate all your questions.

William Conroy, Vice President of Corporate Development and Investor Relations

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

Operator, Operator

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