Nabors Industries Ltd (NBR) 2024 Q1 法說會逐字稿

Good day and welcome to the Nabors Industries first quarter 2024 earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to introduce William Conroy, Vice President, Corporate Development and Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you for joining Nabors' first quarter 2024 earnings conference call. Today we will follow our customary format with Tony Petrello, our Chairman, President, and Chief Executive Officer, and William Restrepo, our Chief Financial Officer, providing their perspectives on the quarter's results along with insights into our markets and how we expect Nabors to perform in these markets.

In support of these remarks, a slide deck is available both as a download within the webcast and in the Investor Relations section of nabors.com. Instructions for the replay of this call are posted on the website as well.

With us today in addition to Tony, William and me are other members of the senior management team. Since much of our commentary today will include our forward expectations, they may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may vary materially from those indicated or implied by such forward-looking statements.

Also, during the call, we may discuss certain non-GAAP financial measures such as net debt, adjusted operating income, adjusted EBITDA, and adjusted free cash flow. All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA as that term is defined on our website and in our earnings release.

Likewise, unless the context clearly indicates otherwise, references to cash flow mean adjusted free cash flow as that non-GAAP measure is defined in our earnings release. We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures.

With that, I will turn the call over to Tony to begin.

Good afternoon. Thank you for joining us today as we present our results and outlook. Total adjusted EBITDA exceeded our expectations in the first quarter. Daily margins in the US Lower 48 remained strong and our two technology segments performed well.

I would like to start my detailed remarks with comments on our international markets. The strength of the international expansion continues to surprise us. It's been over a decade since I've seen an environment as robust as this one. We have a unique opportunity to strengthen our international footprint.

On our previous conference call, I mentioned we had scheduled the deployment of seven international rigs in 2024, three in Saudi Arabia, and four in Algeria. In the first quarter, we started two of the rigs in Algeria. And so far in the second quarter, we started the third Algeria unit. That's the update on our previously expected deployments.

In addition, we have also been successful with recent negotiations for three rigs in Argentina. We expect to have those to go to work in 2024. That leaves a total of six more rigs slated to start up over the remainder of 2024.

The third Argentina rig should commence operations in early 2025. I would like to point out that all three of these awards in Argentina have long-term contracts with favorable pricing and high rates of return. Additionally, we have been shortlisted for three rigs to go to work in the Middle East. These rigs would also have multi-year term contracts with favorable economics.

In the Lower 48, industry activity has been disappointing. We had hoped for a moderate increase during the first quarter. From beginning to end, the Lower 48 industry land rig count declined by four rigs. The average Lower 48 industry count was essentially flat.

Nonetheless, leading edge pricing for the high-performance technology focused rigs in the Lower 48 was stable. This helped support our own daily rig margin. Once again, our expense control in the Lower 48 was outstanding. Daily operating expenses declined.

In the first quarter, total adjusted EBITDA for Nabors was $221 million. Our global average RigCLOUD grew by four rigs. This increase was spread across our operations. Our drilling solutions and rig technologies segments together generated EBITDA of $39 million. Combined, they accounted for more than 70% of total EBITDA in the quarter.

Next, let me make some comments on five key drivers of our results. I'll start with our performance in the US. Daily rig margins in our Lower 48 rig fleet exceeded our expectations. The market for our rigs remained strong. At slightly above $16,000, daily margin in the first quarter was higher than we expected. Revenue was better than our projections, expenses declined.

I am pleased with this performance. These results demonstrate our team's ability to execute at an impressive level in this market environment. We are working diligently to maintain, if not improve, this execution. The industry rig count was essentially flat in the first quarter. Our own RigCLOUD increased, but it was below our target. As we have said before, pricing discipline remains our priority.

Our reported Lower 48 daily rig margin reflects the financial results of just our drilling rigs. The joint solutions portfolio, NDS, generates significant margin on top of that. I'll discuss this in more detail in a few moments.

Now, I'll review our international drilling business. As I said earlier, this international market is the strongest we have seen in a decade. This is providing us with multiple high-return opportunities to reactivate rigs. We see tangible evidence in tendering and negotiating activity, rig awards, and deployments.

During the first quarter, we deployed two rigs of our four rig award in Algeria, a third rig has since started. We have also been awarded three incremental rigs in Argentina. These awards across multiple operators should commence operations around the end of the year, two in the fourth quarter and one in the first quarter of 2025. All three of the rigs are currently idle in the US. We plan to transfer them to Argentina. This redeployment is an excellent use of our existing assets.

In Saudi Arabia, the [sixth] newbuild is currently finishing its acceptance procedure. It should begin drilling imminently. Two more will be deployed this year. Another five are scheduled for 2025, and the final two of the existing awards should start in 2026.

Finally, we were shortlisted for three rigs in a large market in the Middle East. The rigs that we bid are already in-country. This opportunity would cement our position in this important geography. With these developments, it is clear our prior optimism was well placed. I am confident we will report even more progress on this front.

For the first quarter, daily margin in our international segment was impacted by labor unrest in Colombia involving four rigs. Looking forward, we expect deployments and operational improvements to generate daily margin of approximately [$17,000] by the end of the year.

Let me finish my remarks on our international business with a few comments on our activity in Saudi Arabia. Several offshore drilling contractors in the Kingdom have announced a temporary suspension of operations on a number of rigs. As for SANAD's outlook, we are bullish. Aramco's development in the natural gas resource is expanding. Its focus on the unconventional land reserves is increasing.

SANAD's fleet overwhelmingly targets gas. Moreover, the recent new build awards are for rigs capable of drilling for gas. International expansion for Nabors still has [legs]. Beyond our announcements today, we see prospects for additional rigs in international markets. These include units in Kuwait; more opportunities in Algeria; rigs in Argentina, Mexico, and elsewhere in the Eastern Hemisphere.

Next, let me discuss our technology and innovation. NDS's revenue grew sequentially on Nabor's own Lower 48 rigs and on international rigs. This growth was offset by a decline in Lower 48 third-party market. Overall, NDS EBITDA exceeded our expectations. From a product line perspective, managed pressure drilling and RigCLOUD drove the segment's first quarter performance.

Next, I will detail the value that NDS generates in Lower 48 market. The average daily margin in Lower 48 from our drilling and drilling solutions businesses combined was [$19,440] in the first quarter. Of that, NDS contributed more than $3,400 per day. This incremental margin is significant. We generate this margin with limited capital spending so the returns are impressive.

In the first quarter, penetration of NDS' services on Nabors rigs in the Lower 48 remained high. On third party rigs, we saw growth in SmartSLIDE directional steering, our [revenue], six-foot mitigation, and our SmartSLIDE SmartNAV Directional Guidance software.

NDS' first quarter results demonstrate the value of its broad portfolio and its focus on both Nabors owned and third-party rigs. Looking ahead, we are making significant inroads with smaller contractors interested in adding Nabors solutions to their portfolios. At the same time, international clients are increasingly recognizing the performance improvements in the US. They, too, are accelerating their adoption of Nabors' advanced technology.

Next, let me make some comments on our capital structure. Early in the first quarter, we redeemed the notes that were due in 2024 and 2025. We accomplished this with the proceeds from the 650 million of notes issued at the end of 2023. Our next maturity is in 2026.

As we look ahead, our first priority for free cash flow remains reducing net debt and improving our credit ratings. I'll finish this part of the discussion with remarks on sustainability and the energy transition.

Our energy transition initiatives, as you know, focus on improving operational efficiency and reducing emissions intensity. These technology solutions made a significant contribution to our rig technologies segment results.

The most impactful remains our PowerTAP module. This unit connects rigs to the grid, greatly reducing diesel fuel consumption as well as [related] emissions. With the appropriate availability of grid power, operators can realize cost savings by employing PowerTAP.

In this significant development, the first PowerTAP unit deployed outside the US is running in Argentina. This unit incorporates a frequency converter for international applications. We have additional units under construction, including two destined for international clients. Interest in our energy transition portfolio remains strong in the US. On top of that, we see growing opportunities overseas.

Next, I will discuss the rig pricing environment. First quarter results for our Lower 48 operation reflect continued stability in leading edge market prices. Our approach to the Lower 48 market is to exercise pricing discipline and support activity levels while delivering superior value to our customers. NDS is an integral element in this approach.

In the international market, we have growing visibility to additional near-term rig deployments. Pricing on these pending deployments is attractive, reflecting the strong conditions we see across the international domain.

We surveyed the largest Lower 48 clients at the end of the first quarter. Our survey covers 17 operators, which accounts for approximately 45% of Lower 48 working RigCLOUD at the end of the quarter. The latest survey indicates this group's year-end 2024 rig count will be modestly lower than the total at the end of the first quarter, essentially all the projected decline relates to announced merger activity.

From our past experience, combined activity usually drops immediately after the merger is completed. Over time, though, we have generally seen a return to prior activity levels for the combined companies. We anticipate the same behavior by our customers following this latest burst of mergers.

Aside from the mergers, we believe the clients remain cautious about their plans for 2024, particularly in gas-focused basins. Our view of the international market is bullish. With the international additions now in hand, we would increase our international RigCLOUD for all of 2024 by nine rigs. That's up by two versus the seven we had previously announced. So seven is now nine for 2024. And for 2025, we have six expected deployments, including five in Saudi Arabia and one in Argentina. The prospective Middle East rigs would add three on top of that 2025 total.

Next, I will share other notable recent highlights and accomplishments in addition to the rig awards in Argentina. Canrig received an order from an existing client in the Middle East for six land drilling packages. This order demonstrates Canrig's outstanding reputation in the international land markets. It also evidences the wide breadth of the international expansion. And in the Lower 48, a drilling contractor has begun standardizing its entire fleet to Nabors' RigCLOUD platform. This development is a significant endorsement of RigCLOUD, and it clearly demonstrates the value of Nabors' third-party strategy.

Let me finish my remarks with the following. Our performance in the first quarter exceeded our expectations. We are making meaningful progress capturing the significant opportunities in our international markets and for our advanced technology.

Now, let me turn the call over to William, who will discuss our financial results.

Thank you, Tony, and good afternoon, everyone. During the first quarter, our global markets continued to diverge with a strong expansion driving international markets, while the US maintained its flat to downward trend. Our international RigCLOUD improved as we deployed rigs in Saudi Arabia and Algeria. At the same time, we were awarded three rigs in Argentina and an another tender in the MENA region, pending finalization of the technical review, we were successful commercially on an additional three rigs.

The US market, somewhat disappointed, with fewer rigs added than we targeted. But pricing was higher than we anticipated. And despite the weakening industry RigCLOUD in the Lower 48 market, drilling solutions and rig technologies beat our forecast.

Revenue from operations for the first quarter was $734 million, compared to $726 million in the prior quarter, a 1.1% improvement. US drilling revenue increased by 2.3% to $272 million, primarily driven by additional activity in Alaska. Lower 48 drilling and offshore drilling also contributed to the increase. Our average rig count in the Lower 48 was 71.9, an increase of 1.6 rigs sequentially. Average daily revenue held at approximately $35,500.

Revenue from our international drilling segment was $349 million, a 1.9% improvement over fourth quarter results. This increase was driven by a newbuild startup in the fourth quarter and operational improvements in Saudi Arabia as well as deployments of the first two of four rigs awarded in Algeria.

Revenue from Nabors Drilling Solutions declined sequentially by $1.5 million due to lower activity in the US Lower 48 market. Despite flat average industry RigCLOUD in the US, we grew NDS sales on Nabors rigs by 3.6%. We also expanded our presence in international markets by almost 2%. Rig technologies revenue decreased by $9.1 million or 15.4%, following strong seasonal year-end deliveries.

Turning to EBITDA and the outlook. Adjusted EBITDA for the quarter was $221 million, compared to $230 million in the fourth quarter. EBITDA in US drilling increased to $120 million from $118 million, a 2% gain compared to the prior quarter, driven by higher activity in Alaska and higher Lower 48 RigCLOUD. However, a slight reduction in daily margins somewhat offset these gains.

Lower 48 drilling EBITDA decreased slightly. The Lower 48 results demonstrated the ongoing trends of the fourth quarter. Average rig count of 71.9 reflected an increase of nearly two rigs from the prior quarter in a market that is continuing to exhibit high levels of activities churn.

Ultimately, the pending E&P mergers should result in a healthier and more sustainable Lower 48 environment. However, in the short term, these consolidations have put pressure on the total RigCLOUD as operators absorb their acquisitions. In addition, gas focused drilling has continued to weaken. We anticipate our RigCLOUD in this market to average approximately 70 for the second quarter.

The leading-edge price environment continues to be stable and our average daily revenue held up well. Our efforts to limit costs remain effective. Average daily rig margin of $16,011 was a moderate $229 below the prior quarter. For the second quarter, we project our average daily rig gross margin at approximately $15,500.

With leading-edge revenue per day in the low to mid $30,000 range, the expected sequential reduction reflects repricing of renewals.

On a net basis, Alaska and the US offshore businesses performed better than we anticipated. In the first quarter, the combined EBITDA of these two operations was $21.4 million, an increase of 2.7 million. This improvement was primarily driven by activity in Alaska. Combined EBITDA for Alaska and US offshore in the second quarter should be similar to first quarter levels.

International EBITDA decreased by $3 million or 2.9% to $102.5 million. Average RigCLOUD increased to [81] in the first quarter from [79.6] reflecting the start-up of a new build in Saudi Arabia and the commencement of two rigs going back to work in Algeria late in the quarter. The gain in RigCLOUD was offset by a $600 deterioration in daily margin, reflecting a union strike in Colombia.

During the quarter, we saw the commencement of recertification work for several rigs recently renewed in Saudi Arabia. This process normally results in some lost revenue. For the second quarter, we project International Average RigCLOUD to increase between two to three rigs driven by the full quarter impact of the recent additions in Saudi Arabia and Algeria, as well as start-up for incremental rigs in those countries.

For average daily gross margin, we are targeting approximately $15,700. The anticipated modest decrease as compared to the first quarter primarily reflects an increase in lost revenue from continued recertification activity in Saudi Arabia.

Drilling Solutions. Adjusted EBITDA declined by 7.9% to 31.8 million in the first quarter. The fourth quarter of last year was particularly strong with several projects that came to an end late in the year. Gross margin for NDS was almost 52%. While we saw some softness in the lower 48, we continue to see increased penetration in international markets internationally, NDS EBITDA grew by over 7% sequentially.

We expect second quarter EBITDA for drilling solutions to come in essentially in line with the first quarter. Rig Technologies generated EBITDA of $6.8 million, a $2 million decline versus the fourth quarter, mainly related to lower capital equipment and parts sales. Normally, these items are seasonally strong at the end of the year. We expect Rig Technologies EBITDA in the second quarter to increase by approximately $2 million.

Now turning to liquidity and cash generation. In the first quarter free cash flow as we anticipated was slightly above breakeven. As I had mentioned previously, the first quarter for Nabors has the heaviest cash outflows.

In the first quarter, we incur several annual payments, including property and other taxes as well as employee incentive bonuses. Together, these payments, which did not recur during the remainder of the year, amounted to approximately $23 million. In addition, interest expenses on our senior notes are higher in the first and third quarters of the year.

Capital expenses of $112 million, including $35 million for the SANAD new build program were a bit lower than forecast. But collections of customer receivables and certain large international markets were sluggish and offset the lower CapEx. For the second quarter of 2024, we expect capital expenditures of approximately $190 million, including roughly $70 million for SANAD new builds.

We had expected the first quarter to be the high watermark for CapEx for this year. However, some of the spend anticipated to occur in the first quarter for Latin America, Saudi Arabia and the US started lower than we had targeted.

For 2024, we anticipate full year capital spend to total approximately $590 million. The increase as compared to 2023 reflects higher maintenance CapEx and increased international RigCLOUD and preparation expenditures for a significant number of international awards from recent tenders and negotiations.

Although CapEx from these recent awards should weigh on our free cash flow for 2024. We expect these long term contracts to add over $50 million in EBITDA over a full year. In addition, Saudi Arabia EBITDA is expected to increase by another $50 million to $60 million per year as the newbuild program proceeds.

In concluding, I would like to point out that in addition to the international rigs we're planning to deploy in 2024 and 2025. We still have a number of open international tenders and active negotiations. It's increasingly evident that the remarkably robust international segment should continue to provide us with many more opportunities to redeploy existing rigs.

These are coming with high returns and with very short payback periods. That being said, we intend to remain prudent. We will remain focused on generating free cash flow and reducing our net debt.

With that, I will turn the call back to Tony for his concluding remarks.

Thank you, William. I will now conclude my remarks this afternoon. As we look ahead, we see significant opportunities from today. We have six rig startups over the remainder of 2024. More are on tap for 2025. This group should contribute significant incremental EBITDA over their multi-year contracts.

To detailed and many deployments, as of today, we have tenant Saudi Arabia with three in 2024, followed by seven over 2025 and 2026; three rigs in Argentina with two in 2024 and one in 2025 and one more in Algeria in 2024 all together, these add up to 14 pending deployments.

On top of these 14, we have the prospect for an additional three in 2025. This magnitude represents a rare opportunity, one that we are committed to capturing our investment in this environment now provides the foundation for increased free cash flow and greater financial returns in the future.

Looking ahead, we are evaluating additional opportunities in Latin America, the Middle East and elsewhere in the Eastern Hemisphere. Each of these opportunities will contribute significant free cash flow. As I've said, before we are able to use existing rigs to capitalize on this environment. In tandem with these rigs, we see very attractive prospects to materially expand the NDS business with limited incremental investment.

That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.

We will now begin the question-and-answer session (Operator Instructions)

Daniel Kutz, Morgan Stanley.

Hey, thanks a lot and good afternoon. I just wanted to come back to the free cash flow comments. And I appreciate that this year, you're kind of at the full run rate for this SANAD newbuild program. There's a lot of a lot of investment required for the wave of deployments. That you have rig deployments that you have coming and you also mentioned the higher maintenance CapEx.

But I was just wondering if you can help us think through some of the other components that might impact free cash flow conversion on this year outside of outside of the CapEx guidance that you gave us, whether it's working capital expectations, cash taxes.

Even just if I look over the last five years, I think your average net free cash flow conversion is in the kind of 30%, 35% range. Should we be thinking about significantly below that this year? Is that a potentially achievable target in the coming years? Anything you could you could share to help us think through on the free cash line and free cash conversion. Thanks.

Thanks, Dan, that's a that's a good question. I think a lot of people are hoping for some answers on the free cash flow for 2024. So as, we had to wait a little bit because we had a few or several important tenders to be decided and certainly needle moving and both EBITDA and CapEx.

So we hesitated to give something until we have more visibility on those tenders. But what I can what I can do is, tell you a little bit the main components of free cash flow for the full year. And the most important is EBITDA. And so we do think that the rigs in the US Lower 48 will fall, some six rigs, versus the prior year.

And we were hopeful to retain at the same average RigCLOUD in 2024 us we had in 2023, but that just didn't happen. The market just moved down instead of going up as we thought. So that that has some significant impact.

And in addition, we do think that as contracts roll into the leading edge pricing, which has stabilized, unfortunately, but it's a roll into those new leading edge prices, we’re going to see a maybe an erosion of $600 year-on-year. And if you look at that, that's just math, that gets you somewhere in the range of $50 million reduction year-on-year in terms of the US.

Fortunately in terms of Lower 48 I'm sorry. But in terms of Alaska and offshore markets are going to see an increase of about $5 million or so year-on-year so that's a $45 million reduction for the US. Internationally we hope to increase by roughly $50 million and that's partially due to these new awards, but also the Saudi Arabia increase in activity.

So drilling overall on a global scale is going to be about $5 million higher than the prior year. And then we think NDS is probably going to be about 5% higher versus the prior year with the Internet with the US market being a bit of a drag. But international market performing very, very strongly.

And finally, Rig Tech is going to be like a $10 million improvement year on year. And that is based on the fact that internationally we are expanding quite a bit, Tony mentioned some of the awards we've seen recently, but also energy transition is going to contribute to that to that number.

So all in all, we think that we are going to beat last year's $915 million and the range that we can offer at this point and again, take these numbers with a grain of salt. The uncertainty in the US is still high so we don't really have fantastic visibility given the shortness of the contracts that we have today. And that's a trend for the whole market. But we think $920 million to $930 million is an EBITDA range that we'll be comfortable with.

And then if you look at the CapEx, interest expense is going to be about $180 million. Our cash tax about $50 million. That takes you somewhere into a $100 million-plus for the Company as a whole. But in that number, we have a negative 60% for SANAD, right? So we're looking to about $160 million-plus outside of SANAD for the company as a whole for those numbers alone.

Then we expect working capital to provide tailwinds to our free cash flow this year. And of course, I haven't mentioned the prefunding that we get on our CapEx as well that is paid in 2024.

So, if I were to put a number out there, I would say that our free cash flow for the company as a whole would be somewhere between $100 million to $200 million in 2024. Now keep in mind that we do have some $60 million that are going to be very consumed in Saudi Arabia in SANAD.

So outside of SANAD that number would be somewhere between $160 million and $260 million. So that's a range of free cash flow that we would have available to bring down our debt in 2024. Does that answer your question? Dan?

It does. And I think you probably answered a lot of potential subsequent questions as well. So thanks for the super helpful color there. Maybe just a question on international contracts rolling. And just I'm trying to think through on outside of SANAD and outside of the idle rigs that you're redeploying for the for the rest of the international fleet that's working right now.

I'm basically driving at -- that is 2024 or some year in the future a year where a big percentage of those rigs roll and would have the opportunity to kind of mark to leading edge in those international markets is or are there years that you call out as being, I guess, significantly above or below what would be like a normal contract roll?

Just for argument's sake, the average international contract is four years, then 25% of the rigs that roll a year. Would you point to this year or any of the coming years as being above or below what the normal contract roll periods would be?

But looking forward for the next year, we look at about 20% actually, the rigs are rolling right now. And I think the good news is with that number that given the market and given the amount of tenders out there, I think in terms of repricing, it does offer the prospect of maybe moving up leading-edge pricing because all these contracts do require capital and all the capital is going to be at market prices and in some of these projects are significant amounts of capital.

So I think the whole sector is actually we have been pushing internationally up to up to market pricing. And that's good for us so that right now, that would be a number I would refer to about up to reprice about 20% of the fleet, yeah.

Yes, awesome. That's exactly what I was driving at. Thank you very much. I'll turn it back.

Keith MacKey, RBC Capital Markets.

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

Well, I think Archie has been a great success for us because we've exported our technology in the US today. And right now the rigs are going down or what we call the f-rigs, which are 1,500-horsepower rigs with the higher hook load than a normal 1,500-horsepower rig. And the performance there has been outstanding. And also that has gained us a great credibility in the marketplace there.

I think the good thing about the Argentina awards is the fact that next three are going to be redeployed out of the US. So that obviously shrink the asset base here and shows that we have other advantages other ways to redeploy that capital.

And the second point is these contracts on them actually are going to have a significant component in US dollars, which is also big change in terms of where we are to make makes us even more optimistic about the market down there. So in terms of the Argentina contracts in general, I think the backlog for those just those three contracts would be about revenue back on about $230 million just give you a frame of reference.

And as I said, I think the performance and we've demonstrated down there, we've now oriented the whole marketplace to NDS as well, which has really been a good driver for us. So it's not just us the rig, but also our software applications and managed pressure drilling and casing running integrated into the rig are actually gaining a lot of traction there.

And I think we have really good market position in both those in the country. And that's a real success story into real conversion from this for the way that the markets looked at a drilling contractor, and that's what's driving some of the move to shifting stuff to Nabors.

Awesome. I appreciate the comments there. Just sticking with the international markets. So the guidance for daily margin in Q2 is about 157 per day, I think you made a comment about getting that to 17,000 by end of the year. Can you just give us a bit of a bridge in terms of how you get there?

So Keith. As I'm sure you've we have learned by following our results. When you have a significant burst of deployments, you have to automatically be a little bit cautious on what sort of guidance you put out there for the margin because there's always shake down periods and things like that and that hurt the margins a little bit.

So we are trying to be a little bit cautious. We do have some more deployments coming in and some recent deployments. A lot of rigs are being added to our fleet in the first and second quarter.

So that's part of that. But and there is also the fact that we renewed contracts in Saudi Arabia recently. And as part of that commitment, we have to do some recertifications of multiple components in the rig. And that takes a couple of weeks away from each of those rates in terms of revenue generation.

So we are being in this in the first half of the year. And we do have some things that are going to disappear in the second half as all those deployments are completed in Saudi Arabia and Algeria. And at the same time, the rigs in Saudi Arabia do have significantly higher margin potential than our legacy rigs.

They tend to be on the or near the top of margin generation, particularly the new rigs that we're deploying as part of our agreement with Saudi Aramco. So those are the main drivers. So we do have a little bit of extra cost in the first half. And secondly, the rigs coming in the second as the for the full year that are going to be fully impacting our results in the second part of the year do have higher profitability then than our legacy rates.

Okay. Thanks very much. That's it for me.

Kurt Hallend, Benchmark.

Hey. Good afternoon, everybody. I appreciate all that color and detail on that EBITDA and free cash flow. So I guess the international markets, right, are clearly strong. And you have a lot of opportunities as you look out into '25 and '26. I'm just trying to reconcile it's something you guys said about [$50 million] to $50 million-plus of incremental EBITDA.

Again, this is more like going out into 2025 than what you just said for 2024. So it's kind of help out in that context. You've got five new Saudi rigs and those five rigs get a $50 million of EBITDA and then they got another handful of rigs outside Saudi second add another x million of EBITDA. Can you just kind of help connect those dots?

And let me just do some gross some gross calculus here. Let's put this way. So the Argentine rigs with the Algerian rigs represent about $300 million in backlog. And just by way of background those the investments there and those rigs have a rounded payback of about a two-year payback okay on those rigs.

Then when you layer on top of that, the Saudi rigs, which have a backlog of about $1.1 billion and the shortlist, assuming we got to shore that up to $230 billion, a $230 million rather, that represents the backlog. The entire package of all those rigs combined when they're all on board would be an EBITDA run rate of at least $125 million by the end of 2025. That's why we're so excited.

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

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

Okay, great. And then so in the context of the prospects of taking idle rig and moving them into internationally how many just in aggregate right? Is it take beyond even what you we already know you're potentially going to be moving, but how many idle US rigs are feasible options to be upgraded in [10] international?

I think at the kind of numbers that we're talking about, I mean, I think, if you listen to what I just said, our payback on adapting these races, we own less than 2.5 year payback to move a rig into the international lease type of rigs. And I think we have another 10 of those available.

So depends, of course, on the market, depends on every market's different and every market has different deal these required which drives this course higher. But generally we have about 10 more rigs that fit easily into the international marketplace from the US.

Okay. That's great. And again, it gets to the crux of the question, Tony, which was then beyond those 10 it would then require I would assume it will require some element of new build right? And number of --

No, no, no. I'm just giving you the numbers of the low-hanging fruit. I think we have a bunch of iron out there and the pending one that we've had, we're in process, hopefully of concluding right now, the three then I'm talking about, those rigs are actually in-country. So it makes it even easier, separate for those.

So yes, we have we have additional assets internationally as well, not just in the US, but US, it depends on the opportunity. Some subset with deep gas with heavy BOP stuff then you need an Internet or existing international rig. If it's something more like version of the unconventionals like in Argentina that we could take one of our prime US rigs and move it down there without a lot of incremental expense.

So it really you can't just add that it's not a one size fits all kind of concept is more complicated than that.

And by the way, it's not a good risk for RigCLOUD not be transferred. The reason where we say tenants because the remainder of the fleet is more is more adapted and has been adapted to US drilling. So we wouldn't want to transfer those at this point. But the other ones can also perform very well in the US but have some characteristics that make it more adapted and easier to move international markets.

That's great. I appreciate all that. Now one follow up. So there's been a lot of discussion about the prospect incremental rig is needed in the US to satisfy the LNG export capacity coming on in 2025. And then there's been a lot of discussion here of late about incremental gas demand needed for the data center build out.

You guys got any rough numbers as to what the incremental freight demand could be from those two factors?

Yes, I would say at this point, it's pure speculation. I mean, we believe in the thesis that the export market is real on LNG. We believe in the macro, the macro thesis about the drivers for gas globally and in particular for growth in non-OECD countries. And particularly, in terms of gas, in particular for AI, I mean if you look at the electricity production in the US for the past roughly 15 years, I think it's been relatively flat and that's because we've been able to rely on efficiencies in use of electricity to offset the demand. But with this new AI stuff that's coming out, it's so intensive that I think the only clear answer is actually for baseload power is in fact gas.

You show the average data about Amazon I think on the data centers that they're doing and these data centers are going to be huge consumers. And therefore, we think we as I said, these are all reasons why we really strongly believe in it. And we've been disappointed taht it has happened earlier. But we think as you go through this year, we think it should become more visible. And obviously, we're well positioned to handle that.

Our gas mix have obviously moved dramatically from where we were back in the beginning of last year to today. And that market today is probably that the Haynesville and the Northeast are the two most challenged markets in terms of Lower 48 right now in terms of activity. And but for the reasons you're identifying, I think the prospects are bright going forward.

It's great. I appreciate the color.

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

Appreciate that, guys. Thanks.

Derek Podhaizer, Barclays.

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

Okay. Well, today, we have roughly 80% of our rigs are in gas and have any of that 80% about just doing the count and my head here, about 20% of the 80% is in the unconventionals today, what we have and that the unconventionals obviously, the order for the new builds that are being built are all can be, yes, directly up to ramp where they want to put them.

So far they haven't moved many of them to be unconventional because there are so many other needs right now, but obviously we can easily handle that. So of the footprint for us today, 80% is a gas and the market as a whole. I think the numbers for onshore today, conventionals 84% gas, non-conventional 22%, and exploration 37%, oil 70%, so it gives you an idea what how the market breaks down right now.

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

Yeah. That makes sense. So no issues as far as being able to move your existing equipment over there into unconventional field because that's where the demand pulls you, those rigs are ready to go and just doing it could be slotted either conventional or unconventional?

Absolutely, absolutely.

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

Obviously, obviously, international basket, like I was referring to is robust still, I think at the end of the third quarter, I told people through about 55 opportunities in the marketplace that we were looking at. We're sorting through at the end of the fourth quarter that number was around 53, a little bit decline today that number's 30. So there's still 30.

So there and obviously, we store sort through them. And we'll see if anything, really fits and like the last person, I guess the question is obviously, we have some equipment that could be really deployed attractively. But right now, we're our hands are pretty full of what we got, but we'll still be evaluating that.

But the good news is that that pipeline does show the robustness of the market. And that number outstanding is demonstrating the how broad it is. And as I said in my remarks, I think the can rate the Canrig Award is that another example that showing how deep this recovery is in international or upcycle is.

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

Got it. Appreciate the color, guys. I'll turn it back. Thanks.

Thank you.

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

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

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