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Text: 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.
Also, during the call, we may discuss certain non-GAAP financial measures, such as net debt, adjusted operating income, adjusted EBITDA, and free cash flow.
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.
Then I will follow with highlights for the quarter and a discussion of the markets.
William will discuss our financial results.
Let me start by saying our operations performed quite well in the second quarter.
We also made significant progress across multiple strategic initiatives.
Adjusted EBITDA in the second quarter topped $117 million.
Execution across all of our segments was strong.
Our global rig count for the second quarter increased by seven rigs, driven by growth in the U.S. drilling and international segments.
Once again, we made progress on our priorities to generate free cash flow and reduce net debt.
Free cash flow in the quarter approached $70 million after funding capex of 77 million.
These results for the second quarter exceeded the expectations, which we laid out on our last conference call.
Net debt improved by 58 million in the second quarter, driven by our free cash flow.
I am very pleased with our financial performance through the first half of 2021.
I'm looking forward to reporting further progress over the balance of the year.
Next, I would like to highlight five key focus areas as you think about Nabors.
First, our leading daily margin performance in the Lower 48; second, the upturn in our international business; third, the improving outlook for our technology and innovation; fourth, progress on our commitment to delever; and fifth, our progress in ESG and the energy transition.
Let me start with Lower 48 drilling margins.
The margin performance in this core business remains strong.
Daily margin once again exceeded $7,000 mark.
Clients realize value from our leading fleet capabilities and field performance.
We maintained our disciplined approach to pricing as we deployed rates.
This unique combination is responsible for these robust results.
Another way to look at our performance is to combine our drilling margin with the margins generated by NDS in the Lower 48.
That increment amounts to approximately $1,900 per day, so we're generating almost $9,000 per rig per day on this basis.
As you compare results and business models from our peers across the industry, we think it's important to consider this point.
Next, our international business.
Our financial results benefit from our historic pricing discipline and our performance in the field.
Coming out of the pandemic, significant improvements have occurred in Argentina, Colombia, and Russia.
These markets collectively account for approximately 25% of our international rig count.
Saudi Arabia has seen an upturn in activity.
We currently have 38 rigs working in the Kingdom.
There's potential to add a few additional rigs before the end of the year.
In addition, our SANAD joint venture has been awarded five newbuild rigs to date.
These five units are expected to be deployed at approximately one per quarter starting in Q1 of 2022.
They are estimated to contribute approximately annualized EBITDA exceeding $50 million.
As you know, there is a long-term plan by Saudi Aramco to add successive generations of five rigs per year for an additional 45 rigs.
The Saudi Aramco procedure of this plan, we expect a similar EBITDA contribution in each successive year.
These newbuild rigs and their economics were one of the main attractions for our participation in the joint venture.
Next, technology and innovation.
Our technology pipeline remains full.
NDS' penetration on our own Lower 48 rigs with at least five services exceeded 70%.
On third-party rigs, we are seeing strong growth in penetration.
Revenue on third-party rigs increased sequentially by more than 50%.
Growth occurred across most of the service lines.
The third-party rig market remains fertile for NDS.
We are investing to ensure that our products are rig agnostic.
Even though the full potential of the MDS product suite is still maximized when run on Nabors rates.
For NGS in total, we are expanding our digital platform and expect to see greater penetration of these products across the market.
Now let's discuss delevering.
We had quite a bit of significant moves on this topic recently.
We completed the pro rata distribution of equity warrants to our shareholders.
This innovative structure places value in the hands of our equity holders.
The warrants can be exercised with cash or certain of our outstanding notes.
This transaction could result in substantial delevering of our capital structure.
We also signed an agreement to sell our Canadian drilling assets.
This sale will result in cash proceeds of approximately $94 million, plus we will liquidate the working capital in the business.
With this deal, we pull forward multiple years of free cash flow, which we can deploy into our strategic priorities.
In summary, we've made material progress even through the downturn.
We look forward to making additional headway in the future.
I'll finish this discussion of our highlights with ESG and the transition.
We continue to refine and enhance our focus on ESG.
We recently updated our annual ESG report with additional disclosure.
This drove a two-point improvement in our environmental score from ISS.
In addition to the environmental performance, we also recorded improvements in several categories of our social score.
Our position in the energy transition also began to take firmer shape.
Our strategy here is fully supported by the Nabors board and our investors.
The scale of the energy transition opportunity is potentially huge.
We believe it holds very attractive prospects for Nabors in two broad areas.
First, to optimize the environmental footprint of our own operations, and second, to drive the transition in adjacent markets.
Significantly, we believe our global footprint, technology and scale can be applied to drive initiatives in the transition space.
For example, we are working both to reduce our own carbon footprint and to apply our expertise in the broader energy market.
We have exclusive agreements to market multiple fuel additives, which materially reduced fuel consumption and emissions of our own large diesel engines, as well as other fleets.
We have also identified adjacent areas, which we think are synergistic with our core operations.
These include investing in several early stage geothermal energy companies, we believe the geothermal market holds enormous promise as a source of baseload renewable power.
These ventures will enable us to deploy our expertise into this burgeoning field.
We expect to realize investment returns commensurate with the opportunities.
We recently agreed to license innovative IP in the carbon capture area.
The target markets are in drilling as well as other verticals.
We're excited about this technology, which we see ultimately reaching beyond the oil field to stay tuned.
We are evaluating a variety of investment structures in the energy transition.
Our intent is to enable our participation across the spectrum of investment opportunities.
We are confident in our ability to participate in and ultimately help drive the energy transition.
We think this is a compelling opportunity.
Now I will spend a few moments on the macro environment.
The quarter began with WTI just below $60 for early June WTI broke above 70.
Since then, it has climbed into the mid-70s and fluctuated between there and the high 60s.
This range should be conducive to increases in drilling activity across markets.
Next, I'll review the rig count.
Comparing the averages of the second quarter to the first quarter, the baker Lower 48 land rig count increased by 16%.
According to Inverness, from the beginning of the second quarter through the end the Lower 48 rig count increased by 31 or approximately 6%.
The growth rate among smaller clients significantly outpaced the growth in larger operators at 8% versus 2%.
With our focus across the spectrum of clients, our average working rig count in the second quarter increased by 21%.
This comparison excludes rigs stacked on rate.
Our total average rig count increased by seven rigs, while the number of rigs stacked on rate declined by four.
Once again, we surveyed the largest Lower 48 clients.
This group accounts for approximately 35% of the working rig count.
In comparison on the last call, the same group accounted for 40% of the working rig count.
Our review of these clients show a modest uptick in activity planned for the balance of 2021.
In our international markets, we saw demand increase about as expected.
In our served markets, we gained incremental share in the second quarter as activity levels in those markets continue to recover from their pandemic lows.
To sum up, commodity prices have risen significantly as global economic activity increased.
In their current range, oil prices generate acceptable operator economics in virtually all areas where we operate.
With that in mind, we remain vigilant to the potential impact of a resurgence of the virus.
That risk and outstanding, the current commodity environment remains conducive to increased drilling activity.
The net loss from continuing operations of $196 million in the second quarter represented a loss of $26.59 per share.
Results from the quarter included a net loss of $81 million or $10.80 per share related to onetime impairments, which were largely attributable to the sale of our Canada drilling assets and to reserves for tax contingencies in our international segment.
Second-quarter results compared to a loss of $141 million or $20.16 per share in the first quarter.
Excluding the previously mentioned onetime items, the $26 million quarterly improvement primarily reflects better operational results, as well as lower depreciation and income tax expenses.
Revenue from operations for the second quarter was $489 million, a 6% improvement compared to the first quarter.
Revenue continues to increase quarterly with higher commodity prices.
Revenue for all of our segments increased substantially, both domestically and internationally, with the exception of Canada, which experienced its normal seasonal downturn.
Total adjusted EBITDA expanded by almost $10 million to $117 million for the quarter.
This was significantly higher than we anticipated primarily reflecting the strong increase in revenue across our markets.
This quarterly improvement is part of a trend that we expect to continue during the second half of the year.
drilling adjusted EBITDA of $59.8 million was up by 1 million or 1.7% sequentially and a 14% increase in revenue.
Although our rig count increased, our average margins fell in the Lower 48 market.
Lower 48 performance was in line with our expectations.
Daily rig margins came in at $7,017 and falling within our expected range.
Nonetheless, leading-edge day rates have inflected and high-quality rig utilization continues to increase with market tightening for those rigs.
For the third quarter, we expect average daily rig margin to remain stable with second quarter as market day rates continue to grind upward.
Second-quarter Lower 48 rig count averaged 63.5 and a quarterly increase of 13%, which was somewhat above our expectations.
Currently, our rig count stands at 67.
We forecast an increase of four to six rigs in the third quarter versus the second-quarter average.
Adjusted EBITDA from our other markets within the U.S. drilling segment improved moderately.
For these markets, in the third quarter, we expect to remain at the second-quarter levels.
International-adjusted EBITDA gained almost $9 million in the second quarter or 14% sequentially.
The improvement came primarily from higher activity markets with larger rigs, principally Saudi Arabia and Colombia, and generally strong operational performance in the Eastern Hemisphere.
In the quarter, as anticipated, we experienced some headwinds in Mexico that we expect to persist into the third quarter.
We continue to move rigs between platforms to accommodate modifications to the activity profile of our customer.
We believe these changes in activity are linked to the higher commodity price.
The unfavorable impact to our margins from these moves was $3.7 million in the second quarter and is forecast at $6 million in the third quarter.
Also, we lost $1.9 million of revenue in the second quarter related to the general strikes and unrest in Latin America.
Despite this friction, international delivered a strong quarter.
Average rig count increased in line with expectation by 3.5 rigs to 68.3 or 5%.
Current rig count in the international segment is 68.
Daily gross margin for international increased by over $500 to 13,420 in the second quarter beating our expectations by more than $900.
The second quarter included approximately $900 per day in lost margin from the moves in Mexico and in rest in Latin America.
Turning to the third quarter.
We expect international rig count to decrease slightly by one to two rigs, as two over rigs move between clients.
We forecast our average daily rig margin to remain in line with the second quarter.
Our third quarter forecast includes approximately $1,000 in early termination fees from one of our rigs, offset by additional lost margin from the moves in Mexico.
As anticipated, Canada-adjusted EBITDA of $3 million fell by 6.7 million, reflecting the seasonal spring breakup.
At this point, we expect to close the divestiture of our Canada drilling assets by the end of the month.
In the third quarter, we will include one month of activity for our Canada drilling operations before the closing of the transaction.
Drilling solutions adjusted EBITDA of $12.8 million was up 1.3 million in the second quarter and a 10% revenue increase, trending positively in all product lines.
Most notably, improved performance software and casing running services.
Penetration of the performance drilling software in the Lower 48 and TRS internationally, strengthened driving the improvement.
Lower 48 gross margin for our drilling solutions segment totaled $8.9 million for the second quarter.
This comes on top of our Lower 48 drilling gross margin of $40.5 million.
We expect adjusted EBITDA in the third quarter to improve on the strong second-quarter results.
Rig technologies generated adjusted EBITDA of $2 million in the second quarter, an improvement of $2.6 million on a 34% revenue increase.
The growth was primarily related to higher repairs and equipment sales.
For the third and fourth quarters, adjusted EBITDA should move gradually upward on improved capital equipment sales.
Now I will turn to review our liquidity and cash generation.
In the second quarter, total free cash flow was $68 million.
This compares to free cash flow of approximately 60 million in the first quarter.
Our cash generation was driven by improved collections and lower semiannual interest payments, offset by higher capital expenditures and other outflows, mainly annual insurance premiums.
Capital expenses in the second quarter of $77 million were up from $40 million in the first quarter.
These amounts include investments for the newbuilds of 32 million and 8 million for the second and first quarter, respectively.
In the third quarter, we forecast $80 million in capital expenditures including 35 million Versata newbuilds.
Our targeted capital spending for 2021 continues to be around $200 million, excluding approximately 100 million required for Saudi new builds.
Free cash flow for the third quarter should total around 10 to $20 million, excluding proceeds from the Canada divestiture and moderate strategic transaction outflows.
At the end of the second quarter, our cash balance closed at $400 million, and the amount drawn on our 1 billion credit facility was $558 million.
Our net debt on June 30th was $2.4 billion, down from 2.9 billion at the start of the pandemic.
We will continue to prioritize our future cash generation to debt reduction until we reach our leverage targets.
We previously announced the distribution of warrants to shareholders.
By the end of the quarter, we had seen a small amount of the warrants exercised with notes.
This transaction is another demonstration of our commitment to delevering.
Putting things in perspective, the last 15 months have probably been some of the toughest Nabors has faced.
Activity dropped across the globe, driven by industry fundamentals and COVID shutdowns.
Our rig count plummeted and our leading-edge pricing dropped.
Despite that, we maintained our EBITDA at levels higher than the combined EBITDA of our three closest public competitors.
These results were the fruits of our absolute focus on cost control and capital discipline.
But we have also benefited from our overall strategy of maintaining the highest quality fleet with leading drilling performance, driven by our investments in automation, software, remote operations, and data infrastructure.
As a result of our new revenue profile, our capital expenditures as a percent of revenue have dropped.
In addition, our international business has delivered once again by helping us to much better absorb the sharp drop-off in U.S. activity in comparison to our competitors.
Together with our superior operational results, we generated meaningful cash flow for the past 15 months, while also reducing our net debt by $500 million during the period.
Despite the headwinds at the beginning of last year, just before the pandemic, we also issued $1 billion of new long-term debt to address near-term maturities.
And we then renegotiated our credit facility during the worst of the pandemic to avoid potential covenant breaches and allow us to complete a material debt exchange transaction at the end of last year.
I am convinced we have been good stewards of our shareholders' capital during the toughest of times.
As we now launch a significant new initiative into the rapidly expanding field of new energy, we will maintain our commitment to absolute capital discipline and continued debt reduction.
As you may have seen from recent announcements, despite the scope of our initiatives, we have limited our cash deployed into these activities.
We have restricted ourselves to placing minority investments with companies adjacent to our own business, and we have signed alliance agreements with these companies to help them develop their technologies.
In concluding, I would like to emphasize something.
Despite our aspirations to develop our clean energy initiatives into a significant portion of Nabors' portfolio over time, we will retain our capital discipline, as well as our focus on cash generation and debt reduction.
These second-quarter results on top of our performance in the first quarter reinforced that our strategy is working, and we are making progress toward our goals.
Once again, we made significant headway to delever.
At the same time, we advanced our imperative to provide better execution with our portfolio of leading-edge technologies.
The resilience of our financial results through the depths of COVID and now into the recovery is testament to our robust portfolio of businesses.
This process began years ago as we continually reevaluate the portfolio.
We sold assets and businesses pressure pumping and well servicing most notably, and now we're investing in digitalization and automation and the transition.
This active management has served us well, and we expect it to continue.
We have entered a new phase in the evolution of the global energy industry.
Nabors has played a key role throughout the development of the drilling industry.
We are investing now to extend this leadership in the future.

user
compname announces qtrly loss per share $26.59.
q2 revenue $489 million versus refinitiv ibes estimate of $465.3 million.
qtrly loss per share $26.59.
expect continued increases in drilling activity both in u.s. and internationally.
expect pricing to increase in second half of 2021.
for second half of 2021, expect further improvement in oilfield industry fundamentals.

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