Nabors Industries Ltd

NYSE:NBR

Earnings Call Analysis

Company Sees Rig Pricing Bottom, Aims Debt Reduction

The company experienced an 8% increase in third-party U.S. revenue and international revenue. However, the total adjusted EBITDA decreased to $210 million, primarily due to a 17% decline in U.S. Drilling EBITDA. Average rig count fell by 10%, with margin per day also seeing a reduction. The quarter's free cash flow nearly broke even, missing targets predominantly because of higher capital expenditures and an unexpected rise in working capital. Full-year free cash flow guidance has been lowered from $300 million-$350 million to $225 million-$250 million. For 2023, the company aims to increase EBITDA and reduce debt, with expectations of an uptick in drilling activity for 2024 and plans to continue allocating excess cash to debt reduction.

Financial Performance Overview

The company experienced a decrease in revenue and adjusted EBITDA, primarily resulting from a reduction in drilling activity in the U.S. Lower 48 and offshore, combined with problems such as delays and quality issues with newbuild rigs in Saudi Arabia. Revenue fell by 4% sequentially to $734 million, with revenue in the U.S. segment dropping by 12%. Adjusted EBITDA was down by 10.6% to $210 million, largely attributable to the U.S. Drilling segment. The decline in the lower 48 markets significantly impacted both revenue and EBITDA.

Challenges and Opportunities in Operational Segments

The company outlined various challenges such as the expected reduction in Lower 48 drilling activity, quality assurance issues with newbuild rigs in Saudi Arabia by SANAD, and less than anticipated activity increase in the International segment. Despite these setbacks, the company has seen positive trends internationally, particularly in Latin America and the Eastern Hemisphere, and aims to expand its revenue through acquisitions, such as a rented base in Argentina's Vaca Muerta basin, and reviewing opportunities in areas like North Dakota and Texas.

Cost Management and Margin Outlook

The company reported a decline in the average daily rig margin, aligning with expectations and projecting a slight decrease for the fourth quarter. However, the leading-edge prices and costs seem to have stabilized, offering a stable outlook for the upcoming period. Additionally, Nabors Drilling Solutions and Rig Technologies were both affected by lower U.S. rig count, but NDS continued to grow with third parties, and Rig Technologies benefited from higher margin aftermarket sales.

Long-Term Strategy and Free Cash Flow

The company has reduced its full-year free cash flow expectations to between $225 million and $250 million due to unforeseen increased CapEx, mainly due to advancing deployment in Algeria and acquiring the base in Argentina. As for capital expenditures, the third quarter saw an increase to $157 million, with $52 million invested in SANAD newbuilds. In the light of the free cash flow adjustments, the company remains committed to debt reduction throughout 2024.

Expectations for Increased Activity and Revenue Growth

Looking ahead, management projected a meaningful increase in drilling activity in 2024, fueled by an expected recovery in gas drilling. The company forecasts higher EBITDA in 2024 versus 2023, promising a greater generation of free cash flow next year than the revised expectation for 2023. Furthermore, the company maintains a positive outlook for its International segment, citing excellent visibility for growth through 2024 caused by emerging opportunities across major markets.

Collaborations and Technology Focus

Nabors has identified collaboration and technology as pivotal for future growth. Not only has it looked into mergers and acquisitions for Nabors Drilling Solutions, but it has also formed partnerships, like with Halliburton, to strengthen its technology offerings. Such strategic moves aim to improve profitability and the breadth of capabilities, leveraging technology to gain a competitive edge in both the domestic and international markets.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to the Q3 2023 Nabors Industries Limited Earnings Call. [Operator Instructions] Please note, today's event is being recorded.I would now like to turn the conference over to William Conroy, Vice President of Investor Relations. Please go ahead, sir.

[William Conroy, executive]

Good afternoon, everyone. Thank you for joining Nabors' Third Quarter 2023 Earnings Conference Call. Today, we will follow our customary format with Tony Petrello, our Chairman, President and Chief Executive Officer; and William Restrepo, our Chief Financial Officer, providing their perspectives on the quarter's results along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks, a slide deck is available both as a download within the webcast and in the Investor Relations section of nabors.com. Instructions for the replay of this call are posted on the website as well.With us today, in addition to Tony, William and me are other members of the senior management team. Since much of our commentary today will include our forward expectations, they may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission.As a result of these factors, our actual results may vary materially from those indicated or implied by such forward-looking statements. Also, during the call, we may discuss certain non-GAAP financial measures, such as net debt, adjusted operating income, adjusted EBITDA and adjusted free cash flow. All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA as that term is defined on our website and in our earnings release.Likewise, unless the context clearly indicates otherwise, references to cash flow mean adjusted free cash flow as that non-GAAP measure is defined in our earnings release. We have posted to the Investor Relations section of our website, a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures.With that, I will turn the call over to Tony to begin.

[Anthony Petrello, executive]

Good afternoon. Thank you for joining us as we present our results and outlook. Activity in our major global markets was essentially in line with our expectations. Rig count in the Lower 48 declined in the third quarter. It appears to have reached the bottom. Leading-edge pricing seems to have stabilized. Lower drilling activity in the U.S. impacted results in our Nabors Drilling Solutions and Rig Technologies segments.The newbuild rigs in Saudi Arabia were a source of disappointment as reflected in our third quarter results. Specifically, the issues included delivery delays by our local supplier, field performance challenges with certain of the newbuild rate components and higher start-up costs as we address these challenges. The impact to EBITDA in the third quarter was approximately $5 million. We have now addressed the existing quality issues. We expect our supplier's performance to improve rapidly as their local manufacturing experience increases. On the positive side, our Lower 48 margins remained at historically high levels and international rig markets provide us with multiple opportunities at attractive pricing.For the third quarter, adjusted EBITDA totaled $210 million. This result principally reflects the known decline in Lower 48 drilling activity as well as the shortfalls in Saudi Arabia. Our global average rig count for the third quarter declined by 8 rigs, all of which was attributable to the U.S. Our Drilling Solutions and Rig Technologies segments together accounted for 18% of total EBITDA. This contribution is approximately double the proportion immediately pre-COVID.Next, let me make some comments on each of our 5 priorities. First, performance in the U.S. Daily rig margins in our Lower 48 operation were in line with our expectation. Pricing in this market reflects the reduction in industry utilization this year. Please note that our margin performance in the third quarter was higher than that of any quarter prior to 2023. Our reported Lower 48 daily rig margin reflects the financial results of just our drilling rigs. On top of that, Nabors Drilling Solutions portfolio generates significant additional margin. I'll discuss this in more detail in a few moments.Now I'll discuss our International Drilling business. In the quarter, we stood up a newbuild rig in Saudi Arabia and a rig in UAE. These units are the first 2 of the 13 pending international startups that I detailed last quarter. Profitability improved substantially in several international markets, primarily in Latin America. Let me add a few more comments concerning the newbuild program in Saudi Arabia. The fourth rig deployed in the third quarter. The fifth was also expected to start in the third quarter. Although construction of the rig has been completed, its start date has been pushed to the beginning of next year. The aforementioned supplier issues caused this delay. This timing mismatch between the capital outlays and the commencement of EBITDA had a negative impact on free cash flow in the quarter.The second tranche of 5 rigs is currently under construction in the Kingdom. We currently expect the first of this group to spud in the first quarter of next year. 2 of the remaining 4 rigs should be deployed by the third quarter of 2024. The last 2 rigs of that tranche are expected to spud in early 2025. Saudi Aramco recently awarded the third tranche of 5 newbuilds. We expect to deploy the first of these rigs around midyear 2025.In general, the outlook for our International business, including Saudi Arabia, remains quite positive. Coming out of the third quarter, we have 11 deployments expected through the end of 2024. Beyond these, we see improving prospects for additional rigs across a number of markets. These include Kuwait, Algeria and Oman in the Middle East and Argentina and Colombia in Latin America.Next, let me discuss our technology and innovation. Growth in NDS' international business actually accelerated in the third quarter. Managed Pressure Drilling and casing running drove this growth. NDS' U.S. business was impacted by reductions in overall rig activity. Third-party revenue offset some of these reductions.Next, I will detail the value that NDS generates in the Lower 48 market. The average daily margin in the Lower 48 from our Drilling and Drilling Solutions businesses combined was over $19,000 in the third quarter. Of that, NDS contributed approximately $3,400 per day. This significant incremental margin contribution comes with limited capital spending. Thanks to the low capital intensity of the NDS portfolio, the returns on capital are the highest in our company.In the third quarter, penetration of NDS services held steady on Nabors' rigs in the Lower 48 at nearly 7 per rig. Once again, we saw an increase in installations of our SmartSLIDE directional steering system and our SmartNAV directional guidance software. Our volume of casing running jobs also grew sequentially. Our NDS portfolio remains robust. We have seen increasing interest, both domestically and internationally, including for our software solutions on third-party rigs.Next, let me offer an update on our capital structure. Our free cash flow generation and debt reduction were challenged in the quarter. Most of the items impacting our liquidity were one-offs or resulted from shifts in expected timing between quarters. We are addressing the impact of the issues in Saudi Arabia that I mentioned in order to recapture our momentum. The entire company remains focused on increasing free cash flow and reducing net debt. I can assure you, these goals remain our top priorities.I'll finish this part of the discussion with remarks on sustainability and the Energy Transition. Our Energy Transition initiatives, as you know, focus on making a difference on Nabors' own emissions profile and exporting solutions to other verticals. These technology solutions already contribute visible margins. The first of these is our PowerTAP module. This unit connects rigs to the grid. At the end of September, we had 23 modules running. More than 20% of those were on third-party rigs.We have commitments in hand to add 2 units in the fourth quarter. Notably, one of these is our first PowerTAP unit incorporating a frequency converter for the international market. This allows our rigs working in certain markets to tap into the local grid. We believe this is an industry first. In addition to the unit now deploying, we expect 3 more international deployments by early 2024.Second is the nanO2 diesel fuel additive, which improves engine performance and reduces emissions. We have treated more than 22 million gallons of diesel to date on both drilling rigs and pressure pumping units. In the third quarter alone, that increased by 10%. Quarterly revenue and EBITDA from our Energy Transition portfolio once again increased versus the prior quarter. We see a path to further growth across the client base, both on Nabors and third-party rigs as well as in other verticals.Now I will spend a few moments on the macro environment. Notwithstanding the volatile environment as well as the decline in rig count in the quarter, commodity prices remain constructive for operator economics. Compared to our last earnings conference call, oil prices are up more than $10 a barrel. We believe this oil price environment is very positive for international markets. We are still of the view that several large LNG projects along the Gulf Coast will support drilling activity for gas, especially in the Haynesville.These commodity prices form a favorable backdrop for operator economics. However, the combination of operator capital discipline and consolidation could temper the scale-up in U.S. activity that we have normally seen at these higher prices. Recently, we have noted 2 announced mergers involving U.S. majors. These transactions indicate their confidence in the future of the U.S. hydrocarbon business.As I mentioned, given this backdrop, international prospects, particularly those driven by national oil companies, remain favorable. Our balanced geographical portfolio positions us well to capture U.S. growth in 2024 and to capitalize on these international opportunities. Some overhanging risks, nevertheless, remain. These include sustained higher interest rates, if not additional increases by the Fed, and looming geopolitical concerns across several geographies.Next, I will spend a few moments on the rig pricing environment. Our third quarter results for the Lower 48 reflects stabilization of leading-edge market prices. As I have emphasized in the past, these current rates for our highest-spec rigs exceed all of the pre-'23 market highs. Our focus in the Lower 48 market remains profitability while continuing to serve our valued customers. As such, we continue to demonstrate the worth of our technology portfolio with NDS. As I mentioned, in the international market, we still have visibility to 11 additional rigs through 2024. This growth should provide substantial uplift potential. Given the commodity price backdrop, we believe there is room for additional unit additions in the Middle East and Latin America.As rig utilization across these markets improves, we expect rig pricing will increase further as well. Once again, we surveyed the largest Lower 48 clients at the end of the third quarter. Our survey covers 17 operators, which account for approximately 45% of the working rigs at the end of the quarter. The survey indicates this group will add about 6% to its rig count through early 2024. This increase is spread across nearly 50% of the surveyed operators. We are encouraged by the distribution of this planned increase. With the expected international additions, we would increase our international rig count by 15% by the end of next year.Let me wrap up my remarks with the following. We expect our financial performance to improve materially in the fourth quarter as we remain committed to increasing cash flow, reducing net debt and greater returns to our investors.Now let me turn the call over to William, who will discuss our financial results and guidance.

[William Restrepo, executive]

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

[Anthony Petrello, executive]

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

[Operator]

[Operator Instructions] And the first question comes from Derek Podhaizer with Barclays.

[Derek Podhaizer, analyst]

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

[Anthony Petrello, executive]

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

[Derek Podhaizer, analyst]

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

[William Restrepo, executive]

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

[Derek Podhaizer, analyst]

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

[William Restrepo, executive]

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

[Derek Podhaizer, analyst]

Got you. Right. No, that's helpful. That's all I got. I'll turn it back.

[Anthony Petrello, executive]

Thank you.

[Operator]

And the next question comes from Arun Jayaram with JPMorgan.

[Arun Jayaram, analyst]

Yes. Tony, I just wanted to go through some of the -- call it, the challenges you talked about in Saudi Arabia in the quarter. How has this impacted the future timing of the newbuild schedule? Is this going to be kind of compartmentalized to this year? Or does it have kind of a knock-on effect? And I know you gave us a bit of color around 4 start-ups next year and 5 beyond that.

[Anthony Petrello, executive]

Right. Well, let me give you some context first. First of all, the newbuild program vis-a-vis what Nabors normally does in countries, it's kind of sui generis because as you know, in this particular operation, it's unique because Aramco has committed over 10 years for us to build these 50 rigs, 5 a year. But also, this was part of Vision 2030, and they wanted to source the manufacturing in local country and they award that sourcing contract to a joint venture between them and NOV. So unlike where Nabors normally does stuff or our sales and controls and all, that's different.And also, the fact was that, that JV called ARM had no infrastructure. So they had to build a new facility, they have to get up to speed, they have no inventory, all that stuff. And all that was occurring at the same time, the newbuild program started to get underway. So the only thing I'd tell you is that we're committed to follow Aramco's wishes. I'm trying to make this work. We actually have a 30-year relationship with NOV so we respect them. But it's hard. And these are -- this is actually a very big project, and there's a lot of strain in the system when this stuff happens.Aramco has very deliberate acceptance testing processes and procedures. And what's been going on, on these rigs, given it's all a start-up operation from a manufacturing point of view, the acceptance procedures take it somewhere from 2 to 3 months just to go to acceptance testing, never mind putting things that are coming up. And then there's issues of stock inventories for stuff that's never been there in the country before and all those kind of challenges. So that's what's stretching everything out, and that's what's create tension.But notwithstanding that, I think we've really had some great success this year in terms of getting these rigs on the payroll. And as we said, we have great visibility here right now in terms of next year with the 4 more rigs next year and the beginning of the second tranche. So as William said, the fifth of the first tranche is going to be pushed to the first quarter. Obviously, that rig, as we alluded to, is already built. But again, for all these problems, we have to make sure the base rigs are all working in the right way. That's the foundation here.So it's in everybody's interest to make sure they all get up to snuff the exact way. And then it should become cookie cutter as you go forward. So that's why the time is being spent here. And obviously, that all drives extra costs because if you have a rig and you've been crew planning for the rig and then the acceptance testing gets strung out, then we have all the extra crew expense as well. So that's what's driving a lot of this extra expense here. So that's the concept.And then the last thing I'd make is 2 other good points here is we've also told you that the third tranche has also been announced, which is going to start in 2025. Again, that just shows Aramco is really getting behind this thing now. And the fact that they're announcing it so early when 2024 is not even yet delivered. The second tranche shows that their intent on pushing everybody to actually get program going. So here -- so like I said, everybody is motivated to get this to work. I'm sure our friends across the street feel the same way, and we just want to make it work and get this cadence down.In terms of the numbers and impact, I think this is probably the least appreciated thing of what Nabors has today actually. These -- the 4 rigs that have already been put on the payroll next year, combined with the 4 that are going to be added, are going to be more than $40 million incremental EBITDA.

[William Restrepo, executive]

$50 million to $60 million, roughly actually, to be precise.

[Anthony Petrello, executive]

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

[William Restrepo, executive]

And let me say something what Tony said that I think is very interesting and a lot of people are not seeing is that we still have some 11 rigs that have been awarded that are going to be deployed before the end of the year 2024. And then we have another 7 already awarded that would be deployed in 2025. So that's what are between the beginning and the end of 2025. So there's 18 more rigs that are coming on the payroll over the next couple of years. And that's huge growth based on our 77 base.

[Anthony Petrello, executive]

Yes, I would say there's nothing like that in the sector or there's never been that much planned growth committed to in the land drilling sector ever at these kind of numbers. It really is unparalleled. And then as I said, and then you have -- away from Saudi Arabia, you have the other things that's going on in the macro environment.

[Arun Jayaram, analyst]

Great. Thanks for that color on international. I appreciate it. I'll turn it back.

[Operator]

And the next question comes from John Daniel with Daniel Energy Partners.

[John Daniel, analyst]

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

[Anthony Petrello, executive]

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

[John Daniel, analyst]

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

[Anthony Petrello, executive]

Too early, although we have gotten inquiries from the Middle East, we've had a number of -- on the Canrig side actually, we've gotten a number of inquiries from what you might call our local competitor companies. These are companies that really -- we don't really compete with because they typically drill in the shallower part of the market or they're captive companies for certain markets where the national oil company controls it more. And those companies, we've had a lot of inquiries recently reaching out asking about equipment and sizing things up. I mean this goes consistent with the theme that William alluded to, which is the overall international arena here.I mean just to give you an idea, there is -- away from Saudi Arabia, may have a list here, just to give you an idea of the breadth of what's going on internationally. I mean you've heard the big -- all the big boys, all the service companies, they've all talked about super cycles and things like that. But let me -- I can illustrate the following way. Let me give you a list of companies -- countries, Kuwait, Algeria, Oman, India, Abu Dhabi, PNG, I mean Papua New Guinea, Argentina, Mexico, Colombia, Venezuela. Those companies today have tenders out what we have in hand for more than 50 rigs. 50, okay? All right? It's a -- I've never seen -- this is really something that we've never seen before, this kind of scale. It's kind of stunning.And what's the reason for that? I think the reason, alluding to what you're talking about, which is the security thing, I think the [ NOCs ] appear driven to increase their production capacity. That's clearly, a big driver of it. Second, obviously, the geopolitical events, obviously, are also reordering the flows of oil and gas, including into areas like North Africa, where you're going to see people there that up to now put a higher priority on increasing their production. And then finally, I think we're all underestimating the fact that all these major oil and gas countries, their internal energy consumption is increasing themselves. And so that also is a driver. So you put all this together and the fact that lack of investment that's gone on in the past 5 years, that's what all this -- that's what's generating all this activity.Now will this all result in that number of rigs being awarded? That I'm not going to -- I don't want to -- I'm not overselling that, but I'm just trying to give you an idea to respond to your question of inquiries. When you have that many tenders out, you could see why Canrig is getting inquiries from everybody in the world because they want top drives. They want things to be upgraded. They want all kinds of things. And so that's what's driving the activity.

[John Daniel, analyst]

That's very good color, Tony. I appreciate your time.

[Anthony Petrello, executive]

Thank you.

[Operator]

[Operator Instructions] And the next question comes from Dan Kutz with Morgan Stanley.

[Daniel Kutz, analyst]

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

[Anthony Petrello, executive]

Well, obviously, we do like to grow and -- but we'd like to grow profitably. And so there's always that balance. And what we've tried to prioritize in our thinking is focusing on customers that also have a similar view to us as the adoption of technology because as you know, the rig count -- our rig margin is one thing, but the added benefit of NDS margins on these rigs also is a material enhancer, not just of absolute margin, but also of return on capital because the NDS quality of that EBITDA is much higher than also the base drilling business, where the cash conversion rate is almost 80% of the EBITDA to cash conversion. So that's where the priority is.And we think that, as customers begin to get the story of NDS more and more and learn about the product line, that offers great expansion opportunities to help drive the rig sales and it also helps to drive the use of NDS on third-party rigs. And you saw in this quarter something quite interesting, which was even though our rig count dropped, NDS actually grew in third-party business, which is interesting in and of itself, which proves the concept that what we're trying to unlock with this stuff is something that actually has a broader ability away from just Nabors rigs.So the answer is, yes, I do believe as the market matures, as the big players take a bigger position in the U.S. market, and they are more technology-focused that there is an opportunity to gain market share. So one example of that is the focus on, with the consolidation has occurred, I think one of the things people will be focused on is improving EOR, not just drilling wells faster. As you know, the industry has done a great job drilling wells very, very quickly. And at a certain point, there's going to be a law of diminishing returns. So I think some of the metrics may go to looking at EOR per lateral foot drilled, and I've actually seen some of the big guys talk about that increasing lateral length as much as 5 miles.And that kind of stuff benefits Nabors because we've pre-invested in that move. We built the M1000 rig which was the successor to the X rigs a couple of years ago that has 1 million pound hook load that's perfectly designed for these longer lateral lengths. We also introduced in the market a new top drive that has the highest torque available that can actually handle a 5-mile lateral. So the company has positioned itself to capture that moment. And I think when the market moves in that direction, all these were bets we made in the past couple of years as the market moves in that direction, I think it would help us also with share. So that's a pretty long-winded answer, but I hope it's responsive to what you wanted.

[Daniel Kutz, analyst]

No, that's great. It was a long-winded question. And then I guess just another one on the international space. So if I back out the SANAD rigs that are working today, you guys are somewhere in the low, mid-70s. And then if I look back to kind of the pre-pandemic period, when the SANAD program hadn't kicked off, you guys --- international activity was another dozen, 2 dozen above where your ex SANAD activity is now. What I'm basically trying to frame or understand is like, what do you think the potential is in the international space just to kind of get back to the level of investment and activity that's required to kind of get back to a normal production level? And then on top of that, you have all these capacity growth targets that a lot of the Middle East players have put out there. But I guess, I'm just trying to -- I'm trying to understand if there's a historical period that you point to that you think could be the opportunity for international activity upside outside of SANAD. And again, I appreciate you guys have given us a ton of color on your visibility over the next 2 years. But I'm just trying to understand what like the ultimate opportunity could be for international [ redeployments ] aside from the substantial SANAD opportunity.

[Anthony Petrello, executive]

Well, I gave you a pretty big list of those opportunities. It's really going to be a question of our prioritizing where we want to allocate the capital, what's best served is what I would put it. And as we think about that, some of the other logic I've talked about, which is technology and NDS also applies to international in terms of which opportunities we choose to pursue. So it's going to be a balance in terms of allocation of capital and what we want to pursue in terms of how fast we want to grow. But I think right now, you're seeing an environment where there's not going to be a dearth of opportunities. The question is, whether the returns on capital are good enough to meet with our hurdle rates and what are they such that they makes 1 on 1 equal 3 when we pursue that opportunity. And I'll let William add anything to that.

[William Restrepo, executive]

Sure. I think Latin America, which is under, I would say, estimated piece of the pie. I think we have real opportunities to grow in places like Argentina and Colombia, where we already are the strongest player. And in Mexico, on the platform rig market, we're getting a lot of pressure from PEMEX to add rigs in that market as well. So I don't even want to mention Venezuela because it's still a little bit up in the air and whether how much the sanctions are going to be removed and how much some of our clients are going to go back to that. But we do have real opportunity. We have 4 rigs in prime condition in Venezuela waiting for a resumption in activity by some of the foreign players.And then we have seen places like Kazakhstan that have gone down, but we don't know when that will come back. But I think if it does, we're ready for that as well. And then Kuwait, we have some very important tenders coming, and we are very well positioned in that market as well. Now we mentioned that we got an award in Algeria for 4 rigs, which is a very impactful win for us. And we are looking at other places in North Africa as well to expand. So those are the areas where you would expect to see most of the uptick in Nabors. Now we do have to be conscious that we cannot address all the opportunities that are out there. So we have to be selective. We have to focus, as Tony said, on places where you can get technology on top of the rigs. And we have to make sure we have a CapEx program for next year that makes sense in terms of our free cash flow objectives.

[Daniel Kutz, analyst]

Great. I'll turn it back.

[Operator]

And the next question is a follow up from Derek Podhaizer with Barclays.

[Derek Podhaizer, analyst]

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

[William Restrepo, executive]

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

[Derek Podhaizer, analyst]

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

[Anthony Petrello, executive]

I think you've hit on something that clearly has been on our radar for quite a while, and we have been looking and we've added some small software stuff that you haven't really seen much visibility to that to become part of our product lines as well. So kind of add to our internal growth but with kind of small tuck-in acquisitions. And then we've also embarked on partnerships as well. So our example is Corva out there, which has a software product that we competed with. But together, we think we can actually do 1 on 1 equal 4. And the marketplace is not a big marketplace, right? I mean there's only [ ex ] 100 -- 700 rigs in the international -- I mean altogether, maybe 1,500 rigs that are target rigs. It's not like the -- it's not like Microsoft and Apple, which have a gazillion customers out there. So for the technology to work, it makes sense to try to work with incumbents and see if there's a way to make things work better. And so we've embarked on that path with some of these deals we've done, and we're open to it. We are looking at other similar deals, not just acquisitions.

[William Restrepo, executive]

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

[Derek Podhaizer, analyst]

Great. I'll turn it back.

[Operator]

And this concludes the question-and-answer session. I would like to turn the floor to management for any closing comments.

[William Conroy, executive]

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

[Operator]

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