425: Nabors Industries Navigates Market Volatility with International Growth and Strategic Investments

Nabors Industries reports Q4 2024 results, highlighting international growth offsetting Lower 48 challenges, and ongoing investments in Saudi Arabia's SANAD program.

Summary

• Nabors Industries' Q4 2024 adjusted EBITDA totaled $221 million, with international markets showing robust growth offsetting challenges in the Lower 48.
• The company activated 10 international rigs in 2024 and expects another 10 deployments in 2025, including reactivating an idled rig in Colombia.
• SANAD deployed its ninth newbuild in Q4 and plans five more in 2025, aiming for 15 total, with potential for five more awards this year.
• SANAD's newbuild program targets 50 rigs over 10 years, with each rig contributing significant EBITDA, initially over $10 million per year, increasing to approximately $13 million for more recent units.
• The company expects SANAD's working newbuild fleet to generate over $140 million in adjusted EBITDA in 2025 and approximately $200 million in 2026.
• Nabors' Lower 48 daily rig margins remained attractive, supported by demand for high-performance rigs, despite rig churn.
• NDS's gross margin exceeded 54% in Q4, with Lower 48 daily margin contribution of $3,723 per day.
• The company faced challenges in Q4 due to payment delays in Mexico ($50 million), a sluggish Lower 48 market, and accelerated newbuild payments in Saudi Arabia.
• Nabors anticipates closing the Parker Wellbore acquisition in Q1, expecting at least $35 million in annualized cost synergies in 2025.
• For 2025, Nabors projects Lower 48 average rig count between 62 and 64, with a daily gross margin of approximately $14,600.
• International Drilling targets an average daily margin of $17,600 in 2025, with an average rig count between 88 and 89 rigs.
• The company forecasts 2025 capital expenses in the range of $710 million to $720 million, including approximately $360 million for SANAD newbuilds.
• Nabors expects around breakeven free cash flow for 2025, including negative free cash flow for SANAD of approximately $150 million, implying $150 million free cash flow outside SANAD.
• The company plans to use cash flow outside SANAD to reduce gross debt by approximately $150 million in 2025.
• Nabors is positioning itself for the future by managing near-term volatility and deploying enabling technology, with a focus on international growth and strategic investments.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While there are challenges in the Lower 48 and short-term cash flow pressures due to investments in SANAD, the company is experiencing growth in international markets and expects to realize synergies from the Parker Wellbore acquisition. Management expresses confidence in the long-term value creation potential of SANAD and the overall strategic direction of the company.

Positives

• International markets are showing robust growth, offsetting challenges in the Lower 48.
• SANAD's newbuild program offers a unique, large-scale opportunity in Saudi Arabia.
• NDS's gross margin exceeded 54% in Q4, demonstrating the value of the NDS portfolio.
• The Parker Wellbore acquisition is expected to generate significant synergies and be accretive to free cash flow.
• Nabors is well-positioned to capitalize on the trend toward longer lateral well designs in the Lower 48.
• The company has a new operating model in Argentina that allows for the extraction of cash and profits denominated in US dollars.
• Nabors is working diligently to improve efficiency and align its cost structure.
• The company's rig supplier, a joint venture of NOV, has been improving performance on delivering milestones for SANAD newbuilds.

Negatives

• Free cash flow in Q4 fell short due to payment delays in Mexico, a sluggish Lower 48 market, and accelerated newbuild payments in Saudi Arabia.
• The Lower 48 market has not improved as anticipated, impacting drilling rigs and NDS businesses.
• The company experienced an elevated level of rig churn in the Lower 48 market.
• Pemex has announced reduced activity for 2025, which could impact Nabors' revenue.
• SANAD's newbuild program requires significant capital investment, impacting consolidated free cash flow in the short term.
• The closing date on the Parker Wellbore transaction is not yet known as regulatory approvals are pending.

Risks

• Delays in payments from customers, particularly in Mexico, can negatively impact cash flow.
• A continued sluggish Lower 48 market could further impact drilling rigs and NDS businesses.
• Reductions in activity by Pemex could impact Nabors' rig count and revenue.
• The significant capital investment required for SANAD's newbuild program could strain consolidated free cash flow.
• Regulatory approvals for the Parker Wellbore acquisition are pending, and the closing date is uncertain.
• The company faces potential risks associated with operating in international markets, including political and economic instability.
• The company's projections assume no favorable impact on Lower 48 drilling from changes in policies by the new administration, or from incremental US gas drilling potentially driven by new infrastructure, or from data centre-related demand.

Future Outlook

Nabors anticipates a flat year in the US market, growth in international markets and Drilling Solutions, and continued investment in Saudi Arabia. The company expects to reduce gross debt by approximately $150 million in 2025.

Management Comments

• 'We are positioning Nabors to not only capitalize on the future, but also to drive it.'
• 'SANAD is currently in its investment phase and already generating long-term value.'
• 'Parker should be immediately accretive to our free cash flow and has the potential to generate significant synergies.'
• 'Nabors can tell their free cash flow today masks the strength of our company away from SANAD.'
• 'Given the clear profitability and the inherent cash generation potential of the Saudi operation, we are reinvesting all of SANADs cash flow to continue to build for the future.'

Industry Context

The announcement reflects the ongoing trends in the oil and gas industry, including the shift towards international markets, the importance of technology and innovation, and the focus on capital discipline. Nabors' investment in Saudi Arabia aligns with the country's strategic decision to build a sizable drilling rig fleet in the Kingdom.

Comparison to Industry Standards

• Nabors highlights that SANAD's newbuild program offers five-year payouts with ten-year contracts, which it claims is unparalleled in the industry.
• The company contrasts this with other deals in the industry that have eight-year payouts on an EBITDA basis, which translate to 10to 12-year payouts on a free cash flow basis.
• Nabors estimates that SANAD, without additional new investment, is already generating substantial cash flow in excess of $200 million per year, which is expanding at about $50 million per year.
• The company suggests that SANAD could be valued anywhere from $2.5 billion to $3.5 billion today based on valuation metrics used in the region.

Stakeholder Impact

• Shareholders: Potential for long-term value creation through international growth and strategic investments, but short-term pressure on free cash flow.
• Employees: Opportunities for growth and development in international markets, potential for synergies and integration with Parker Wellbore.
• Customers: Access to advanced drilling technologies and solutions, potential for improved efficiency and cost savings.
• Suppliers: Continued demand for equipment and services, particularly in Saudi Arabia.
• Creditors: Commitment to reducing gross debt using cash flow generated outside SANAD.

Next Steps

• Complete the merger with Parker Wellbore.
• Continue deploying newbuild rigs in Saudi Arabia.
• Focus on improving efficiency and aligning cost structure.
• Monitor and address payment delays in Mexico.
• Pursue additional rig awards in international markets.
• Reduce gross debt using cash flow generated outside SANAD.

Key Dates