Nabors Industries (NBR) Q4 2021 Earnings Call Transcript

Nabors Industries (NBR 2.58%)
Q4 2021 Earnings Call
Feb 09, 2022, 2:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the fourth quarter 2021 Nabors Industries Ltd. earnings conference call. [Operator instructions] Please note, this event is being recorded. I'd now like to turn the conference over to William Conroy, vice president of corporate development and investor relations.

Please go ahead.

William Conroy -- Vice President of Investor Relations and Corporate Development

Good afternoon, everyone. Thank you for joining Nabors' fourth quarter 2021 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 myself, are Siggi Meissner, president of our Energy Transition and Industrial Automation Organization, and 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 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 free cash flow as that non-GAAP measure is defined in our earnings release.

We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. With that, I will turn the call over to Tony to begin.

Tony Petrello -- Chairman, President, and Chief Executive Officer

Good afternoon. Thank you for joining us as we review our results for the fourth quarter of 2021. This afternoon, we will follow our usual format. I will begin with some overview comments.

Then I will detail the progress we made on our five key to excellence and follow with the discussion of the markets. William will comment on our financial results. I will make some concluding remarks, and we will then open up for your questions. I am pleased with our strong operating performance in the fourth quarter.

Once again, all our segments met or exceeded the outlook we gave on our previous earnings call a quarter ago. We also made further progress on each of the company's five key strategic initiatives. Adjusted EBITDA in the fourth quarter was $132 million. As you can see from this result, we finished the year on a strong note.

We maintained our execution at a high level, while we grew the overall business. Our global average rig count for the fourth quarter increased by 12 rigs, excluding the impact of the sale of our rigs in Canada. This rig count growth was driven by increases in both our U.S. drilling and international activity.

Revenue in our Advanced Technology Drilling Solutions and Rig Technology segments also increased. Combined, sequential EBITDA in these two segments grew more than 25% and accounted for nearly 18% of the company's total. This is a new high watermark for these segments' contribution to our EBITDA. In the fourth quarter, we again made progress on our twin priorities to generate free cash flow and reduce net debt.

Free cash flow in the quarter totaled $50 million. As I mentioned, our EBITDA generation exceeded our outlook. Looking another way, EBITDA minus capex exceeded our expectations for the quarter and totaled $68 million. Free cash flow was impacted by increases in working capital as the business expanded in the quarter.

Net debt improved by $32 million in the fourth quarter, driven by the strong operating performance and disciplined capital spending. I am pleased with our overall performance in the fourth quarter and for the full year. I look forward to reporting further progress throughout 2022. In 2021, we began highlighting the five key drivers that we believe support the investment thesis on Nabors.

These include: our leading performance in the U.S.; the upturn in our international business; improving results and the outlook for our technology and innovation; our commitment to sustainability and the energy transition; and our progress on our commitment to delever. Let me update each of these, starting with our U.S. performance. Our strong daily rig margins in the Lower 48 improved yet again.

We exited the year with 79 rigs running. In the fourth quarter, our daily margin increased to $7,161. This accomplishment reflects our superior value proposition and was achieved even with upward pressure on costs. We remain committed to delivering the industry's best performance and most advanced technology while leading in safety and sustainability.

Next, let's discuss our international business. We bring those same attributes I just mentioned to our International Drilling segment. Our financial results in this segment were consistent with last quarter's margin outlook. This demonstrates our excellent performance in the field as we continue tightly disciplined spending.

Looking ahead, we expect SANAD to deploy its first in-Kingdom newbuild rig around the end of the first quarter. The rest of the 5, which have been awarded, should come at a rate of approximately one per quarter. We estimate each of these new rigs will generate annual EBITDA of approximately $10 million. We are excited as SANAD nears the deployment of the first new rig into the field.

The JV's long-term plan calls for a total of 50 newbuild units over 10 years, each successive year of five deployments to have $50 million to annual EBITDA. This visibility to future growth is unmatched in the industry. Now let's discuss our technology and innovation. Our focus on the development of advanced technology continues to pay dividends.

Our initiatives span several key target areas, including automation, digitalization, integration and robotization. Once again, our portfolio's market position improved. Quarterly EBITDA in our Drilling Solutions segment increased sequentially by 25%. This segment's EBITDA of $19.6 million exceeded its performance in the first quarter of 2020, immediately pre-pandemic.

The business crossed another milestone in the fourth quarter. When we combine the daily margins in the Lower 48 from our Drilling and Drilling Solutions businesses, Drilling Solutions added more than $2,000 per day in the fourth quarter. We recognize some competitors' top performance contracts, which are not yet yielding superior margins. In contrast, our combined daily rig margin figure amounts to more than $9,200 per day, reflecting the value pricing of our rigging technology offering.

This is the highest daily margin per rig by far in this market. In addition to this quarterly performance, our pipeline of advanced technology solutions remains full. Our development initiatives focused on the critical goals of improving customer wellbore quality and productivity while reducing operator costs. We believe we are unique in that our apps and products are deployable beyond the Nabors fleet on third-party rigs.

This approach to the business significantly expands our addressable market. Notwithstanding this opportunity, the full potential of the Nabors portfolio is maximized on Nabors' high-specification rigs, which we believe are the industry's most capable. Looking ahead, we expect to see greater penetration of our digital portfolio across the market. I'll wrap up my comments on our technology with a brief update on Rig 801.

You will recall, we deployed this groundbreaking fully automated rig in the third quarter for ExxonMobil in the Permian. The rig has completed its second full pad. Its performance is comparable for our other high-spec rigs, and it drills with the rig crew members away from the red zone. Now let's discuss delevering and the steps we've completed to derisk our capital structure.

In the fourth quarter, we again generated free cash flow and reduced net debt. This performance kept a full year in which we generated significant free cash flow and made meaningful progress to delever. Also, during the fourth quarter, we completed an offering of senior notes. Subsequently, we closed on a new revolving credit facility.

These two transactions have positioned us with materially reduced debt maturities over the next three years. This enables us to potentially manage our debt maturities through 2024 with free cash flow. I'll finish this discussion of our key value drivers with sustainability and the energy transition. We continue to refine and enhance our focus on sustainability.

With the emphasis we place on employee safety, we improved our safety record in 2021. With a TRIR of 0.41, we believe we lead the industry. This notable accomplishment by the Nabors team should be viewed in the context of activating more than 30 rigs worldwide during 2021. On the environmental front, we made significant progress.

We reduced our 2021 greenhouse gas emissions in our Lower 48 field operations by 10% versus the 2020 level, doubling our target. We also made progress across our initiatives supporting the energy transition. Initial prototype testing of our carbon capture and hydrogen injection technologies has been promising. We hope to have commercial products available this year.

We have several more projects underway as these proceeds will be reporting the results. Nabors Energy Transition Corp., or NETC, which Nabors sponsored, completed its IPO in November. The SPAC structure enables us to address the scale of energy transition opportunities with a lower cost of capital than Nabors. This remains an exciting initiative for Nabors as well as one we think could have material synergies with Nabors' existing operations.

To reiterate, our approach to the transition is comprised of three pillars: first, reduce our own environmental footprint by applying new technologies; second, take advantage of the opportunities in the areas adjacent to our activity; and finally, invest in companies, both adjacent to Nabors and in other verticals and help them to reach scale. Now I will spend a few moments on the macro environment. The fourth quarter began with WTI just above $75, followed by a dip to the mid-60s. Since then, it's been a relatively steady climb to the $90 level.

As we pointed out at our analyst meeting in December, sustained crude prices above the $60 mark provide returns that would incentivize operators to increase their drilling activity. This pricing drove activity materially higher in the quarter. During the quarter, Nabors added eight rigs equating to 11% growth. In comparison, according to Inverness, from the beginning of the fourth quarter through the end, the Lower 48 rig count increased by 54 rigs or approximately 9%.

This translates to a 15% share of the incremental rig count for Nabors. For the industry, larger clients accounted for slightly more than half of this growth. Once again, we surveyed the largest Lower 48 clients at the end of the fourth quarter. This group accounts for approximately 30% of the working rig count.

Our survey indicates an increase in the activity approaching 20% to this group by the end of the year. Nearly every operator among these 15 clients plan to increase activity. The pricing environment is moving upward quickly. Our own leading-edge day rates now stand several thousand dollars higher than the daily average in the fourth quarter.

We see pricing accelerating as industry utilization increases throughout the year. As we mentioned earlier, NDS' growth in the quarter was exceptional. This growth reflected the strong value proposition of the portfolio. Fully 74% of our Lower 48 rigs run five or more NDS services.

Our top service runs on 99% of those rigs. Going forward, in addition to our own domestic rigs, NDS will be focusing on both third-party and international opportunities. In our international markets, those same macro factors exist. Strong commodity prices and expected production increases are driving oilfield activity higher.

We see potential activity increasing in several countries. In particular, we have visibility to the SANAD newbuilds coming in Saudi Arabia. Tendering activity has picked up across other markets in the Middle East. The supply of suitable aisle rigs remains limited in that region, which should be favorable for pricing.

We are also optimistic for additional rigs in Latin America beginning in the first half of 2022. Clients there are planning increases in activity, and we have the rigs and relationships to support those plans. I'll wrap up this macro discussion with an update on our labor availability and the global supply chain. For labor, we have been successful at recruiting and staffing to support increases in our activity.

We took actions to address the labor market tightness and remain competitive. In the fourth quarter, we increased compensation on the field and throughout the organization. As a result, this challenge has recently eased somewhat. Now let me address the inflation and the supply chain.

We have seen higher costs across our supply chain. Their effects have been mitigated thus far through our vertically integrated manufacturing structure. The primary stress factor in our supply chain remains vendor lead times which have widened significantly. Our team has been on top of this challenge, and our operational continuity remains excellent.

I would note that we managed to increase the average drilling margins in the Lower 48 even as our costs increased. This speaks volumes to the performance we're delivering to our clients. To sum up, commodity prices remain at levels that are supportive of increased operator activity. We are also encouraged by the reduction in the DUC inventory, which suggests a favorable shift in operator spending toward drilling.

Natural gas prices, as indicated by the two-year strip, remain above $3. We are also seeing increased interest from operators, which can benefit from these higher prices. With all of this and the worst of Omicron seemingly behind us, we remain vigilant to potential future disruptions from the virus and challenges in the economy. Those risks, notwithstanding the current commodity environment, supports increased global drilling activity.

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

William Restrepo -- Chief Financial Officer

Thank you, Tony. The net loss from continuing operations for the quarter was $114 million or $14.60 per share. This compares to a loss of $122 million or $15.79 per share in the prior quarter. The quarterly improvement reflected the sequential increase in EBITDA.

Revenue from operations for the fourth quarter was $544 million, a 4% improvement compared to the third quarter. Strong operational results more than offset the absence of $8 million in third quarter early termination revenue and the sale of our Canadian assets. Canada generated $6 million in drilling revenue during the prior quarter. Excluding those items, revenue increased by almost 7%, with strong contributions from all our segments.

Drilling Solutions, Rig Technologies and U.S. Drilling all delivered double-digit percent sequential growth. U.S. Drilling and NDS benefited from higher rig count in the Lower 48 market and from an improving pricing environment.

Higher activity in international markets also drove revenue increases for both drilling and NDS. Total adjusted EBITDA of $132 million increased by $6 million or 5%. Excluding the impact of early termination revenue and the Canadian sale, EBITDA improved by approximately 14% as compared to the third quarter. On a normalized basis, all of our segments delivered strong growth.

U.S. Drilling EBITDA of $69.2 million was up by $7.1 million or 11% sequentially. Our Lower 48 average rig count increased in the fourth quarter to 75 rigs, up 7 rigs. Daily rig margin came in at $7,161, $136 higher than the prior quarter.

This improvement reflected a $457 increase in revenue per day, offset primarily by higher compensation for our crews. We have adjusted compensation for our rig employees over the last two quarters to ensure we remain competitive in the tighter labor market. Rig count continues to make progress on the strengthening commodity price, and higher utilization is pushing leading-edge day rates upward. During the last month of the quarter, on new pricing negotiations, we managed to push base rig day rates to between $22,000 and $23,000 per day.

I would like to point out that these rates do not include additional items normally charged on top of the base day rate when providing drilling rig services nor do they include our NDS offerings. This price momentum has translated into higher average daily revenue for our fleet. We expect average day rates and margins to continue to increase during the coming months. For the first quarter, we project our Lower 48 average daily margin to be between $7,500 and $7,600 as we continue to roll our rigs onto contracts with higher pricing.

Currently, our Lower 48 rig count stands at 83, which translates into 75% utilization for higher spec rigs. We forecast an increase of nine to 10 rigs in the first quarter versus the fourth quarter average. On a net basis, EBITDA from our other markets within the U.S. Drilling segment grew moderately versus the third quarter due to the addition of one rig in Alaska.

For the first quarter, we expect to add another rig in Alaska. However, the combined EBITDA of these two markets should decrease by several million dollars. The Alaska improvement will be more than offset by nonrecurring downtime for recertification on our most impactful offshore rig. International EBITDA of $73.2 million in the fourth quarter decreased sequentially by $3 million, driven primarily by the absence of the early termination revenue realized in the third quarter.

Excluding this item, EBITDA improved by roughly 7% as rig count increased by 4.4 rigs on average. Daily margin of $13,172 decreased by $1,203, reflecting the prior quarter's early termination revenue. Current rig count in the International segment is 72. We expect rig count in the first quarter to remain in line with the fourth quarter average with further rig additions coming in the following quarters.

Daily margin is targeted at approximately $13,000, in line with the fourth quarter level. Drilling Solutions continued making meaningful strides in the fourth quarter. EBITDA of $19.6 million was up $4 million or 25% from the third quarter. Gross margin for NDS was over 50% for the quarter.

We continue to see penetration improvements across all of our product lines, with the largest contributions coming from performance software in the U.S. and casing running services in international markets. Activity in the Lower 48 generally improved, taking our combined Drilling Rig and Drilling Solutions daily gross margin to nearly $9,300. This translates into approximately a $2,100 per day contribution from a rapidly growing Solutions segment, up from roughly $1,900 per day in the prior quarter.

The combined gross margin for Lower 48 Drilling and Solutions reached $65.1 million and delivered gross margins of 36.2%. We expect first quarter EBITDA for the Drilling Solutions segment to be just above the fourth quarter level. It is worth highlighting this segment's growth year over year. Comparing to the fourth quarter a year ago, NDS EBITDA increased by over 90% and its EBITDA contribution to Nabors as a whole increased from 9% to 15%, while gross profit margin widened by four percentage points.

Rig Technologies generated EBITDA of $3.8 million in the fourth quarter, an $800,000 improvement. The growth was primarily related to improved rig activity, which resulted in higher aftermarket sales. Higher specification requirements also drove demand for recertifications. For the first quarter, we expect EBITDA to come in on the positive side of breakeven.

Now turning to our liquidity and cash generation. Free cash flow totaled $50 million in the fourth quarter. We delivered material free cash flow even with higher accounts receivable, which reflected stronger revenue toward the end of the quarter. This compares to free cash flow of $133 million in the prior quarter.

The third quarter included a net benefit of $78 million from strategic transactions, namely the sale of our Canadian drilling assets for $94 million. This sale was partly offset by several investments in geothermal and other energy transition initiatives totaling $16 million. For the full year 2021, we generated free cash flow of $312 million as we continue to deliver industry-leading results, together with sustained cost and capital discipline. The first quarter is normally challenging in terms of cash flow generation as we pay several large annual items, such as property taxes, insurance premiums and employee bonuses.

In addition, capital expenditures for the year tend to be front loaded. Nonetheless, we are targeting breakeven free cash flow for the first quarter of 2022 as we expect some tailwinds from our year-end accounts receivable to offset these annual payouts. Capital expenses in the fourth quarter were $64 million, essentially in line with the prior quarter. This includes $11 million for the SANAD newbuilds.

For the full year 2021, capex totaled $244 million, including $69 million for the SANAD newbuilds. We are targeting capex between $95 million and $100 million in the first quarter, including approximately $35 million for the SANAD newbuilds. Our forecast capital spending for full year 2022 is approximately $380 million, including $150 million for SANAD newbuilds. The increase in the ex-SANAD capex reflects primarily the increase in average rig count for 2022 over the prior year's level.

In the fourth quarter, net debt declined by $32 million to $2.27 billion. This improvement was driven primarily by the positive free cash flow somewhat offset by the distribution of an additional $9 million to each of SANAD's shareholders. For the full year 2021, we reduced net debt by $260 million despite total distributions of $59 million to Saudi Aramco from our SANAD JV. We also continue to take steps to improve our position in terms of liquidity and debt maturity profile.

During the fourth quarter, we issued senior priority guaranteed notes with a principal amount of $700 million due in November 2027. We then used the proceeds from this transaction to reduce our near-term maturities. Subsequent to year end, we closed on a new revolving credit facility maturing in 2026 with a principal amount of $350 million. The new credit facility replaced our previous facility maturing in 2023.

The facility includes accordion and grower features for additional funding totaling up to $200 million, and a carve out that can be used for a secured letter of credit facility of up to $150 million. With the closing of the new credit facility, we have also increased our senior priority guaranteed node capacity to over $400 million. Together with the capacity on our priority guaranteed notes, we have nearly $1 billion available for future debt refinancing. We made significant progress in 2021.

We generated over $300 million in free cash flow and reduced net debt by $260 million. With the completion of the two recent financial transactions, we are well positioned in terms of liquidity and runway in our debt maturities. Currently, we are seeing a robust market environment. With our confidence in additional growth through 2022, we expect to continue capitalizing on the market upswing and make further progress on our long-term objectives to continue generating free cash flow and reducing our net debt.

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

Tony Petrello -- Chairman, President, and Chief Executive Officer

Thank you, William. I will now conclude my remarks this afternoon with the following. In 2016, we unveiled our strategy aimed at extending Nabors' technology leadership in the global land drilling industry. With our advances in process automation, digitalization, integration, and robotization, we have achieved our goals.

Over the same period, we set out to significantly improve our capital structure and materially delever. Our financial results, capped off by the fourth quarter, demonstrate material progress on those goals as well. Recognizing these successes, we believe the future holds unprecedented opportunities. Nabors is ideally positioned to help drive the energy transition.

And at the same time, we are committed to the responsible production of hydrocarbons. We believe this combination opens up a long, wide runway for Nabors. As I have said before, the best is yet to come. That concludes my remarks today.

Thank you for your time and attention. With that, we will take your questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Connor Lynagh from Morgan Stanley. Please go ahead. 

Connor Lynagh -- Morgan Stanley -- Analyst

Yes. Thanks. One of the things that stood out to me most in the press release was the $4,000 step-up in day rates. I was wondering if you could give a little bit more color.

How nuanced was that contract signing? Was there any special features to the rig? And how realistic would it be to think of the rest of your fleet migrating toward that type of a rate over the year here?

Tony Petrello -- Chairman, President, and Chief Executive Officer

OK. Well, I guess the color is that we see leading-edge base rates moving pretty quickly here. The fourth quarter average revenue per day, as you know, was $21,700. And the number you referred to is leading edge.

So I wouldn't say every renewal was that bad, but that's pretty applicable to most of the discussions. And interestingly, it applies to almost all the basins: Permian, the Haynesville, North Dakota. I think where it may not be as applicable is Marcellus given the fact that that market is suffering a little bit from takeaway capacity limits and who operates their hedge. So that puts a little bit of damper on things.

But generally, I think the market is very hot. In my 30 years at Nabors, it's probably the hottest in terms of ramping up -- ramp-up of day rates that it's ever been. Of course, that's off an extremely low point that was also unprecedented, so take it with a grain of salt. I think the other point to note is that even at these higher rates, given costs and other points, we're still not at prices where you cannot afford new capital investments.

So we're not really earning the kind of return that we really need to keep the industry healthy. But all that said, obviously, it's all very constructive.

Connor Lynagh -- Morgan Stanley -- Analyst

That's helpful context. I mean if we could sort of stay on this point. Is your view that the industry is sort of now out of, whatever you want to call it, super-spec pad-optimal capacity? And is there a reason to think that there will be a meaningful rig upgrades occurring later this year?

Tony Petrello -- Chairman, President, and Chief Executive Officer

I still think there's some runway to go yet. I mean we're at 75%. So if things stay on track by the end of the year, then I think you can reassess that question. Right now, there's still capacity to absorb.

And obviously, at the numbers we're at, we're at 75% historically, as you know, that's when the hockey stick of pricing starts kicking in a little bit. So it's hot. And you can tell that from the operators. Operators today want a hot rig and the guys who have rigs, even if they have a gap in their program, they usually efforts to kind of hold on to the rig, even working out deals with other people to hold on to the rig because they want to let it lose, all of which are constructive signs.

But I think we're still a ways yet from calling that we have a new area of replacement pricing for newbuild rates or even for significant upgrades because obviously, that depends on the long-term curve and what things look like, and I think it's way too early to say that. But in the meantime, it is pretty constructive.

William Restrepo -- Chief Financial Officer

I'll make an additional comment, Connor. I think we're going to be adding somewhere in the range of nine to 10 rigs in the first quarter. So by the end of the first quarter, we'll be in the low 80% kind of utilization, which is really as high as it's been a long time. And I think we're going to exit the year around the 100-rig mark.

So out of the 110 high-spec rigs that we have. So that's how hot the market is going to be, we think.

Connor Lynagh -- Morgan Stanley -- Analyst

Yes. That's all helpful context. Maybe just to sneak one more in here. So based on your comments there, it doesn't sound like we should really expect a lot of upgrade capital or anything like that, really the only growth capital.

It sounds like it's slated for this year's SANAD program. Is that a fair summary?

Tony Petrello -- Chairman, President, and Chief Executive Officer

Yes. Well, I mean, one of the things, obviously, where we're different is that with our 111 rigs, they all have walking capability already. So unlike some of our leading competitors, we don't have that as an issue. Now -- so I don't think for us to get to that one level down that there should be significant growth capital.

Beyond that 111 number, then we have to address that issue. But as I said, we're not at that point now so I don't think for us to get to that one level down that there should be significant growth capital. Beyond that 111 number, then we have to address that issue. But as I said, we're not at that point yet.

So the good news is we've got a pretty good runway here in front of us, pretty clear runway. And that's what we're going to take advantage of.

Connor Lynagh -- Morgan Stanley -- Analyst

All right. Thanks for all the color. 

Operator

The next question comes from Waqar Syed from ATB Capital Markets. Please go ahead.

Waqar Syed -- ATB Capital Markets -- Analyst

Thank you for taking my question and congrats on a great quarter. 

Tony Petrello -- Chairman, President, and Chief Executive Officer

Thank you, Waqar.

Waqar Syed -- ATB Capital Markets -- Analyst

William, if you analyze in Q4, EBITDA kind of come at around $525 million. Now you have a target of $800 million EBITDA for 2023 that you highlighted. Could you remind us how you're going to fill up that gap? Like $275 million or so gap that exists from annualizing Q4 to getting to $800 million?

William Restrepo -- Chief Financial Officer

So you want to go that far out, Waqar?

Waqar Syed -- ATB Capital Markets -- Analyst

Yes. No. Just -- we got a question -- this question again. So I just -- I think it will be useful for everybody.

William Restrepo -- Chief Financial Officer

I'll just give you a bit of a 10,000-foot analysis. But we think that -- keep in mind that run rate is about $520 million right now, so let's call it a $300 million gap to get us to the $800 million in 2023. So if you look at the growth -- the rigs where we were in the fourth quarter, which were roughly 74 rigs in Lower 48 and you get us to about 105 average, say, in 2023. That growth in rigs represents roughly about $110 million of incremental EBITDA.

And if then you take our margins from $7,000 to $10,000, which we think will be the case by the end of -- by the year 2023, we're looking at another $90 million. So that's $200 million on top of what we had in the fourth quarter annualized. Then if you look at SANAD, we're looking at another $50 million, $60 million of incremental capex from the rig additions that we have on the JV, with the newbuilds that are coming out at $10 million EBITDA per year. And then our Drilling Solutions, I can't tell you how optimistic and positive and bullish we are about Nabors Drilling Solutions.

That's going to be our strongest growing segment overall. I have full confidence that we're going to be giving positive news all the time going forward with the Drilling Solutions. And I think it's somewhere in the range of $50 million to $60 million growth in that business alone. So that's how we get there.

Waqar Syed -- ATB Capital Markets -- Analyst

That's very helpful. Now in terms of you're seeing very strong momentum in obviously rig rates, do you see over the next three years or so, rig rates getting to levels that were -- getting to newbuild-type economics in the U.S.? And again, what would be the day rate at which that newbuilding would be justified?

Tony Petrello -- Chairman, President, and Chief Executive Officer

Yes. I think at a minimum, that has to be 30-plus in terms of a day rate. And again, it depends on the outlook of what the real or the futures curve is going to look like so that people can actually plan accordingly programs that will justify paying those incremental numbers. I think the other question is going to be what those rigs are going to look like.

As you know, our thesis is that the industry has to move to automated rigs to have a new level of automation, and that could help drive that move. But I think it's still too early to say that. And obviously, the economics don't support it. So -- but yes, it is a possibility.

Again, I think it's too early to call, but you need at least a $30,000 day rate to get there. 

Waqar Syed -- ATB Capital Markets -- Analyst

Great. Thank you very much. Thanks for your answers. 

Operator

The next question comes from Karl Blunden from Goldman Sachs. Please go ahead. 

Karl Blunden -- Goldman Sachs -- Analyst

Hi. Good afternoon. Thanks very much for the time. On the distribution from SANAD, I was wondering if you could provide just a bit more context around that $18 million number in 4Q? I realize it's small, but the context would be helpful.

And then just bigger picture. Taking a look at the SANAD rig program and newbuild program you have in place, it does look like the JV is positioned to turn cash flow positive in 2024. Just will be interested in your expectations around when you would start receiving consistent cash distributions from the JV? 

Tony Petrello -- Chairman, President, and Chief Executive Officer

Well, from an initial comment, I'd just like to make this one, this deal, when it was first announced, I think there was some concern about the partner's willingness to actually clause their recash distributions. And with the two distributions that we've made this year, I hope those concerns have allayed. That shows that Aramco is also a partner that's looking at things practically and business like. So I think it's really a testament to the partnership we have that you actually see that because that was one of the concerns.

The other point as you make is, yes, they've come to a point where the newbuild, once it gets in stream, then it should be self-funding, in a way. And I'll let William talk about the exact timing of that. 

William Restrepo -- Chief Financial Officer

Yes. I'll give you what our forecasts and our projections are. And by the way, the reason we distributed $59 million to each partner, which is roughly about $120 million out of SANAD this year, is because we have -- we accumulated some excess cash in SANAD. We still have more.

But obviously, we didn't want to take too much out of SANAD at this point. So at year end, we reviewed our forecast, our consumption over the next several years. And there's two conclusions. One of the conclusions is that we had a bit too much cash.

So we continue to distribute, in addition to the 15 -- to the $100 million we did early in the year. And the second one is that we estimate somewhere in the 2024 time frame, we reach balance, sometime in that year. So from that point onwards, you could expect to see significant cash coming out of SANAD on a yearly basis. 

Karl Blunden -- Goldman Sachs -- Analyst

That's very helpful. I also took note of the comments that you made around debt reduction in December and January of the $89 million across the '23s and the '25s. I don't if it's possible to provide more specifics around which of those '25s you took out. And then just some context on addressing more of the '25s.

Now one step at a time, and you did outline very clearly, you plan to use cash flow through the 2024 bonds. But just thinking around those '25s, it's a bit of a larger maturity wall. Is that something that you would plan to address primarily with cash flow for a while? Or is there a larger plan to just extend that and then not worry about the maturities for some time? 

William Restrepo -- Chief Financial Officer

Well, we do have two sets of 2025s, right? We have the exchange notes, $218 million of those, and the rest are the nonguaranteed, let's call them that way, 2025s. So our plans are to, first, apply our free cash flow to the remaining 2023s and 2024s, the convertible bonds. And in answer to your question, about 80% of what we bought was in the 2025s, by the way. So our plans for the wall, as you described, is to start making a dent also on the 2025s.

But at some point, when that number in the 2025s reaches somewhere in the range of $500 million, I think that would -- that could be refinanced with the $1 billion in capacity we have now to issue no-guaranteed debt. So that's more or less the plan. When that will be, at this point, I can't tell you. If our cash flow is a little bit longer and we can reduce it even more, then the refinancing can be delayed.

But usually, I'd like to look at -- and the company has done that in the past, but some were within a two-year period, we start looking at refinancing opportunities. 

Karl Blunden -- Goldman Sachs -- Analyst

That's helpful. And then you recognize the...

William Restrepo -- Chief Financial Officer

Two-year period of maturity, right? So before maturity, we start looking at opportunities. So that -- and that's something you could expect to see in the future. 

Karl Blunden -- Goldman Sachs -- Analyst

That's very helpful. We definitely recognize the flexibility you have there with those -- the guaranteed capacity. 

Operator

The next question comes from Arun Jayaram from J. P. Morgan. Please go ahead. 

Arun Jayaram -- J.P. Morgan -- Analyst

Yeah. Good afternoon. I'd say one of the key, call it, early themes from earnings season has been punchy spending increases for the majors in the U.S. Lower 48, Exxon, Chevron, Conoco.

Historically, this has been a pretty important customer group for Nabors. Tony, you mentioned more recently that you've kind of been capturing about 15% of some of the incremental rig count additions per what you've reported versus what you're seeing in Inverness. I was wondering if you could maybe comment on what you're seeing from the separate customer groups? And would some increases by the majors, what would that mean to Nabors? 

Tony Petrello -- Chairman, President, and Chief Executive Officer

Sure. So obviously, I think we have a pretty good position with the majors and any increase there, we'll get our fair share, hopefully. I think in terms of the move that has occurred so far, however, if you look at our Tier 1 customer group, it's actually the large independents that have been driving that. And obviously, in the market as a whole, I think the privates have really played a great role in pushing it.

So the super majors have not yet stepped up, and notwithstanding the prices, they haven't yet put the foot on the pedal. And I'd also comment, even the large independents, I think the increases have been tempered a little bit by even by then, given the fact that we've seen a large amount of consolidation in the sector, obviously, Pioneer, Conoco and Devon have well done deals, and that when they're digesting those deals that they don't put the foot to the pedal as aggressively either. So whether that will change as they get more into integration, that's an open question. But right now, at least in our customer base, the Tier 1s -- those Tier 1s have been a bit more responsible for the charge rather than our historical super majors. 

Arun Jayaram -- J.P. Morgan -- Analyst

Great. Great. And just my follow-up. You guided to $380 million in capex in 2022, $150 million for the SANAD JV.

So for the $230 million in capital outside of the SANAD JV, can you give us a sense of how much of that is maintenance capex versus maybe some upgrades in that total? Just a little bit more flavor on the capex program. 

William Restrepo -- Chief Financial Officer

I'll give -- I'll take a whack at that one. I think I would say virtually all the money that's being spent outside SANAD is for sustaining capex. So that includes maintenance, which is most of that. We do have some, I would call, some capex in the budget for bringing rigs back.

But again, we had a lot of rigs brought back in 2021, and that was absorbed in our capex numbers. We didn't really have huge numbers for that. And we do have some maybe $9 million goes to our facility in Saudi Arabia. We have a big rig in Papua New Guinea that we signed five years ago.

So it maybe some $10 million for that. Everything else is maintenance sustaining capex. We're going to spend some money, a little bit more money in NDS, but it just doesn't move the needle. I think I told you multiple times before that NDS is very light, capex light.

So in reality, what moves the needle are the rigs. And the rigs, as the fleet goes up, there's a certain amount of dollars per rig per year that need to be spent on the maintenance of those rigs. So that's where you see the increase. 

Arun Jayaram -- J.P. Morgan -- Analyst

Great. And I just had one maybe quick housekeeping question. In the other long-term assets section of the balance sheet, it moved kind of almost $275 million sequentially, from $408 million to $675 million. What is in that? Can you give us some detail on that increase? 

William Restrepo -- Chief Financial Officer

That's just the SPAC money.

Arun Jayaram -- J.P. Morgan -- Analyst

OK. Got it, got it. That makes sense. 

William Restrepo -- Chief Financial Officer

The investment in the SPAC, right? So that's what you see there. 

Arun Jayaram -- J.P. Morgan -- Analyst

Thanks. Thanks very much for the time.

Operator

[Operator instructions] Our next question comes from Taylor Zurcher from Tudor, Pickering, Holt. Please go ahead. 

Taylor Zurcher -- Tudor, Pickering, Holt and Company -- Analyst

Hey, Tony, William. Thanks for taking my question. My first one is on international pricing. Tony, I think you talked about some tendering opportunities in Latin America for the first half of the year.

And some Middle East opportunities above and beyond Saudi where you think you might be able to get some pricing in 2022. And I guess I'm just curious for more color on the pricing outlook. Just looking at your rig count, you're at roughly 70 rigs today, and exiting 2019, you were closer to 90. So if we just extrapolate that out, it would suggest that capacity is not actually super soaked up right now and maybe there's some mix issues underneath the surface that I can't really see very well for my seat.

But long winded way of asking, I'm just curious how you're thinking about international pricing over the course of 2022 outside of Saudi? 

Tony Petrello -- Chairman, President, and Chief Executive Officer

Sure. First, let me comment on activity. So in terms of activity, obviously, you have visibility on the Saudi rigs, which are four for this year. In total, we have good visibility on eight rigs, including Saudi for this year, three in the second quarter and the other five in the back half, and the other region will be flat in America.

In terms of bidding activity, I think Oman, Kuwait, or other areas that are out there. And there is some activity there as well, although we're not yet willing to call actual visibility on it, but it's in our runway. And in terms of pricing, I think it's fair to say that it depends on the type of rigs. If it's oil stuff, then you're not looking at that big of increases.

If it's deep gas, those rigs don't exist today. And even in our fleet, we have to dig deeper in terms of meeting the requirements because that has a lot of BOPs and heavy pressure equipment. All that kind of stuff and that stuff is not readily off the shelf. So if those -- if you're landing any one of those things, those are going to be -- they're going to require additional capex, as that has been planned for, but there will also be a replacement cost margins because the rigs don't exist.

So that is a great opportunity out there to the extent one can get it. So that's -- and obviously, that stuff, we're on the hunt for as well. 

Taylor Zurcher

Got it. Thanks for that. And a follow-up on free cash flow for 2022. I don't think I -- I might have missed this in prepared remarks, but a question is at the recent analyst day presentation, you outlined a plan for $200 million of free cash flow.

I imagine this outlook has only gotten better since then or neutral at worse, but I'm just curious if $200 million is still...

William Restrepo -- Chief Financial Officer

Let me correct that. In the analyst day, we outlined $300 million for 2023. I believe there's...

Taylor Zurcher

Yes. I'm talking about $200 million for 2022. 

William Restrepo

That must be your interpolation between numbers. But what -- I mean, it's early in the year and at this point, the best I can give is some sort of range. So I'll give you a wide range because it's early in the year. So I think somewhere between $100 million and $200 million.

It will be positive, it will be meaningful. And of course, it will depend on what year-end collections and that always affects the number. To give you an example, in the fourth quarter of this year, we had a pricing increase with our largest client late in the year, and they could -- they didn't have the time to put it in the systems. So about $20 million of collections that should have come in the fourth quarter ended up in the first quarter.

So that can happen at year end. So at this point, I can give you a wide range, but it just -- my range just tells you the confidence we have that we're going to be meaningfully positive. We'll continue using all that money to reduce our net debt.

Taylor Zurcher

Thanks for the clarification.

Operator

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

Keith MacKey -- RBC Capital Markets -- Analyst

Hi there, and thanks for taking my questions. Just wanted to start off maybe on NDS and I heard your commentary about the growth implied to get to your 2023 targets of $800 million for the corporate and $50 million to $60 million in NDS. Can you just give us a sense of how much third party or additional third-party penetration that implies? Or is most of that growth on the Nabors' kits on Nabors rigs? 

Tony Petrello -- Chairman, President, and Chief Executive Officer

Yes. I can't give you the exact breakdown, but it's a two-step process. One is to go deeper. I mean we're up 75%, up five or more services in Nabors rigs and to get -- make sure that all the high-margin stuff is part of that parcel to extract more content from Nabors rigs.

And then the second point is to do the third party. And right now, the third party is relatively small, but...

William Restrepo -- Chief Financial Officer

$50 million in revenue. 

Tony Petrello -- Chairman, President, and Chief Executive Officer

$50 million revenue. But we've made a lot of investment this past year in rearchitecting our portfolio so that we can more easily put these services on third-party rigs. Obviously, a third-party rig will not get all the benefits of being on a Nabors rig, but we think we have a way now very cost-effectively to introduce these services on third-party rigs. And we're going to do that not just in the U.S.

but internationally as well. And also, we've also said that we're willing to put them on what you might view as competitor rigs as well that people don't normally think of working together. But we're trying to make the value proposition that this helps the customer, and it will help you as well if you do it, if you go down this path. We think the scrutiny's out of the bottle on this automation.

And so therefore, it's in everyone's interest. For example, our performance software and performance tools, our rig operating system, which I think is unmatched in the industry now with the rig sequencing engine, which you saw the benefits of in the rack and pinion rig, that is now available as a -- on every rig, on Nabors rigs as well as third-party rigs, it will be available as well. And if you go to the website, Nabors' website today, you'll see under Insights on the landing page, a video of the rack and pinion rig, so it gives you an idea how automated it is. You'll see it's stabbing into a hole without a person on the rig floor.

That level of automation is available now to be transported on our competitor rigs as easily -- or not as easily but pretty easily, and we're going to try to make that accessible, which helps the operator because -- this allows the operators' well plan to be executed digitally, which is the real value prop. You can't get to automation,  you can't get the factory drilling today unless you go down the path of both automation and mechanization. And we think that, that path has now been -- that Pandora's box is open, and we think it's only going to continue. So our position is to try to take advantage of it by exporting some of this technology out to third-party rigs.

Subodh, do you have anything to add? 

Subodh Saxena -- Senior Vice President, Nabors Drilling Solutions

Yes. I guess the key thing to -- that we are focusing on NDS is to target the underserved markets that we have, where technology is really required to lower the cost per foot drilled. And the other key markets are the LSTK markets. So aligning -- because those customers which are operating those lump sum turnkey projects are really looking for a step change in their performance.

So our focus on third party is focused not just on Lower 48, but also internationally to ensure that we work with the customers to grow the performance levels that are possible today in Lower 48. 

William Restrepo -- Chief Financial Officer

I'll make an additional comment, Keith. I think it wasn't missed by our competitors that one of the large independents decided to give us all their work, almost 12 rigs. They were getting good performance from their supplier at the time, but they just wanted to go a step further in technology implementation and using some of the techniques that have been very successful with our clients. So because of that, they gave us all the work.

And this won't be missed by our competitors. I think this will be something that will allow us to start introducing those technologies with our peers as well. 

Keith MacKey -- RBC Capital Markets -- Analyst

Got it. And maybe just one follow-up on that topic. How do you see the economic model changing at all? I know NDS is certainly very high margin as it is. But how do you see maybe the economic model changing as you increase the amount of mechanization on rigs and adding value in the per foot drilled? Is it strictly a day rate model that you'll prefer? Or is there a way to get a larger piece of the pie as you prove the benefits? 

Tony Petrello -- Chairman, President, and Chief Executive Officer

Obviously, it's a work in process. I mean, this has been the age-old question in the sector. When you look at NDS today, virtually all the NDS pricing is based on the value pricing. So when you talk with -- other operators talk about their performance contracts, to me, there's nothing revolutionary about those kind of contracts.

They're just -- you do a KPI that -- you give the operator a KPI that you can't perform -- I mean, that you think you can beat and then you call that a performance contract. That's nothing innovative as far as I can see. What we're trying to do with NDS is deliver a service that he needs on the wellbore, but to deliver it with a quality level and in a way that unlocks additional value. And on that additional value, we take a proportionate share.

And that's the way the pricing on the NDS products work, which is why they're so -- they've been so successful right now. And we intend to continue that. And as the rig gets more integrated with this automation stuff, I think there'll be more opportunities to do exactly the same thing. And by the way, I think with our automation platform, I think we have this concept of using the rig as a platform.

It will also be the case that we can use the rig as a service, where other service providers, like the big three or big four that have technology or apps they want to run on a rig, we can actually enable that out to our rig, which will allow them to be successful, but also we get our fair share of that pie as well because we're creating an ecosystem that allows us collaborative sharing. So that's part of the mission as well. So in that sense, we aren't going to change the sector a little bit if we're successful in making inroads on that. Subodh , you got anything to add to that? 

Subodh Saxena -- Senior Vice President, Nabors Drilling Solutions

Yes. Just to complement what Tony said, our approach is to be flexible in our commercial terms. But the key thing that we are trying to drive is stickiness that comes either as service-as-a-subscription model, platform-as-a-service model. So the idea is to generate continuous revenue streams going forward, which helps in meaningful discounted cash flow for today.

So I think that's our approach to ensure that what we provide is going to be sticking around for a long period of time. 

Keith MacKey -- RBC Capital Markets -- Analyst

OK. Thanks very much. 

Operator

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

William Conroy -- Vice President of Investor Relations and Corporate Development

Thank you for joining us this afternoon. If you have any additional questions or wish to follow up, please contact us. We'll end the call there, Jason. Thank you very much. 

Operator

[Operator signoff]

Duration: 66 minutes

Call participants:

William Conroy -- Vice President of Investor Relations and Corporate Development

Tony Petrello -- Chairman, President, and Chief Executive Officer

William Restrepo -- Chief Financial Officer

Connor Lynagh -- Morgan Stanley -- Analyst

Waqar Syed -- ATB Capital Markets -- Analyst

Karl Blunden -- Goldman Sachs -- Analyst

Arun Jayaram -- J.P. Morgan -- Analyst

Taylor Zurcher -- Tudor, Pickering, Holt and Company -- Analyst

Keith MacKey -- RBC Capital Markets -- Analyst

Subodh Saxena -- Senior Vice President, Nabors Drilling Solutions

Keith Mackey -- RBC Capital Markets -- Analyst

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