Nabors Industries (NBR) Q1 2022 Earnings Call Transcript

Nabors Industries (NBR -5.02%)
Q1 2022 Earnings Call
Apr 28, 2022, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Nabors' first quarter 2022 earnings conference call. All participants will be in a listen-only mode. [Operator instructions] After today's presentation there will be an opportunity to ask questions. [Operator instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. William Conroy, vice president of investor relations. Please go ahead, sir.

William Conroy -- Vice President, Investor Relations

Good afternoon, everyone. Thank you for joining Nabors' first quarter 2022 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 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 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 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.

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

Good afternoon. Thank you for joining us as we review our results for the first quarter of 2022. 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 market. William will comment on our financial results. I will make some concluding remarks, and we will open up for your questions. Our performance in the first quarter marked solid progress on each of our five key initiatives.

Our strategies are paying dividends. At the same time, we benefited from the increasingly constructive markets for our services. Adjusted EBITDA in the first quarter was $131 million. Our operational execution remains strong, especially in our key markets.

Our results reflect minor impacts from disruptions in our operations in Russia, as well as ongoing challenges to the supply chain. Our global average rig count for the first quarter increased by 10 rigs. This rig count growth was mainly driven by increase within our U.S. drilling activity.

Revenue momentum in our drilling solutions segment remained strong, increasing by nearly 5% sequentially. EBITDA in this technology leader reached $20 million mark its highest level since the start of the pandemic. In the first quarter, we made significant progress to reduce net debt. For the quarter, EBITDA less capex, totaled $47 million.

Typical working capital leads in the first quarter were exacerbated by supply chain constraints, inventory, and the growth in the business. Net debt improved by $55 million in the first quarter, driven by exercises of our warrants, which were issued in 2021. Next, as I have outlined for the past few quarters, I will highlight our progress on the five key drivers that we believe support the investment thesis on Nabors. These drivers include our leading technology and performance in the U.S.

market, expansion of our international business, improving results for our technology innovation, improving our capital structure and reduce leverage, and our commitment to sustainability and the energy transition. Let me update each of these, starting with our performance in the U.S. The only big margins in the Lower 48 improved yet again. We exited the quarter with 87 rigs running.

In the first quarter, our daily margin increased by $533 and was just under $7,700. The continued growth in our margins demonstrates the market demand for our value proposition and our ability to price to value. I'm convinced, this leadership is driven by the quality of our assets and the level of our execution. But let's be clear, the technology leadership we bring to the market through Nabors' drilling solutions is equally important in helping our rigs deliver best-in-class drilling performance.

We remain committed to delivering the industry's best performance and most advanced technology, while leading in safety and sustainability. Let's discuss our international business. We performed well and our financial results in this segment were consistent with our outlook. Operational execution in the field was excellent.

SANAD's first in-Kingdom new build rig, which was anticipated before the end of the first quarter, is now expected to deploy in May. The rest of the five new builds which have been awarded should come at a rate of approximately one per quarter. Given the terms of the JV agreement, we estimate each of these new rigs will generate annual EBITDA of approximately $10 million. With the JV's long-term plan for 50 new build units over 10 years, the prospects for significant future growth are outstanding.

Now, let's discuss our technology and innovation. We believe the development and deployment of advanced technology are key to Nabors' future success. Our focus areas include automation, digitalization, and robotization. Again, in the first quarter, our market position improved.

Quarterly EBITDA in our drilling solutions segment increased to $20 million. We used the combined daily margins in the Lower 48 from both our drilling and drilling solutions businesses to evaluate our business on an apples-to-apples basis versus peers. In the first quarter, drilling solutions added more than $2,100 per day. With this contribution, our combined daily rig margin figure amounts to more than $9,800 per day.

One of the core elements of NDS' strategy is to target the third-party rig market. This approach to the business expands our addressable market well beyond Nabors' own rigs. We have made progress on our goal to expand penetration of the NDS portfolio into this third-party universe. Last quarter, third-party customers accounted for more than 20% of NDS' Lower 48 revenue.

I'll wrap up my comments on technology with a brief update on our fully automated rig R801. This rig runs our Smart Suite of performance automation tools, as well as integrated casing running. We are in the process of using lessons learned from this rig and applying them across the rest of our fleet. We have identified certain automation modules on the rig that can be exported in component form to replicate functionality of R801.

We are now ready to install one of these automation modules on one of our Permian rigs. We expect that over time, these automation modules will be deployed on most of our existing high-spec rig fleet. In addition, we also intend to make them available on third-party rigs. In this way, we intend to exploit these new technologies without the need for a new rig build cycle and broaden the knowledge and acceptance for these solutions.

Now, let's discuss our delevering efforts and the steps we've completed to derisk our capital structure. In the first quarter, we made significant progress to reduce net debt. In particular, exercises of our warrants contributed a reduction of net debt exceeding $120 million and a commensurate increase in equity, recognizing our improved near-term debt maturity profile, as well as the completion of our new revolving credit facility in February, one of the major debt rating agencies raised its issue-level ratings across our notes. I'll finish this discussion with remarks on our key value driver of ESG and the energy transition.

Building on our industry-leading TRIR performance in 2021, we are looking to improve on that further in 2022. Less visible in the TRIR statistic is the significant progress in the severity of the incidents reported. Our incident severity rate improved by 44% in 2021. We expect to further advance in 2022.

Both of these measures demonstrate the positive emphasis we place on employee safety. On the environmental front, in our Lower 48 field operations in 2022, we are targeting a further 7.5% improvement in greenhouse gas emissions intensity on top of the 10% we delivered in 2021. We made additional progress across our initiatives supporting the energy transition as well. We further build out the organization, adding support for our carbon capture and hydrogen injection technologies.

We hope to have commercial products available this year. Most recently, we announced an investment in another advanced geothermal company, GA Drilling. This addition to our existing portfolio enhances our position to help drive next-generation geothermal technology. Since then, we also invested in a company focused on monitoring and measuring ESG and other emissions.

To reiterate, our approach to the transition is comprised of three pillars: reduce our own environmental footprint by applying new technologies and best practices, capitalize on opportunities in areas adjacent to our core activity using our global footprint and existing expertise, investing companies, both adjacent to Nabors and in other verticals and accelerate their achievement of scale. As you can see, we are making significant progress on each of these fronts. Now I will spend a few moments on the macro environment. The first quarter began with WTI just above $75 and climbed steadily to late February.

Since the onset of the war in Ukraine, the price has been more volatile. The quarter closed with WTI just over $100. Crude oil prices remained above the pre-war level, let alone above the $60 mark we highlighted in our December analyst meeting. Since that meeting, the forward market has improved as well.

The futures price of WTI 24 months out from now stands 20% higher than its priced 24 months out from the December of last year. In this range, oil prices provide returns that would incentivize operators to increase their drilling activity above our previous expectations, in response to improving operator economics, drilling activity for the industry will materially higher in the quarter. Nabors' quarterly average rig count increased by 12% in the first quarter. Once again, we surveyed the largest Lower 48 clients at the end of the first quarter.

This Group accounts for nearly 30% of the working rig count. Our survey indicates an increase in activity of more than 15% for this Group by the end of the year. Nearly every operator among these 15 clients plans to increase activity. The pricing environment remains bullish.

Our average daily revenue exceeded $23,000 in the first quarter, which was up nearly $1,300 or 6% sequentially. Our own leading-edge day rates are in the high 20s. With the potential activity increase indicated by our survey, we see pricing continuing to increase as industry utilization times over the balance of the year. Turning next to technology and NDS.

The first quarter's EBITDA exceeded the exceptionally strong performance of the previous quarter. This continued growth reflects the strong value proposition of the portfolio, 82% of our Lower 48 rigs, run five or more NDS services. This metric is up by 8 percentage points versus the previous quarter and represents record high penetration among specific services. Let me wrap up on this macro discussion with updates on several other areas, Russia, covenant interest rates, labor availability, and the global supply chain.

In light of the conflict in Ukraine, we remain concerned for the welfare of citizens there and throughout the region. We currently operate three drilling rigs in Russia under contracts that require us to continue performing for a period. While maintaining compliance with all applicable sanctions, we are refraining from making additional investments and from introducing new technologies into the country. Recent events in the credit markets, coupled with the resurgence of COVID in China, still loom as potential risks to global energy demand.

We remain vigilant to the impact these factors could have on the forward outlook. For labor, the tight market we experienced through the end of last year has eased somewhat. Timely staffing for additional rigs remains challenging. We addressed compensation levels to remain competitive and those steps have been successful.

Notwithstanding the increase in costs, profitability has continued to improve. Finally, let me address inflation and the supply chain. We have seen higher costs across our supply chain, including materials and logistics. We have been able to offset a significant portion of the pressures on our supply chain with our internal manufacturing infrastructure.

We and the industry continue to experience significantly stretched lead times. This challenge has forced us to increase our inventories to ensure we can deliver without disruptions, great components, and spare parts to our customers and internally to Nabors'. We remain committed to maintaining our operational tempo. To sum up, we are seeing indications for continued drilling activity increases globally.

Our latest survey of the larger Lower 48 operators indicates a slightly higher 2022 rig count than expected just a quarter ago. This reflects that Nabors' standing of hype, at least for now, operator plans appear to remain largely based on the pre-war commodity outlook. We see opportunities emerging in our larger international markets. We are also seeing a significant increase in gas prices and many countries, reassessing their hydrocarbon needs focused on natural gas.

These factors could spur additional activity as well. Inflation and supply chain constraints remain present. At Nabors, we have demonstrated our ability to grow our business while improving our financial results and our capital structure. I fully expect this performance to continue in the coming quarters.

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 first quarter was $184 million or $22.51 per share. This compares to a loss in the prior quarter of $114 million or $14.60 per share. In the first quarter, the conflict in Ukraine led to a significant devaluation of the Russian currency and to restrictions in operations.

These challenges resulted in a reduction in our adjusted EBITDA of approximately $2 million and charges to other expenses of close to $3 million for a combined impact after tax of $5 million or $0.61 per share. The first quarter results also include a non-cash charge of $72 million or $8.63 per share related to mark-to-market treatment of Nabors warrants. Because the warrants initially included an incentive shares feature, the number of warrants is not always equal to the number of shares obtained through a warrant exercise. Because of this disparity, accounting rules record that we mark to market the warrants based on their fair value at the end of the quarter.

The quarterly gains or losses resulting primarily from the fluctuations in our common share price will add some volatility to our earnings as long as the warrants remain outstanding. However, this income or expense will have more cash impact and the net cumulative effect on our equity will be reversed at the end of the life of the warrant. Revenue from operations for the first quarter was $569 million, a 5% sequential improvement, more than offsetting a 2% reduction in available days for the quarter. In general, our results continue the trends for the fourth quarter, namely strong overall drilling results, particularly in the Lower 48 market.

Revenue from U.S. drilling and drilling solutions was up significantly, reflecting improving pricing and higher rig count. The Lower 48 market for drilling rigs surged ahead. While rig count increased by 12%, revenue was up 16% as average day rates for the fleet continued to improve.

Higher activity in international markets also drove revenue increases for our international segment. Total adjusted EBITDA of $131 million decreased by $1.1 million or 0.9%. The fewer days available in the quarter versus the fourth affected our operational EBITDA by approximately $3.7 million as compared to the fourth quarter. Russian headwinds further reduced our EBITDA by approximately $2 million.

These reductions were almost offset by longer term trends in our results. U.S. drilling EBITDA of $74.3 million was up by $5 million or 7% compared to the prior quarter. This improvement was driven by our Lower 48 EBITDA, which rose by $8 million, a 19% improvement sequentially.

Our average rig count in the Lower 48 increased in the first quarter to 83.4 rigs, up approximately nine rigs from the fourth quarter average. Daily rig margins came in at $7,694, up $533. This improvement resulted from a $1,291 increase in revenue per day, $900 of which were from higher average day rates for the fleet. These pricing increases were partly offset by higher labor expenses and costs related to start-ups.

Rig count continues to move up on the strong commodity price and pricing continues to improve on the higher utilization for high-spec rigs, now approximately 80%. During the quarter, we saw leading-edge pricing in the high 20s for our rigs alone, without layering on any of our NDS offerings. As our fleet reprices to market, we expect this favorable rate trend to endure. For the second quarter, we project our Lower 48 average daily margin to continue expanding and reach approximately $8,500 per day.

Given the current level of customer interest and existing commitments, we forecast an increase of six to seven rigs in the second quarter versus the first quarter average. On a net basis, EBITDA from our other markets within the U.S. drilling segment decreased by a few million dollars despite the addition of one rig in Alaska. The reduction reflected primarily lower deferred revenue on one of our offshore contracts.

In the second quarter, the combined EBITDA of these two markets should improve by $1 million to $2 million on higher day rates in Alaska. International EBITDA of $71.2 million in the first quarter decreased sequentially by almost $2 million, driven primarily by our operation in Russia. Despite the Russian impact, international daily margin at $13,134 remained in line with the prior quarter, driven by solid results in the Middle East and strong performance in our South American markets. Rig count at 72 rigs increased by just over half a rig over the fourth quarter average.

Current rig count in the international segment is 73. We expect recon in the second quarter to improve by nearly two to three rigs versus the first quarter average, primarily from deployments of the first SANAD in-Kingdom rig, as well as an advanced M1200 Series rig in Saudi Arabia. We expect further rig additions in Saudi and Latin America coming in the following quarters. For the second quarter, daily margin is targeted between $12,700 and $13,000 with performance in Russia remaining challenged.

Drilling solutions delivered EBITDA of $20 million, up from $19.6 million in the first quarter. Gross margin for NDS was nearly 49% for the quarter. We continue to see increased penetration, particularly in third-party rigs with the largest contributions coming from performance software in the U.S. Activity in the Lower 48 generally improved, taking our combined drilling rig and drilling solutions daily gross margin to -- as expected, the quarter was challenging in terms of cash flow generation since we normally pay several material annual items, including property taxes and employee bonuses.

These payments will not recur during the remainder of the year. In addition, the growth of the business and longer lead times for inventory items led to a substantial increase in working capital of approximately $48 million from accounts receivable and inventories. Although we expected the revenue increase and its negative impact on accounts receivable, we also expect a lower DSO than what we actually achieved. In addition, inventories expanded as a result of higher expected Canrig activity in the quarters to come, as well as the need to compensate for significantly longer lead times.

Some of these inventory increases were also related to Canrig shipments that were delayed into the second quarter. Capital expenses for the quarter totaled $84 million. This included $33 million to fund the new build program for our joint venture in Saudi Arabia. Looking ahead, we expect second quarter capex to land between 110 and $120 million, including approximately $45 million for SANAD in-Kingdom new builds.

For the full year, we estimate capital spending will remain within our prior guidance of $380 million, of which $150 million support the SANAD new build rigs. We are targeting breakeven free cash flow for the second quarter, reflecting the higher EBITDA, lower cash interest expense, the absence of material annual payments, and lower outflows from working capital buildup. We are committed to deliver well above $100 million of free cash flow in 2022. We remain focused on addressing our liquidity and leverage.

In the first quarter, we took significant steps in improving our debt maturity profile. We closed on a new revolving credit facility maturing in 2026 with a principal amount of $350 million. The new facility replaced our previous revolver maturing in 2023. With the closing of our credit facility, we have also increased our senior priority guaranteed note capacity to over $400 million.

Together with the remaining capacity on our priority guaranteed notes, we have nearly $1 billion available for future debt refinancing using our combined guaranteed note layers. With those actions, we are well-positioned in terms of liquidity and debt maturity profile with only $260 million in notes maturing before the end of 2024. With that, I will 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. With Nabors leadership in the development and deployment of advanced drilling technologies, we are well-positioned for the current environment. Operators prioritize automation and digitalization.

Our industry-leading solutions in those areas enable them to achieve their goals. More recently, an additional priority has emerged, namely, the need to improve environmental impacts, we are developing a pipeline of technology, both at the wellsite and beyond to enable clients to achieve their environmental targets through responsible hydrocarbon production. Ultimately, those solutions may grow into significant businesses. All of this is occurring as we continue to improve our capital structure and materially delever.

Our focus and progress on our five key value drivers are producing significant benefits across our stakeholder base. We are very encouraged by the growing adoption of our advanced automation, both in the U.S. and in our international markets, and we're confident there's more to come. I hope you share my excitement for the future.

I look forward to sharing our progress with you. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] At this time, we'll pause momentarily to assemble our roster. And the first question will come from Karl Blunden with Goldman Sachs.

Please go ahead.

Karl Blunden -- Goldman Sachs -- Analyst

Hi, good afternoon. Thanks for the time. Just a -- first question on the utilization rates, they have been picking up very nicely, particularly in the U.S. Lower 48 high-spec area.

Could you give us a sense of where you think that might be able to max out? What kind of utilization can you support? And then what happens from there when we get to that tight level? Is it additional capex, a spike in day rates, maybe some of the non-high-spec rigs getting some business? Just be curious in your thoughts.

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

Sure. So as we said from the survey, you saw that we said there is an increase of about 15% expected by the market in general. That's about 100 rigs for the remainder of the year. And looking at Nabors, I think we can look at an exit rate maybe of a rig count exiting at over 100, which would mean adding a bunch of rigs.

Now for Nabors, we have 23 additional super-spec rigs in various stages. The first five, we can bring out with very little capital. The next 11 for capital less than $1 million. And then the remaining seven -- as you go into the seven deeper and deeper.

So, we have some firepower there to get that rig count above 100 by the end of the year. And so that's our plan right now. In terms of new builds, obviously, the market pricing doesn't support new builds yet. I think the new build price is going to be obviously greater given the cost inflation that's occurred in the meantime as well.

So, I don't think we're anywhere near new builds, but the pricing environment is robust, as we've said, it applies to all markets. And it's moved faster than any time we've ever seen in my 30 years at Nabors. We've never seen it move this fast.

Karl Blunden -- Goldman Sachs -- Analyst

That's very helpful on the activation costs in particular. With regard to the warrants, you pointed out $131 million of deleveraging in 1Q. I know that the warrant website has some information, but I wonder if you could comment on how warrant exercise has trended so far this quarter, just given the expiration of the incentive shares, for example, and the strong stock price movement. And maybe more broadly, when you think about addressing your near-term debt, just be interested in your priorities around doing that with through warrant exercise, which will come as the stock is strong versus potentially just kind of waiting for free cash flow or even doing some new guaranteed bonds?

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

That's a mouthful. So I think in terms of the warrant, I think the warrant has served its purpose in terms of generating in a non-dilutive form pay down of debt, which is what it was designed to do. Now we issued a notice that we terminated the right of the bondholders to use bonds to exercise the warrant. We did that because we wanted the benefit to stay with the shareholders, and we thought the extra benefit -- with too much extra benefit was going to go to bondholders frankly, above their face amount.

So we don't want to do that anymore. So the bonds as they currently are outstanding, they're only exercisable for cash, and that -- yes, they are only exercisable for cash. And we will see and have seen some cash exercises roll in. And obviously, at the price of $168, that's attractive right now as a means of going forward.

In terms of additional financings, I'll let William talk to that. But as I said, the warrant transaction served its purpose.

William Restrepo -- Chief Financial Officer

Yes, I think when we remove the incentive shares that basically took the bonds out of the equation. We formally eliminated the convertible bonds. We still could use the 25%, but it's just not financially advantageous because the bonds don't have really a big discount anymore. So we expect all the future exercises to happen for cash.

A couple of million dollars have come in this quarter, somewhere in that range. In terms of using those warrants in the future, I mean, that's certainly possible. Obviously, with a strike price at $167, it provides an interesting way to continue deleveraging. But we haven't decided if that's the best step or if we issue more equity in the future or if we issue other types of notes in the future.

We'll continue evaluating the market. We think there's potential for more high yield in the future. Again, we will continue evaluating all the options in today's -- where share price stands, where coupons are today, and our yields. We have a lot of options as compared to some time in the past.

Karl Blunden -- Goldman Sachs -- Analyst

Thanks for all that. Appreciate it.

Operator

The next question will come from Dan Kutz with Morgan Stanley. Please go ahead.

Dan Kutz -- Morgan Stanley -- Analyst

Hey, thanks. So, I just wanted to ask if we're kind of thinking about how Lower 48 margins trend beyond the second quarter, just kind of at a high level, is the prior cycle peak kind of where you think that we can get to? Can we get above that level, I think it was around $10,000 a day? And obviously, I appreciate that the inflation dynamics have changed in kind of the cost and revenue per day calculus. But just wondering if there's anything you can do to help us think about where you could see margins going?

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

Sure. So, as we said in the prepared remarks, the base rate right now is in the high 20s, let's say, 28% already. And if you add on the add-ons that make up a normal add-on rate that's another roughly $3,800 on top of that. And so, at those numbers, I think, as you said, for Nabors point -- from Nabors, that's a pretty a attractive number from where we stand today.

As we said, for the second quarter, it's $8,500. And I think we made clear -- one of the good things about what we've seen happen is the fact that in December, when we did the Analyst Day, you'll recall, we laid out a plan to get to $800 million EBITDA. And so, the way we think about it is that plan, which some people had some head scratching about back in December, I think only -- it only supports and reinforces our conviction that we're going to get there. And that plan we lied on a $10,000 a day margin per rig, and that's what we see happening by the end of the year.

We'll be well poised to do that.

Dan Kutz -- Morgan Stanley -- Analyst

Thanks a lot.

William Restrepo -- Chief Financial Officer

Longer term, if you look at where our rates -- leading-edge day rates are today, and if we assume our fleet rolls into those rates and we execute on all of our contracts, that would imply a margin of $15,000 per day at some point. Obviously, we need to execute, and we need sufficient time for contracts to roll into those kinds of day rates. We have -- we do have some long-term contracts still that are not anywhere close to those rates. So it will take us a while to get there.

But that certainly is the potential.

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

And the other thing, just to remember, is all the stuff that we talked about, we're talking about drilling doesn't include NDS, which is -- you have to add that margin on top of it, which, in this quarter, that was about $2,200 a day. So on an apples-to-apples basis, when you compare it to other people, you always have to have the NDS margin on top of it because we break it out.

Dan Kutz -- Morgan Stanley -- Analyst

That's really helpful. Thank you. And then, yes, maybe on the point of -- you said that you have some longer term contracts that will take a while to roll and that there's still a lot of the fleet that is on contracts that was, like you said, leading-edge spot rates are $5,000 above the 1Q average. So can you just help us think through the timeline for when the majority of the fleet will be able to reprice at higher levels? Or anything that you can do to help us think through that progression.

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

In the U.S., the majority will be -- is poised to reprice, taking advantage of what's happening now. That's what I would say. Internationally, on the other hand, the international market has shown is the term market and the other duration -- duration is one year to one and a half year out. And the only thing I could say there is that if you look at our rigs away from Saudi Arabia, by the end of the year, half of those rigs are going to be in position to have price reopeners, OK? So there is a great potential not only in the U.S., but also international to capture the pricing movement as we head there.

Obviously, it depends on the international markets eating up the way they have in the U.S. But given the macro and you can judge that, as well as I can, all signs are pointing in that direction.

Dan Kutz -- Morgan Stanley -- Analyst

That's all really helpful. Thanks, again. I'll turn it back.

Operator

The next question will come from Taylor Zurcher with Tudor, Pickering and Holt. Please go ahead.

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

Hey, Tony, William. Thanks for taking my question. Tony, I actually wanted to follow-up on your prior response there on some of the international contract reopeners you have outside of SANAD over the balance of the year. So in the U.S., I mean, I agree with you, pricing momentum has really gone through the roof and surprise, at least me to the upside and trying to think about the case for a similar outcome internationally with the caveats being that the asset capacity utilization internationally is not as great and the labor dynamics is much different internationally as well.

So I'm just curious for more color as those contracts reopen and you have the ability to reset pricing. I mean what's going to be the driver of pricing improvement from the existing pricing rate for those international contracts? Is it labor tightness? Is it supply demand tightness or something else?

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

I think it should be supply demand tightness in general. I mean there are labor issues as well there. I mean cost inflation is not unique to the U.S., it applies internationally, particularly given the travel situations we've all been dealing with. So -- but I think it's supply demand.

If you look at the activity away from Saudi, I think the markets that in that region are -- have some tendering possibilities would be Kuwait and Oman in particular. And the rigs out there -- one of the things that will drive pricing as well is some of those projects are going to require rigs that actually don't exist today in the sense that some of the configurations require such high-specs that you don't require replacement capital to go on those projects, and that's going to uplift not only the new projects but the existing rigs as well. So I think that's one of the dynamics that work here. So as those contracts open up and there is a need for additional equipment that need then is going to be competed with existing rigs that meet those specs, as well as new rigs that require higher capital, which in turn will drive the whole pricing scenario up.

So that's the upside, I think.

William Restrepo -- Chief Financial Officer

So one thing that Tony pointed out is the Middle East, but the reality is the international market is not homogeneous. It's a bunch of different markets with different drivers. And most of the markets we are focusing on, we're experiencing tightness in rigs. I give you examples like Argentina, where Vaca Marda is requiring higher spec rigs and they just aren't any in country.

In Colombia, we're seeing expansion of drilling activity by Ecopetrol and others. And then in Mexico, we are seeing some rebirth on land activity that again requires some 30 high-spec rigs. So all of that is happening in multiple countries where the supply of rigs is just not there. So we are seeing a little bit of tension on the pricing and on the positive sense.

So the pricing power seems to be solidly in the hands of the drilling companies today, even in the international market.

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

Yeah. Good to hear. And on the margin front, it sounds like there'll be some Russia-related headwinds for international in Q2. I was hoping you could just help us think about if that's going to be a lingering impact over the back half of the year, if it's just too soon to say.

And then if I compare your forecast to -- the 2023 forecast at the Analyst Day, you're well on your way to exceeding the U.S. piece of the forecast, international piece with the Russia impact in the near term. Just a little bit unclear to me if you can get to the margin guidance you gave for 2023. So just curious if you still feel comfortable about that with respect to 2023?

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

I'll let William answer that. But before he does, I just want to make a comment on our quarter. So our internal number was 132 actually. And you saw what the numbers we delivered and that obviously was impacted by Russia for a couple of million dollars.

We also have Saudi slip into another quarter, and we also had some cost inflation that it showed that we were able to absorb the cost inflation and still make progression on the margin. And on top of it, Canrig had an order, I'm bringing this up because it relates to international. Canrig had an order, which slipped to the next quarter, and that order was for an international project. And it's typical when the problems with international is there's always lots of things out of your control.

In this case, the client did some changes to their schedule. And even though the Canrig had ready to deliver the equipment, they wanted to defer it because the back end of the project wasn't ready. So -- but in the context, I want to just give you an idea, so that those were all things that were kind of set off some of our bottom-line results, but all in, it's a pretty good quarter when you look at that from that point of view. And some of those things are one-time things.

So with that, I'll let William follow through on the roll forward to 2023.

William Restrepo -- Chief Financial Officer

So, yes, good color. We are very happy with the quarter. The U.S. was very strong.

International was very strong with the exception of Russia. The only hiccup I would say, would be rig technologies with the Canrig delays in shipments. And even with the Russia, we kind of absorbed that fairly well. It's not a huge amount, but it does account in the international margins.

So we think that the second quarter, we will see a little bit of impact from Russia still, things have stabilized there. We're running out some of those contracts. So, we are forecasting similar to the first quarter, but obviously, we're being cautious. And then in Saudi Arabia, we're deploying two brand-new rigs that are highly -- they're highly competent, highly advanced, and will have a material impact, but there could be some start-up costs.

So we put a little bit of caution in our guidance for the second quarter. Throughout the remainder of the year, Russia will not even be a factor. You will not see it, it will disappear. And I think Saudi will continue to grow really very materially over the next three quarters.

So we feel very comfortable about the guidance that we gave for 2023. If anything, I feel very -- I feel we will do better than that guidance, not only in the U.S. but international as well.

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

All right. Good to hear. Thank you.

Operator

The next question will come from Derek Podhaizer with Barclays. Please go ahead.

Derek Podhaizer -- Barclays -- Analyst

Hey. Good morning, guys. So, we're believers in a multiyear up cycle, you talked about exiting the year over 100 rigs for 2022. You move into '23, '24, you can quickly come sold out of your 111 super-spec rigs.

So I just wanted to ask beyond that 111, can you talk about the different options that you have, be it upgrading some of the -- about the 60 legacy rigs you have, maybe for renewable economics, or even an acquisition of a smaller rig operator. Just what are the levers and how you view that if we become sold out over the next couple of years?

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

Yeah. I think we have an installed base of about 45 rigs that are candidates for an upgrade. We already have upgraded about five or six of those rigs to what we call the M750, and we have a formula for that. And the upgrade cost of that platform even in an escalated environment will be no more than 50% the cost of a new rig, and we have 40 of them.

So we have at our disposal a pretty large inventory of additional rigs to work from -- to draw down on it. And that will obviously be the -- one of the choices. The second choice, obviously, would be to do new builds on our M1000s, which is the flagship. I think is the best rig in the marketplace today.

No question about it, and that would be the alter -- the second alter to do a new build there. In terms of acquisitions, yes, we always look at acquisitions. There, you have to measure what you get, you have to measure the difference of the homogeneity of the fleets, etc. But we always keep our eye out for that as a possibility.

To be clear, we haven't forecasted our capex building any M1000s or upgrading any of those other rigs. That's not part of our guidance or results or for capex today.

Derek Podhaizer -- Barclays -- Analyst

Right. That makes sense. I was thinking more about beyond into the next few years. I appreciate the color there.

Switching over to the energy angle and geothermal, obviously, you guys are very active in the investments along with some of your other drilling peers. Just can you spend some time what's the outlook there? What's the goal? How these investments can materialize in the earnings potential for Nabors if you just think about over the next five to 10 years, what's the outlook there? It seems like this is a natural crossover industry for the drillers and you guys are on the leading edge of it. So just want to get some more expanded color and thoughts around how you see this materializing into potential earnings power.

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

So when I first joined Nabors 30 years ago, we actually had a pretty big segment, the geothermal, including in places like Japan and then later Costa Rica and then parts of Africa as well, obviously, in California. So we've always been active in it historically. And obviously, the push against geothermal is an image play. And our proposition is that with technology, is there a way to make it be something that's scalable that you can do in multiple places and then use our footprint to exploit that.

And that's what's drove the combination of investments we've made, and we've identified these four companies, which we think in the marketplace today have the best chance of unlocking one of those scalable solutions, and that's what we're doing. And geothermal is the only source out there that's both base slowed and renewable. And we think if one can do what we're talking about, it could be a huge game changer. And the companies we bought all approach from a different vantage point, Nabors was chosen enough for just money on these things.

We're part and parcel of the R&D that's going on with each of the companies to make the technologies come to market faster and more robust in the marketplace. So, William, you got anything to add?

William Restrepo -- Chief Financial Officer

Yeah. I think we're very excited about it. I mean we just -- we think the companies on their own are good investments, but the reality is that we're going to be partnering with these companies and then the amount of geothermal wells if we're successful in developing, this technology is going to be staggering. I mean we -- I envisage sometime in the next five years or so, where a quarter of our business could be coming from some of these energy transition initiatives, including geothermal.

Derek Podhaizer -- Barclays -- Analyst

That's helpful. Appreciate the color. Thanks.

Operator

The next question will come from Arun Jayaram with J.P. Morgan. Please go ahead.

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

Hey, good afternoon. Tony, I was wondering if you could discuss kind of your contracting strategy at this point in the cycle, still feels a bit early cycle. But talk to us on what you're thinking about in terms of locking in term versus spot. And also, as you are capturing higher and higher margins, could you talk a little bit about the level of customer churn you're seeing today and maybe compare and contrast that to different cycles that we've been through.

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

Sure. So, during the downturn, obviously, with the exit of some of the large publics, the super majors out of the market, obviously, the private truly stepped up. And today, the private play a big role in the marketplace, as you know. And we've tried to satisfy both groups demand.

I think it's fair to say, though, over the next -- last six months, if you actually analyze our customer base, you'll see a shift that already has occurred about 10% from -- away from the private portion of our customer base back to the public. And that represents something that's probably going to continue in terms of a trend in large part because of the nature of the contracts. Those are -- the publics usually have longer term contracts, but more importantly, they are embracers of technology. And so the value of Nabors' ability to use the stuff that we can bring to the table and make a big difference applies.

And so I think you'll see that in our strategy going forward, and you'll see that shift at work. In terms of specifically term contracts, obviously, we went short during the downturn because we wanted to be poised for the upturn and have the freedom to reprice. And I think we're in that mode now. And as I said, the pricing has moved pretty robustly.

And it is true that right now, given where we are today, as well as where operators now see the forward curve looking, which I think is equally important over the next 18 months. There has been dialogue with operators about trying to capture and lock in some term. And we're part of those discussions, but I'm not going to give you my strategy as the percentages or anything, but obviously, we'll start looking at it right now.

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

Great. And then just a follow-up is internationally, Tony, post the Russia-Ukraine conflict, the question we're getting is, where is globally -- how is the world going to make up for some of the barrels from Russia, which, as you know, could be impacted by lower production? And then as the marketing of those barrels are more problematic today. But can you give us any sense of any areas within your global footprint where you're starting to see some acceleration in terms of active pulling projects forward?

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

Well, obviously, here's the logical first choice in terms of making things happen. But I think there's a few hurdles, one of which is to preserve the financial discipline by the operators and to see who's going to actually back these programs to provide for long-term progress, so people can make sure they make a return on their money. I mean we've seen in the past 60 days, the whole world's perception of everything has radically shipped. Mr.

Putin has done in 60 days what people in the industry haven't been able to do, which convince people that the renewables are not yet ready to poise to take over base load demand anywhere. And so that's said in. But the question is how long is that mindset going to continue. And I think there's going to be a reluctance on a lot of people to actually invest on just a promise right now.

So I think there are areas where there is capacity to rev up. Obviously, the No. 1 area in the U.S. is Saudi Arabia, and Ramco has been committed to increase their production capacity by 1 million barrels and also, they're making a big commitment on the unconventional away from our new builds, there's actually interest in there and adding to their unconventional rig activity, and they have the ability to actually add up and provide a lot of incremental gas.

So, I think the opportunity exists out there. The question is who's going to put pen to paper and actually do the long-term commitments that we all can invest in, that we can build the rigs against it, the operator can be sure he has a proper takeoff contract, etc., to do it all. That's really the question.

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

Thank you very much.

Operator

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

William Conroy -- Vice President, Investor Relations

Thank you all 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, Chuck. Thank you very much.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

William Conroy -- Vice President, Investor Relations

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

William Restrepo -- Chief Financial Officer

Karl Blunden -- Goldman Sachs -- Analyst

Dan Kutz -- Morgan Stanley -- Analyst

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

Derek Podhaizer -- Barclays -- Analyst

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

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