ADNOC Drilling Company P.J.S.C. (ADNOCDRILL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the ADNOC Drilling Fourth Quarter and Full Year 2023 Earnings Webcast and Conference Call. My name is Massimiliano Cominelli, Vice President of Investor Relations. Before handing over the floor to the main speakers, I would like to draw your attention to the disclaimer that you find in the second slide, which I encourage you to read carefully. The text contains important information. We advise caution on the interpretation and limits of historical data and forward-looking statements. I would like to remind you that this presentation and the recording of this call will be available on our website shortly after the end of the call. Today's presenters are our Chief Executive Officer; Abdulrahman Alseiari; our Chief Operating Officer, Christopher McDonald; and our CFO, Youssef Salem. As always, after the presentation, we will have a Q&A session where we will be happy to answer your questions. I will now hand over the call to our CEO, Mr. Abdulrahman, who will lead you through the key highlights of the year.

[Foreign Language] Thank you, Max, and welcome all. Good day. It's my pleasure to be here with you today to discuss the fourth quarter and full year 2023 results. As a strategic partner at the heart of ADNOC Upstream, we continue to execute our strategy, delivering long-term value to our clients, shareholders and the UAE. The ambitious journey of becoming one of the world's largest owned and operated drilling fleet is well on the way as we continuously expand our fleet. This development is driven by our firm commitment to allow our client to deliver the 5 million barrels per day of oil production capacity by 2027. Now we are working firmly to deliver this as it remains our top priority. Moreover, building on our successful track record, we continue to seek opportunities inside and outside of Abu Dhabi. We keep growing profitably as financial results and targets are showing. While expanding operations, as highlighted by the first rig being outside of UAE and the growing focus on developing unconventional resources. Operational excellence supports this growth and drive performance through efficiency technological advancement, resulting in continuous customer satisfaction. We operate sustainably and responsibly as an integral part of ADNOC's 2045 net zero journey. ADNOC Drilling is a national champion, and we are proud of our role in developing the nation's top talent and capabilities by advancing the local industry. Excellence sits at the core of what we do. As our people do, we remain committed to deliver beyond 100% in all we do. Next Slide. We have constantly delivered strong results and significant shareholder returns will be utmost attention to safety and the environment. For the full year 2023, our total recordable incident rate was 0.44 against target of 0.7. The strong commitment to the highest standard of HSE remains our #1 priority. Additionally, we are also on track on our greenhouse gases emissions target. Our strategy of expanding our fleet and integrated oilfield services continues to pay off and leads to improving margins through strong cost performance. Full year revenue grew 14% year-on-year to over $3 billion, with an industry-leading EBITDA margin of 49%. We also experienced excellent growth in our net profit, which increased 29% year-on-year to over $1 billion. During the year, we have added additional 14 rigs to our fleet, out of which 10 were land rigs and 4 jackups. With these additions, the owned fleet at the end of December stood at 129 rigs. We continue to expect our owned fleet will reach 142 units during this year. Following a record year, I would like to reaffirm our path to further growth with a full year 2024 and medium-term guidance. I will now hand over to Chris to provide more details on the operations side.

Thank you, Mr. Abdulrahman. I will now walk you through our operational developments. As our CEO mentioned earlier, we continue to execute our strategy and deliver value to our clients, shareholders and the UAE. ADNOC plans to increase production capacity to 5 million barrels per day continues to drive our rig fleet expansion. During the fourth quarter, we added 5 hybrid land rigs to the fleet count. Two of these rigs started operations during the last week of the year, while 3 are expected to gradually start operations in the first quarter of 2024. As part of our journey to become an integrated drilling services provider, we now have 48 IDS capable rigs. Turning to unconventional and the growth opportunity presented by the development of these resources, we had 5 rigs drilling unconventional wells in the fourth quarter with scope for more as we aim to become a regional leader in this field. Also, our recent joint venture with Alpha Dhabi will support and accelerate ADNOC Drilling's OFS offerings by building our IP portfolio, evolving from a buyer of technology to an owner, enabler of technology, future-proofing our business for the long term. Bottom line, we are executing on our strategy and paving the way for further successful and profitable growth. Next slide, please. We are one of the world's largest integrated drilling services companies by rig fleet size. We added to the fleet a total of 14 rigs over the year, 4 jackups and 10 land rigs of which 4 are lease-to-own land rigs, an impressive annual growth. The 4 jackups that joined the fleet in the third quarter commenced operations in December and they will bring full benefit in terms of revenue and profitability from 2024. Drilling activity remained robust in the fourth quarter as we drilled 161 wells in the quarter for a total of 613 wells in 2023. In terms of average drilling duration, the onshore segment maintained its outstanding 43 days, while performing batch drilling. The offshore segment had good performance as well, further improving sequentially with lower drilling duration. The OFS business accelerated with 15.5% improvement in Integrated Drilling Services' drilling efficiency versus last year's benchmark. Moreover, we added new services to our OFS offering and performed IDS on 48 rigs, 8 more compared to the previous year. Next slide, please. Moving on to the joint venture. As you know, we made the first announcement in November to invest up to USD 1.5 billion in technology-enabled oilfield and energy services companies with attractive financial profiles. Then on January 9, 2024, we announced the successful incorporation of the joint venture Enersol, along with the successful completion of its first investment to acquire a 25% stake in Gordon Technologies, a leading provider of MWD, Measurement While Drilling, based in the United States. This acquisition, as stated in our previous call, has strong potential for shareholders with excellent deal dynamics and more importantly, serves as the first stepping stone in our journey to build a portfolio of tech-enabled businesses through value-added transactions. To this end, we will continue to evaluate, execute and integrate transactions in line with the investment mandate from the 10-plus or circa $1.3 billion pipeline, a value-accretive investment supporting ADNOC Drilling's future-proofing strategy and decarbonization plans. Speaking of the future, I'd like to update you on the decarbonization initiatives. Next slide, please. Starting with camp emissions abatement. There has been good progress in Q4 with our Madinat Zayed camp obtaining final approval for power energization, while our Tarif camp is scheduled for connection in the first quarter of 2024. Moreover, we installed our first solar panels to power a mobile camp. As you know, we ordered new hybrid land rigs while also implementing a battery energy storage system. At year-end, the total number of acquired hybrid rigs stood at 16. Of these newbuild hybrid rigs, 2 have been deployed last December, while the other 14 are set to follow throughout 2024. With regard to sustainability initiatives, we are optimizing the number of personnel at rig sites and developing a digitally focused workforce, utilizing new technologies to unlock new efficiencies across our operations. On electrification, further initiatives are under evaluation some of which are, for example, applicable to our island rigs. Finally, with respect to diesel consumption, we continue to work on improving our combustion efficiency with trials on a fuel additive underway. I'll now hand over to Youssef to walk you through our financials.

Thank you, Chris. We had a record fourth quarter to bring 2023 to an end. We delivered our highest ever quarterly revenue of $841 million, up 15% year-on-year. This then translated into EBITDA growth of 20% year-on-year. to $424 million and net profit growth of 41% to $329 million. For the full year 2023, total revenue was well over $3 million, a 14% year-on-year increase. EBITDA increased 20% year-on-year to about $1.48 billion. Our cost management initiatives continue to deliver results, evidenced by industry-leading EBITDA margin of 49% for the year, a 3 percentage points margin expansion year-on-year. Net profit also grew 29% year-on-year, surpassing $1 billion. Our net profit for 2023 was positively impacted by around $55 million reduction in depreciation in the fourth quarter. This came on the back of a change in the remaining useful life and residual value estimates of assets, along with a more granular approach in asset recognition. For full year 2024, we expect depreciation expense to be around $440 million. Cash from operations stood at around $1.36 billion, slightly lower than last year, which benefited from one-off collections. Working capital performance was good as it stood at 8% of revenue in 2023, well below our indication of being around the top end of our 10% to 11% target. This was due to a strong recovery in the fourth quarter, driven by improved collections and phasing related to capital expenditure. Net of this phasing, the normalized ratio would have been 12%. As our growth plans materialize, we expect to maintain a net working capital on revenue ratio of around 12% in the medium term. Moving on to CapEx. As anticipated, we saw a ramp-up versus 2022 as we continue to deliver our rig acquisition program. Our CapEx for the full year was $1.3 billion, up from $942 million in the previous year and in line with the expected ramp-up in rig acquisition and our 2023 guidance. The CapEx number you see on the slide for 2023, $1.062 billion, refers to the actual cash out, excluding the accruals. Including the accruals was just above $1.3 billion, in line with our guidance. As we continue on our growth program, we expect CapEx to remain elevated through the first half of 2024, given the payment profile of our rig acquisition. For 2024, we are targeting a CapEx between $750 million and $950 million. The balance sheet remains healthy with net debt of around $1.8 billion at the end of December, leading to a leverage ratio at 1.2x EBITDA. Next slide, please. Let's take a look at revenue for the different segments, with all of them delivering year-on-year growth. In onshore, fourth quarter revenue increased 10% year-on-year to $416 million from $379 million, mainly due to increased activity. Sequentially, 4Q revenue was also up 10%, driven by the full contribution of the 4 lease-to-own rigs and supported by long range rig move for certain rigs in the quarter. For the full year 2023, revenue was $1.5 billion, up 3% year-on-year due to the contribution of new rigs starting operation, which more than offset lower reimbursement of cost escalation claims. Offshore jack-up had another remarkable quarter and year. Fourth quarter revenue increased 25% year-on-year to $225 million from $180 million, mainly due to higher activity and lower major maintenance compared to the same period last year. Quarter-on-quarter, revenue increased 13%, driven by jack-up starting operations. For the full year 2023, the segment delivered strong revenue growth, up 31% and to $800 million from $611 million in the prior year, driven by new rigs starting operations. Moving to Offshore Island. Fourth quarter revenue increased 2% year-on-year, reaching $52 million driven by increased activity. Sequentially, revenue decreased 4% due to one rig undergoing major maintenance in the quarter. Full year revenue increased 2% versus 2022 to $209 million, driven by mobilization revenue for the reactivated island rig. In Oilfield Services, fourth quarter revenue increased 20% to $148 million from $123 million in the same period last year, driven by increased activity from pressure pumping, drilling fluids and directional drilling. Quarter-on-quarter revenue increased 2%, benefiting from the addition of 7 IDS rigs close to year-end. For the full year, revenue was $553 million, up 37% year-on-year on the back of increased activity volume across the entire portfolio. Now let's see in the next slide what revenue performance meant for EBITDA. Over to the next slide, please. Starting again with Onshore. EBITDA for the fourth quarter increased by 8% year-on-year to $203 million with an EBITDA margin of 49%, supported by the realized cost efficiency measures. Sequentially, EBITDA increased 7%, also benefiting from cost efficiency measures. For the full year, EBITDA was up 3% year-on-year at $724 million, growing in line with revenue. Offshore jack-up EBITDA in the fourth quarter grew by 37% year-on-year to $148 million, with a healthy margin of around 66%. Sequentially, EBITDA was up 13%. For the year, offshore jack-up EBITDA increased 55% year-on-year to $510 million from $329 million, driven by significant revenue growth and lower major maintenance activity. In Offshore Island, fourth quarter EBITDA increased by 18% to $33 million due to lower operating expenses, which was driven by the successful implementation of cost efficiency metrics. Quarter-on-quarter, EBITDA decreased 14% due to one rig undergoing major maintenance. For the year, EBITDA increased 11% year-on-year to $134 million. Lastly, OFS EBITDA for the fourth quarter increased 38% to $40 million, driven by the growth in the top line. Sequentially, EBITDA grew 38% and the quarter was characterized by a larger contribution of higher-margin product lines, which allowed for a recovery of margin versus Q3. For the full year, EBITDA increased 49% to $115 million, reflecting increased activity across the segment and leading to a year-on-year EBITDA margin expansion to around 21%. Next slide, please. Before going into the details of the guidance, I'd like to highlight that the Board of Directors recommends a final dividend payment of $358 million for 2023, 8.22 fils per share, in line with the interim 2023 dividend. The final 2023 dividend is expected to be distributed in the first half of April 2024. The total dividend for 2023 equals to $717 million, 16.45 fils per share, representing a 5% year-on-year increase. Moving on to guidance. Following the record quarter and year and on the back of increased visibility on earnings and profitability, we have issued full year 2024 and midterm guidance. To enable ADNOC's strategic imperatives of expanding production capacity from 4 million to 5 million barrels per day by 2027, we continue to deliver on our accelerated growth plan and to expect our owned rig count to increase to 142, including 4 lease-to-own land rigs by the end of 2024. We expect total revenue between $3.6 billion to $3.8 billion, with the contribution of existing rigs and the addition of new rigs. This target includes the first phase of our unconventional development. As we grow our business, we expect an EBITDA between $1.7 billion and $1.9 billion with a margin range of 48% to 50% as OFS growth with a relatively lower margin will be offset by the delivery of more efficiency. Depreciation and amortization for 2024 is expected to be slightly above the level of 2022 and 2023, or around $440 million as the natural increase related to the rig fleet expansion will be partially offset by the change in the remaining useful life, and the residual value estimates of the assets, along with a more granular approach in asset recognition. As a result of the above, net profit is expected in between $1.05 billion to $1.25 billion with a margin range between 30% and 33%. CapEx for 2024 is expected to be between $750 million and $950 million while maintaining a leverage ratio net debt-to-EBITDA below 2x in 2024, excluding material M&A. The growth projected in our guidance will be visible from the first quarter. We expect the first quarter to grow around mid-single digit versus 4Q in both revenue and EBITDA terms as increased activity is partially offset by pure calendar days and rig moves. The sequential growth will be skewed towards offshore given jack-ups starting activity towards the end of 4Q. In terms of EBITDA margin, we expect to start the year with levels around the full year 2023 and gradually improve it over time towards the 50% midterm target as we continue to deliver on efficiency. As a proxy for net income margin, we expect it to be around the Q3 2023 levels as 4Q had a positive one-off in D&A. As a general trend, for Q1 to Q3 we project broadly similar sequential growth between quarters as we deliver on the rig fleet program. For this reason, we expect the second half with revenue and EBITDA higher than the first half. Finally, our midterm guidance has been refreshed as well. We expect revenue CAGR in the 12% to 16% range from 2023 base; EBITDA margin around 50%, with drilling margins exceeding 50% and OFS margin in the range of 22% to 26% in the medium term; conservative long-term leverage target of up to 2x net debt to EBITDA, excluding material M&A; net working capital as a percentage of revenue target of around 12%; and finally, maintenance CapEx post 2024 of $200 million to $250 million per annum. That concludes my remarks. Thank you, everyone. And now I will hand over to Mr. Abdulrahman for his closing remarks.

Thank you, Youssef, and the team. To recap, we have delivered another strong year, fleet expansion growth across the key lines of our business. supported by strong cost performance across the organization and resulting in a leading margins in the industry, while also delivering on the growth strategy with the creation of the JV Enersol to future-proof our business. Our objective to enabling our clients' capacity growth through safe, efficient and sustainable operations has supported the delivery of our ESG agenda. I would like to thank the ADNOC Drilling team again for this strong performance. Thank you for joining us today, and I will now hand over to the moderator to open the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Ricardo Rezende from Morgan Stanley.

Yes, first question is on dividends. If we look at the current guidance for dividends and also your 2024 guidance and medium-term guidance, it looks like that you're going to have quite a lot of room for increased dividend payments. So my question would be whether there is a potential for a special dividend at some point or if you would rather wait until 2026 and maybe then having a structural change on your dividend payment strategy. And then the second question, and more in the shorter term, if we look at the rigs that are still to be deployed this year. So should we assume then that most of the rigs will be deployed on the first half?

Thank you, Ricardo. I appreciate the -- your questions. I'm sure, I mean, the team will be providing some more details on the both dividends and the rig deployment. On the dividend part, and I would say, I mean, we have so much programs on the pipeline that we are continuing with. So definitely, it's an area that continuously will be questioned in two different investor calls or different meetings that we are having. But definitely, we have a program that we want to continue with especially in the growth side whether it is internal or external. And probably you have seen some progress that we have made in acquisitions also, and there is so much in the pipeline. Youssef will add more to this. And also the deployment part, I think majority of the rigs expected in the first half, except one or two may slip, but definitely, it will be more in the first half of the year. Chris will add also into more that -- more details into that also. Youssef?

Thank you, Abdulrahman. Thank you, Ricardo. So Ricardo, as you highlighted, we do have ample headroom, whether you look at this from a 2x net debt-to-EBITDA kind of a long term, staying below that, as you can see on Page 23, that still leaves us with $1.8 billion of headroom. Whether you look at this from the existing committed facilities undrawn, we have $1.25 billion committed undrawn facilities that we can draw on or whether you look at that from a free cash flow perspective, looking at our 2024 guidance, even with $750 million to $950 million CapEx that we have, we still have ample free cash flow. So that definitely gives us flexibility. I think our existing dividend policy already bakes in this flexibility with a growth in dividend of at least 5%. So that flexibility is baked in. To your point, we are currently focusing this year on finalizing, reaching the 142 rigs and kind of having that expansion phase, but we'll obviously continue to optimize capital allocation, not only waiting until 2026, but this is something that we do on an ongoing basis, continuing to refresh and optimize our capital allocation. I think Chris will expand on the rig deployment, but to give you the financial side of it, as we've guided, we expect relatively uniform growth between Q1, Q2, Q3 of this year around mid-single digit. And that effectively reflects that you can have relatively uniform nature of the rigs coming in, in the first half and then as Mr. Abdulrahman mentioned, potentially a few into Q2. Chris, if you'd like to add.

Ricardo, most of the land rigs are either in the UAE or on their way to the UAE and therefore, in various stages of commissioning. So I echo the CEO's comments that most of them will go to work in the first half. We've got 2 jackups that will probably be in the tail end of the year, of third and fourth quarter, depending on the scope, and we're in discussions with our client to finalize that scope and once that's finalized, then we'll have a better view on the timing of those 2 jackups entering the fleet.

I hope that answers, Ricardo, your questions.

The next question comes from Faisal Al Azmeh from Goldman Sachs.

Congratulations on the numbers. Maybe a few questions from my end. Maybe starting off with your midterm guidance. I guess when looking at the numbers, you've raised them on a medium-term basis, maybe try and understand what is driving this is, just if you can provide some color there. My second question relates to the number of wells, maybe when looking at the number of wells this year, they're mostly flat versus last year despite the higher number of rigs. Maybe if you can just shed some color on how we should think about the number of wells drilled and how the dynamics evolve over the coming years?

Thank you, Faisal. I think I'll take second, then first. Now with regard to the number of wells, the type of wells which is being done by the operators, some of them are development, some of them are workovers and there are different categories. So that may vary. But the plan for '24 will be beyond 700 wells also. Again, the total operating rig years that we are utilizing and the -- whether it was '23 or '24, because of the deliveries of the rigs late '23, early '24 or half '23, half '24. So [Foreign Language] I think '25 will be more clear numbers or more accurate numbers because there will not be fraction of wells that is going to be picked up because some of the things is we count the number of wells on completion, not on percentage of the wells. So that is there. On the guidance, Youssef can provide more update here.

Thank you, Abdulrahman. Thank you, Faisal. So I think in terms of your question of what does the midterm guidance reflect, one, it reflects the fleet expansion. So going to 142 rigs by the end of this year and then any further expansion required to achieve the 5 million barrels per day for ADNOC by 2027. Second, it reflects continued expansion of our Oilfield Services business. So now that we've reached 48 rigs, we've been adding on average 8 to 10 rigs per year to our OFS fleet, so the continued expansion of that fee. And third, it reflects the first phase of our unconventional drilling and associated services, which is just over 100 wells over the kind of this year and the next couple of years. That is what is in the guidance. Obviously, what is not in the guidance is any investments from Enersol, our oilfield services joint venture investment platform, as well as any other kind of potential M&A and then any other incremental plans for ADNOC, whether on the conventional or unconventional side, above 5 million barrels per day, and any potential regional expansion.

Maybe just a quick follow-up on my side. So when you say maintenance CapEx post '24 of $200 million to $250 million, you don't need to have some growth CapEx to achieve the unconventional side that you've mentioned as part of the medium-term guidance? Shouldn't we make an assumption relating to some growth CapEx in there?

So there will be nothing substantial there because we already have 5 rigs, which are working on the unconventional as we speak. There may be a handful more rigs that will be added for Phase 1 between utilizing the existing fleet and potential minor addition, but there is nothing substantial there. The other potential addition above the maintenance CapEx is as the OFS business continue to add rigs before -- beyond the 48 rigs, there may also be some -- again, nothing substantial there, but some of the CapEx that is associated with the OFS equipment. So we definitely do expect that the CapEx, the actual CapEx level will end up being above that kind of level that you see post 2024. Any potential also incremental rigs required for the 5 million barrels per day by ADNOC, but that will continue to become clearer as we go through the year. So the number will end up being higher than that number as the total CapEx, but it will not be substantially higher as things stand today.

Our next question comes from Abdulelah Hakami from Hassana Investment Company.

Am I audible?

Yes, very clear.

First of all, congratulations on the very strong set of results. I have one question from my side. Are you still interested in expanding into the GCC market, particularly given where the downside risk to day rates following the recent Aramco news?

Thank you, Abdulelah. I think a question, which is again very interesting. Definitely, we are interested in going out within the region, let's say. If you recall, I mean we have went out to Jordan, and we are in Jordan now operating a rig. And hopefully, that will be also the tool which will help us to expedite our regional expansion, at least having the international experience also, which is part of the prequalification requirement in the GCC. So this will help us. And definitely, we are at different stages in the prequalification, some of the GCC are -- we are very close to the end. Some are almost -- were ready to go. And I'm expecting during '24, we will be participating in some of the tenders that will be coming out. Now I will not say whole GCC, but there are certain places we're ready to tender, certain places we are at the final stage and certain countries we're, I would say, in the midway kind of thing. I hope that answers, although if you want to add anything, please.

I think, Abdulelah, also on your question on the day rate, I think just on your question also on day rate. I think if you look at our kind of 2024 guidance in terms of the jackup revenue and you look at the number of jack-ups we have and you look at the implied day rate from that you will see that we are currently below what the market rates are in the GCC. And that demonstrates that we can be quite competitive even in a day rate environment that is lower than what exists today in the GCC. And on these day rates we're able to achieve -- still achieve quite substantial margin. We are also able to be quite competitive from an overall package perspective because of our integrated drilling services capability and hence, even in a potentially lower day rate environment in the GCC, we think between our existing day rates in the UAE and between our capability offering, we can still be value additive and competitive in the rest of the GCC.

Our next question comes from Sashank Lanka from Bank of America.

Thank you very much for the presentation and the opportunity to ask questions. Firstly, congratulations on a strong set of results. Just going back to one of the questions that my colleagues asked in terms of the 142 rigs that you've guided for. Have you already acquired these rigs, the additional rigs or the incremental 13 rigs that you're guiding for? That's the first question. And just in terms of the price that you're seeing in the market now, we obviously did see a lot of drilling activity happen in the U.S. and as well, you've seen a lot happen in the GCC, which has led to pretty high day rates for offshore. So I just wanted your view there and the availability of offshore rigs going forward.

Thank you, Sashank. And on the 142 rigs, yes, we have committed all 142 rigs or we have committed rigs that will take us towards the 142, different phase of deliveries and would be updating, I mean, as we go whenever we are getting rigs delivered to Abu Dhabi, commissioned, integrated and we start counting them. Though today, as we talk, we do own 142 rigs, but the number is getting adjusted as we are integrating them into the business. Is there any more to come? There is potential. But it depends on different projects that is being discussed today. Chris, if you would like to add?

Yes. So all 142 are spoken for. We've contracted them, sales purchase agreements or for new builds with the suppliers. With respect to offshore, and jackups, the utilization of the worldwide fleet is at historic highs. There are very few jackups available in the market and the secondhand value of those jack-ups has increased. And I think that's benefited us given that we went out and purchased 17 of them at the bottom of the market. We don't see a lot of new build activity. So we think even though it's balanced today, the supply is still short. There's not a lot of marketed rigs at the moment. And even though in the Middle East in the next few years, it's probably plateauing, there's fixtures now in Asia and other places. So -- and those are all significantly higher than what's going for in GCC.

I think the other benefit we have from that is given our contractual mechanism as our jackups exit the initial 10- to 15-year based term, we do have an indexation to market. And hence, as market rates are tighter, one, we can be more and more competitive driller. And two, as effectively these rigs exit the base term, there's an upward indexation on them, which is a post to the rates and the financials.

Our next question comes from Alex Comer from JPMorgan.

I just wondered if you might give an update on your tax status and any changes you might see going forward?

Thank you, Alex. I think we started communicating on this subject of tax. We are today working with our clients and Youssef can update into this.

Thank you. As Mr. Abdulrahman mentioned, we have initiated the process for the recoveries. As we've shared previously, our contracts do bake in escalations for that the same way they do and we've been utilizing these escalations historically for diesel and certain manpower position. Accordingly, since the start of the year, since 1st of January, when that 9% tax has officially kicked in, we have basically initiated the contracting process for the billing and recovery and required approvals from the client side for that. And this process is currently underway. And at the end of Q1, which is going to be the first quarter where effectively this tax is reflected in our financials, we will be providing a further update on where we are in that recovery process.

Just -- I'm sort of failing to sort of understand this. If you can recover the tax effectively from the government through the contracts, what was the point of them taxing you?

So the recovery is not from the government. The recovery is from the clients. The clients have differential holding structures. So some of our clients, for example, ADNOC Onshore and ADNOC Offshore are majority owned by ADNOC and then they have independent international companies as minority shareholders, some of the other smaller clients we operate for in the UAE have different shareholding structure than international companies. And hence, the tax is not reimbursed by the government. It's reimbursed by the client, which have varying shareholding structures.

Okay. But as you sound today, you're effectively saying that the net impact of this tax is minimal, is that correct?

Correct.

Our next question is from Aakarsh Tomar from SICO.

Congratulations on your results. My question -- first question is, can you elaborate on your lease-to-own rigs, what is the contractual framework there?

Thank you, Aakarsh. We have the lease-to-own plan as we lease for 2 years and we own the rigs. So basically, I mean this was the fastest way to expedite delivery of the rigs because of the programs of our clients and we can see some of them we are renting without that option because based on the long-term plans, we saw for our good to be on the lease-to-own program. So it's -- we are almost completing the first one year and hopefully will be in the process of owning them after that. And Chris, do you want to add something?

No, that's perfect.

I hope that answers, Aakarsh.

Yes, just a follow-up on that. So currently, you have 129 rigs, and you said that 14 onshore are already contracted, which will come in and 2 offshore. So will you be retiring 3 rigs based on your target of 142 or will there be more rigs if you can provide more clarity on that?

No, on the 142 rigs this is what we have counted. I mean we have some of the old rigs we are anticipating that we will be retiring. Now as we go along, plans may change and those 3 rigs which you are referring to, probably they will continue for a slightly longer period. Again, there is so much to be done to bring the capabilities required by different clients. Now some of that maybe will continue with the -- some of the old rigs, but on the lighter work, some of the workovers kind of activities or even we're looking at opportunities, I mean utilizing those assets for what we call in our industry, I mean something that we prepare the wells for pre-spud kind of services, whether it is -- we do certain sections of the well or certain services. So the bigger rigs when it comes to utilize it to the best and it's more efficient. It's a win-win from both ends, the decline trends and everybody is happy. So we are still counting 142, but there is potential and that may spike to 145 and may go beyond also but not as mentioned by you, there's not something substantial. I hope that answers, Aakarsh. Or if you have any...

Yes, yes. That's very helpful. Congratulations on the results and all the best for future.

The next question comes from Amir Badran from NBK Wealth.

Congratulations on the strong set of numbers. Just one question from my end regarding your net profit guidance, so I was wondering if it already includes the recovery of tax from your customers or that's pre-recovery?

Thanks, Amir. Go ahead, Youssef.

Thank you, Amir. Yes, that is inclusive of recovery. So there is not another further upside on top of it for recovery, that is inclusive of recovery.

The next question is from Nour Sherif from Arqaam Capital.

Thank you for the can and for the opportunity to ask questions. Just a couple of questions for me, if I may. First, on the unconventional drilling, can you share some of the results of the wells being drilled there? And there could be an upside from there in terms of number of rigs if we think of Phase 2 or 3? And my second question on the Jordanian expansion, can you share with us some details about the commercial terms or plans for further expansion there?

Thank you, Nour. I think on the unconventional, we are, today, I would say, at this stage where we -- I mean where we are exploring, appraising and derisking. So it's really very at the early stage that we can have more details into this. And actually, more information is with the operators and what they are finding out, but the way we have the plans with our clients and today, we have up to 5 rigs potential to go probably to 8 to 10 rigs and the process of doing the Phase 1 of the program of the 140-plus wells that we are planning. But again, there is a bigger plan which goes all the way to probably 7,000 wells. So in terms of long-term plans are there very, very promising. Today where we are, at the stage where we are exploring and appraising. The other part on the Jordan I think we are very active there now. We are also participating in a tender which is being issued by the Jordanian government. Beyond that, I would say, it's still too early to give any information because we are on the first well, almost at the end of the first well. It's not we have completed. So probably next quarter, we will have more update into that area. I hope that answers, Nour.

Our next question is from Faisal Al Azmeh from Goldman Sachs.

Just a quick follow-up from my end. Just in terms of your medium-term guidance, does that include maybe the adjustment on the day rate for the taxes or that excludes it?

Yes, that is included as well. So the day rate in terms of impact of tax is included in both kind of top line and bottom line.

[Operator Instructions] It appears we don't have any further questions. So I will now hand the floor back to wrap up the call.

Thank you very much. I appreciate this session, and we have -- I think we have a very much interesting question this time. And again, it shapes up our plans for next phase. Thank you very much, and wish you all best guys. Thank you.