Parker Wellbore Company (NBR) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Nabors Industries' conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to William Conroy, Vice President, Corporate Development and Investor Relations. Please go ahead, sir.

Good afternoon and good morning. Thank you for joining us to discuss the acquisition of Parker Wellbore. Participating in this morning's call are Tony Petrello, our Chairman, President and Chief Executive Officer; and William Restrepo, our Chief Financial Officer. In support of our remarks this morning, a slide deck is available both as a download within the webcast and in the Investor Relations section of nabors.com. Since our commentary today includes 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 releases. 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 releases. 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.

Good morning, everyone. Thank you for joining us today on short notice. This morning, we announced we have reached an agreement to acquire Parker Wellbore. Parker is a leading provider of drilling services across global markets. I will discuss some of the key highlights of the acquisition. William will discuss the terms of the transaction. Let me begin by saying Nabors is very excited to add Parker's team and businesses to our global portfolio. We are very impressed with the quality of the Parker organization and the successful pivot they have made over the past few years. This transaction is consistent with our long-term strategy and, in fact, checks all the important boxes. I'll begin on Slide 3 of the presentation. The acquisition of Parker materially expands our drilling solutions footprint. NDS generates the highest returns in our company. The transaction also brings Quail Tools to our family of drilling services. Quail is the leading franchise in each market, and it has clear tailwinds. The acquisition also meaningfully increases our global revenue base with multiple opportunities for growth. It strengthens our drilling rig and NDS presence in several key international markets. with Parker's healthy balance sheet and cash flow generation, the transaction improves our leverage metrics and it adds accomplished high-quality employees across the globe who will strengthen the Nabors' team. In terms of the transaction, I now refer you to Slide 4. We are acquiring Parker's equity in exchange for 4.8 million shares. That translates to an approximate value of $472 million, including $100 million of assumed net debt. Parker is expected to deliver before synergies approximately $180 million in normalized EBITDA. That amount excludes transaction and other exceptional costs. This translates into a transactional multiple before synergies of 2.6x at last night's close. Moving on to Slide 5. The company's 3 main lines of business are service and tubular rentals and repairs, which includes Quail oil tools. Quail is the industry's leading rental tubular provider in the U.S. This segment accounts for 48% of Parker's revenue. Well construction, a global operation that primarily includes onshore and offshore casing running services, it accounts for 13% of Parker's revenue. And drilling, which includes a fleet of 10 land rigs and 7 barge rigs in the U.S. and international markets. This segment also includes operations and maintenance services, primarily in Alaska and offshore Canada. Drilling accounts for 39% of revenue. I now refer you to Slide 6. As mentioned earlier, the addition of Parker is entirely consistent with our strategy to expand our drilling solutions portfolio, both the surface and tubular and the well construction businesses will be part of our Nabors' drilling solutions segment. Based on these pro forma numbers, the addition of Parker represents a revenue increase in our NDS segment of over 120% or more than double. I now refer you to Slide 7. With this transaction, we will add Quail Tools to the Nabors portfolio. Quail accounts for nearly 85% of Parker's surface and tubular segment. The balance of the segment's revenue comes from the North Sea and the Middle East. I would like to highlight that the EBITDA margin of the surface and tubular segment is higher than our current NDS margin, and that's driven by Quail, in particular. We believe Quail is already starting to benefit from the progressively longer laterals in the Lower 48. For instance, based on the recent Spears report, average lateral length in South Texas is expanding. Spears estimates that measure will reach approximately 11,600 feet in the fourth quarter of this year. That translates to 8% growth during all of 2024. Lateral lengths have increased in all of the Lower 48's most important basins in each of the past 5 years, and we all know this from the rig business very well. We believe this trend will continue across unconventional basins in the Lower 48. This development provides a path for Quail's future growth, and that gives us an opportunity to grow in a market with a sideways rig count. In addition, the Lower 48 market is poised for a multiyear recovery from the decline in natural gas drilling and the impact of the large volume of recent consolidated E&P transactions should also diminish. We believe the timing is therefore right for this transaction. I now refer you to Slide 8, which illustrates our combined geographic footprints. The transaction materially expands our casing running business. Notably, it grows the business in the Middle East. This includes Saudi Arabia and the UAE where Parker is the largest casing running contractor. Parker's drilling operations include land rigs, barge rigs and operation and maintenance services. We believe these operations can be quickly integrated into our own fleet. Moreover, the O&M business provides stable financial results and low capital intensity. These attributes are consistent with our own long-term goals. Now I'll turn the call over to William, who will discuss the financial benefits and the rationale for the transaction.

Thank you, Tony. We believe this acquisition is one of the best opportunities for Nabors in today's environment. As Tony mentioned, it is entirely consistent with our long-term strategy. But just as importantly, we know the services Parker offers very, very well. In fact, we participate in all of them ourselves in one way or another. And we have experience in the geographies where they operate. In addition to a robust due diligence, the close familiarity with Parker's offering should help us reduce execution risk. I would now like to refer you to Slide 9. The transaction meaningfully expands Nabors' scale. On a pro forma basis, using our 2024 consensus numbers and normalized Parker projections, the combined 2024 EBITDA would reach approximately $1.1 billion. Parker EBITDA before synergies would represent about 20% of Nabors' pre-acquisition EBITDA. On a pro forma basis and after synergies, the transaction improves our leverage to a projected 1.9x net debt to EBITDA at the end of 2024 from a projected 2.3x for Nabors alone. Nabors' fastest-growing segment is drilling solutions. Please refer to Slide 10. The Parker acquisition meaningfully expands one of our most valuable businesses. On a 2024 pro forma basis, the transaction takes NDS EBITDA from $137 million to $321 million and projected EBITDA less CapEx increases from $119 million for Nabors alone to $221 million on a combined pro forma basis. Excluding the impact of synergies, pro forma NDS EBITDA in 2024 would reach 30% of total combined EBITDA, from about 15% for Nabors alone. We are very excited for this shift in the composition of our business from drilling rig activity towards a higher proportion of drilling solutions revenue. We believe this change will materially impact our cash flow generation potential in the future. I now refer you to Slide 11. As you can see, Parker's revenue has grown over the past 2 years despite the general slowdown in the U.S. market, its largest. In fact, by the end of 2024, Parker's revenue is expected to grow by about 22% over the prior 2 years and its EBITDA by 53%. We believe this growth trajectory will continue as the international activity keeps expanding, and the U.S. recovers from the reduction in natural gas drilling and the recent E&P consolidation activity. We would like to point out that we are adding a meaningful cash-generating business to Nabors that should grow at least at the same pace as our existing Nabors footprint, if not faster. The Parker acquisition brings meaningful synergies relative to the size of the transaction. We expect to achieve cost synergies alone of approximately $35 million through reductions in corporate overheads and by combining duplicate operational facilities in the U.S. and in international markets. We believe cost synergies could increase over time. Including these cost synergies, the total price for the acquisition of Parker of $472 million translates into an acquisition multiple of 2.2x. We believe this valuation is attractive as compared to our own EBITDA multiple and to those of other recent transactions. Let's please go to Slide 12. Under the terms of the transaction, Nabors plans to acquire Parker in exchange for 4.8 million shares of Nabors common stock, subject to a Nabors share price collar. The collar runs from the base price of $71.16 per share and is capped at 40% above and below that midpoint. At Nabors share prices above the upper ceiling, the number of shares will be adjusted downwards. At share prices below the floor, consideration will be adjusted with cash while the 4.8 million shares will remain unchanged. In addition, Nabors will assume Parkers' outstanding debt, which net of $75 million in cash totals almost $100 million. We plan to repay a portion of this debt while refinancing the remaining debt at a lower interest rate. At this point, we expect the transaction to close in the first quarter of 2025, subject to customary conditions and regulatory approvals. With that, I'll turn the call back to Tony.

Let me conclude my remarks with the following. Let me refer you to Slide 13. This acquisition enhances our strategy to grow NDS. The tubular rental business should benefit directly from the trend toward longer wellbore laterals, a recovery in the U.S. market and international expansion. We have the opportunity to migrate the casing running business to our integrated model, which should improve its margins by leveraging our Middle East presence. And as pointed out by William, we can accomplish all of this while adding to free cash flow and improving our leverage profile even before synergies. The synergies just added sweetness on the cake here. The addition of Parker wellbore adds scale and diversification to our existing business portfolio. Parker brings a dedicated team with a demonstrated record of success. We welcome them to Nabors. We believe clients will benefit from greater efficiencies from the combined companies. The transaction will also improve Nabors' financial performance metrics. We are confident the combination will create value for Nabors shareholders. I would ask you to refer to Slide 14. And with that, we'll take your questions. Thank you.

[Operator Instructions] Our first question comes from Waqar Syed with ATB Capital Markets.

Congrats on the deal. My question relates to how does your -- how this transaction benefits from your JV in Saudi Arabia with SANAD and all the focus towards unconventional drilling?

Well, actually, I feel it very well complements our position there. We have our own -- some casing running services operations there already. And in the U.S., as you know, we're rolling out our integrated model of casing running services. So I think the combined footprint in Saudi Arabia, combined with the new model, gives us a growth opportunity there. Now on the SANAD rigs and third-party rigs, both Nabors and Parker have a good share of the third-party rig market, not just SANAD. So I think, overall, it gives us a great opportunity for growth in that market.

And a comment, Waqar, that's a great question because Nabors drilling solutions does particularly well in unconventional basins. So the expansion in Saudi Arabia, the unconventional activity is going to be very beneficial to not only SANAD, but also NDS in Saudi Arabia.

And Tony, could you give us some color on the motivation of the seller? Or how did this transaction come about?

Sure. Well, as you know, Parker went through a reorg, and therefore, the seller -- the owners of the company were unnatural buyers in the sense that they were former debt guys, and they were looking for an opportunity to exit, and they understand the market where it is today and the benefit of our transaction is we're the logical buyer because of the -- all the synergies on the deal. And the fact is that they see great upside in Nabors' stock price. And you could see they're so willing to take a low transaction multiple on this deal because of that. And the deal was structured with a collar to protect Nabors' shareholders as well, which I think is very important in the deal when you look at the structure of the deal. So it's only attractive from a transaction multiple point of view, as William said, 2.2x synergies, but the collar ensures that if the market reacts as it should to this transaction, the stock blows through the $100 price that the 4.8 shares comes down. Now the seller understood all this, but they believe in the long-term story of Nabors, and we spent some time talking with them through it, and they bought into the whole thesis of the transaction, which we're very proud of.

And the next question comes from Keith MacKey with RBC Capital Markets.

Yes. Maybe just keeping on with the structure of the deal. Can you just talk about any applicable lockup in the 4.8 million shares that will be issued to the seller?

Sure. Almost 85% of the shares in the deal are locked up already in the deal. So we have high confidence in closing of the transaction.

Of the lockup post sale.

I mean post [ deal ]...

Post deal. Yes. It's a 90-day lockup. Some of the shares could be sold initially, but most of it is locked up for 90 days.

Okay. That's helpful. And just on Quail, you mentioned the advantage there or the amount of long horizontals that the business is involved in. Can you just talk about any specific advantage that the business might have in terms of winning a lot of that longer horizontal work? Or is it mostly just a matter of geographic distribution?

Yes. Well, obviously, what's happening, especially with the larger operators, is the migration to the longer laterals, Quail has the blue chip customer base already representing most of the major players there. And therefore, as they go in that direction, Quail is well positioned to do that. In fact, they're already growing in that segment for that reason. So it's only natural. Then combined with the fact that Nabors' rigs today, as you all know, are the rigs most capable for doing the longer laterals, and we have the extra equipment like the top drive, which has the extra torque to accomplish the longer lateral. So this just reinforces the package that we have to meet the needs of these customers that want to move to longer laterals. And obviously, longer laterals mean even with the same well count, you get more revenue on the pipe. So basically, it's a way -- even with a sideways rig count to get more benefit out of the longer laterals by -- through the Quail play, and that's the concept.

And Keith, I'd like to point out also that Quail is, by far, the largest player in the field in the industry. And we do the same thing as Nabors. We try to also be in that business, and in fact, we are in that business. But our cost in buying the drill pipe is much higher than what Quail manages to achieve given their size and their scale. So I think that their main advantage is, in fact, the knowledge of the business, the relationship with the clients, the reliability and dependability and, of course, a cost advantage that they managed to have because of their size.

The next question comes from Kurt Hallead with Benchmark.

So we've got a couple of questions. First, when you look at the customer makeup in the U.S., I think it's fair to assume that there's a significant overlap in the customers. So the question being, is there some customers that Parker is dealing with that you guys have always wanted to get a bigger share of the wallet for that they bring to the table? Or is it just the overlap is what it is and you don't really see an opportunity to really grow your customer list per se?

I think it's, like in most deals, it's a mix -- there's a mix. I think there's -- a lot of the core customers that we have today, there is an overlap, but they do bring some other customers. And obviously, there's some not the super majors, but other ones that they actually bring to the table. The other thing about Parker is that their sales force is a very motivated sales force and they're very successful, and that we think that's going to help drive not only the stuff that's in their current portfolio, but other -- some of the other NDS products and services that Nabors has. So there's a double benefit here from the transaction in terms of building on their organization and their sales expertise to help sell and put more heft behind the NDS products being sold in the Lower 48, particularly on third-party rigs, which -- where they would have a real advantage compared to what we do today. So that's the added benefit. So it's both customer mix as well as the ability to take our existing stuff and help drive more penetration.

I think there's a couple of markets where they are strong, like in the Emirates and India, for instance. We also like their O&M in the North Sea. I'm sorry, in Canada offshore and in Alaska. So those are certain different segments where we participate but where they, in particular segments, have access to some clients that we haven't had traditionally in the past. So we are very excited to exploit those relationships.

Okay. All right. And then -- so, Tony, given all the rapidly evolving dynamics around automation, machine learning, AI, et cetera, and what you have going on with rigs -- with your technologies business, do you see a possibility to kind of connect what's going on with the drilling solutions business with what you got going on with the rig technologies business?

Absolutely. I think there's a huge link that's in process right now. As I alluded to in the comments about casing running services, the casing running services that we're really pressing is not the conventional casing running services, but what we're calling the integrated model, where we bring a CRT tool and then we're going to have changes in the control system to try to make casing as automated as possible without needing an extra casing crew, maybe just one additional person at the rig side do the casing, and that's in process. And with this acquisition, we have the scale and the wherewithal that really help drive that the market change there because I strongly believe the market needs to do that, particularly on casing. I think it's a very antiquated model where you have separate casing companies come out with a separate crew and a separate overhead, separate safety regulations. And as you know, casing on the rig is where a lot of accidents occur. And so if we can integrate that into the rig, which is my philosophy of going forward, that's a big win for both the operator and for us. And so we're pretty committed to trying to make that happen.

Okay. And if I may, last one on the rig front, right? So they got some U.S. rigs, some international rigs. They got some barge rigs, which I know you guys have done platform work but not necessarily barge work in the past. So multipart. What's the land rate quality relative to what you currently have? How is the contract status of those land rigs? And what do you eventually see as being the synergy or upside that the barge rigs can bring to your platform?

The barge rigs are going to be an open evaluation. To understand that, we've been in the barge rig business in the past, as you know. And -- but the market is a limited market. It's mainly, the transition is all down there, and we'll evaluate that going forward. On the land rigs themselves, in Alaska, of course, they have a good position there with some good quality equipment. And internationally, they have operations in Kazakhstan and Bangladesh where they're operating for super majors with, again, good quality rigs. So on the land rigs side, it's only additive. The barge rigs is going to be something we have to example what's the best way to go forward to extract more value because, as you know, the market there is not a big demand growth market right now. So we have to figure out what we want to do.