Land driller Nabors sees slowing Lower 48 rig count adds, but still ticking up

Global land driller Nabors Industries sees slower Lower 48 rig count adds for his company, although its international rig additions remain at their same pace as in recent quarters, its top executive said Feb. 8.

Consistent with a tighter and more cautious outlook for North American rigs in general, Nabors CEO Anthony Petrello said the rig operator expects to place just one more drilling unit into the Lower 48 onshore fleet in the first quarter, for a total of 96.

Even so, "with spot and future prices for WTI in the current range, we believe the outlook for continued increases in drilling activity in the Lower 48 is still constructive," Petrello said during a company fourth-quarter earnings call. "We expect these increases to materialize as we move throughout the year."

Nabors' international rig count should expand by one to two in the same time frame, totaling as many as 78, he said.

However, owing to the scarcity of top-tier rigs, which is the type of rig most in demand, particularly for shale, Nabors has been able to fetch premium prices which continue to rise for their drilling equipment.

Nabors was able to reprice nearly two-thirds of its roughly 95 Lower 48 rigs working in Q4, company Chief Financial Officer William Restrepo said.

"In the Lower 48, day rate increases were significant," Restrepo said. "Our revenue per day average for the fleet reached $32,000," or up more than $3,500 in Q4

Repricing to higher rates

That is below leading-edge day rates which are near or at $40,000/d. But Restrepo said: "There's still plenty of room to run as we reprice our fleet to the current leading edge day rates."

Higher daily rig revenues increased the driller's daily gross margin by nearly $3,500/day to an all-time high of $14,600/d, Petrello said. The amount could be as high as $16,300/d in Q1.

He added the company recently signed contracts with revenue above $40,000/d – and that sum is before factoring in add-on drilling component systems.

Also, "we have a material portion of the fleet remaining to reprice to the current market therefore we expect daily revenue and margins to continue to climb," he said. "We and the Lower 48 ... have inventories of [idle] high-specification rigs which can be reactivated," but at increasing costs.

Reactivating the next seven idle rigs would cost more than $2 million, and for the eight rigs after those, the price tag moves up to "about $6 million," he added. "We believe the Lower 48 [operators] have a limited appetite to incur this level of expense speculatively. This puts a lid on the available supply of additional rigs."

Looking ahead, Nabors surveyed its largest Lower 48 clients at the end of 2022, which combined accounted for about 34% of its rig count in the region. Adjusted for one outlier "in a special situation, the results indicate "essentially net flat activity for the group through the end of the first quarter," Petrello said

He believes this primarily reflects recent lower natural gas prices, although Nabors has shifted some rigs from natural gas to oil plays and that, along with more inquiries for additional rigs in the Permian Basin of West Texas and New Mexico and refreshed capital budgets, represents "positive signals" in that region.

Moved to West Texas

For example, in South Texas, some rigs have been relocated to oilier plays in West Texas, Petrello said.

In the gassy plays sited in the Northeast US, "the market hasn't been as sensitive, in part because of the cost structure and in part due to the quality of the rig fleet in that region, he said.

Internationally, Nabors' 50-50 joint venture with Saudi Arabia known as SANAD (Saudi Arabia Nabors Drilling) started up its second newbuild rig of an initial five, in Q4 and the remaining three should begin operating in Q3 2023, Petrello said.

SANAD has also been awarded five more newbuild rigs, bringing the total awards so far to 10. The second tranche of five rigs should begin work around the end of 2023 "at the earliest, he added.

Other drillers are also reactivating older or less-capable rigs since the cost of building new units is still comparatively more expensive than reactivating older rigs.

Despite his optimism on the macro outlook, Petrello said several near-term snags could crop up, especially a possible recession that could reduce US oil demand. That said, labor availability which has been tight for the last few years, has begun to improve in part from the easing of the pace of rig additions, he said, adding inflation has declined in key areas – namely, metals and metals subassemblies.

Nabors' vertical integration and global supply chain continues to enable the driller to meet customer demand, which "gives us confidence in our outlook through 2023," he said.