I would now like to turn the conference over to William Conroy, Vice President of Corporate Development and Investor Relations. Please go ahead.
Good morning, everyone. Thank you for joining Nabors' first quarter 2026 earnings conference call. Today, we will follow our customary format with Tony Petrello, our Chairman, President, and Chief Executive Officer, and Miguel Rodriguez, our Chief Financial Officer, providing their perspectives on the quarter's results, along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks, a slide deck is available, both as a download within the webcast and in the investor relations section of nabors.com. Instructions for the replay of this call are posted on the website as well. With us today, in addition to Tony, Miguel, and me, are 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 Miguel 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.
Good morning. Thank you for joining us to review our first quarter results. The quarter included several important operational and strategic milestones. I will highlight those today. I will begin with the situation in the Middle East and its effects on our business. Today, our rig footprint in the Gulf region consists of 53 rigs operating under our SANAD Land Drilling joint venture in Saudi Arabia, four rigs working in Oman, and three rigs in Kuwait. We conduct large casing running operations in both Saudi Arabia and Abu Dhabi. Our Canrig subsidiary is also active across the region. It operates with manufacturing and repair facilities in Saudi Arabia and Dubai. Across the region, our staff number is approximately 7,000, including SANAD. Today, we have maintained our pre-conflict operating tempo across each of these operations. Our clients in the region continue to follow through on planned activity.
Importantly, they have not communicated any material change to their forward plans. The impact on our financial results so far has been limited. Miguel will address the financial implications in his remarks. Many of you have asked whether Lower 48 operators have increased their activity in response to higher oil prices. Oil futures are steeply backwardated. While supportive for incremental production, forward pricing remains below current front-month levels. This tempers the near-term activity expectations. Changes in drilling plans require confidence in sustained pricing. Given current volatility, it remains early for broad-based revisions to existing drilling programs. In the Middle East, approximately 7.5 million bbl a day of production was shut in according to the EIA. This total could actually increase in April. Restoring this shut-in production will require time, capital, and operational execution.
As a result, supply disruptions in the Middle East may persist beyond the near- term. This dynamic should provide underlying support for both commodity prices and activity levels in other regions, including the United States. In short, we see tightening supply, we see durable demand, markets will adjust. Let me now turn to our financial results for the quarter. Adjusted EBITDA totaled $205 million. Notwithstanding the financial consequences from the conflict, our performance was essentially in line with the expectations we outlined on our last earnings call. This outcome reflects progress across our key strategic priorities: operational excellence in the Lower 48, measured growth in the international markets, technology that improves returns for our customers and for Nabors. We expect them to drive further improvement through the year. Let me turn to the market environment and our positioning.
The oil market shifted sharply in early March as the hostilities began. Near month WTI has remained volatile around $90. The current oil market is more constructive than in 2025. Operators have not broadly adjusted activity in response to these price levels. As I noted earlier, the futures curve remains backwardated. We remain aware of global supply and demand balances alongside inventory trends. These trends may offer the opportunity for additional drilling activity, which we are positioned to capture. Let me address Venezuela. We have five rigs in the country. While our fleet remains idle, we have maintained a small local staff. We have operated in the country since the 1940s. The resource base remains significant, and the long-term opportunity is substantial. Under the right circumstances, Venezuela presents a meaningful opportunity. Recently, a number of operators have expressed urgency to expand their operations in Venezuela.
We are ready to support their activity. Discussions are underway to determine suitable commercial terms. We will structure these agreements to protect our capital in country. Turning to the U.S. market, operators are evaluating the global dynamics we discussed earlier. For the most part, large public operators are not moving quickly to increase capital spending, even with higher oil prices. Resolution of the conflict, along with a clearer view of its impact on global supply, would allow operators to adjust their plans with greater confidence. Since the end of February, near month WTI has moved more than 10% on seven trading days. This level of volatility complicates planning and capital allocation. Our approach in this market is to continue doing what we've been doing: deploy advanced technology that increases efficiency and improve operator EURs and returns. We pair this with tight cost control and capital discipline.
Turning to natural gas, several factors are shaping its near-term outlook. The conflict is affecting global LNG flows, with disruptions to exports through the Strait of Hormuz. This may increase LNG exports from the U.S. Also, in the U.S., year-over-year, natural gas demand for electricity generation declined in 11 of the past 12 months. Renewables have displaced some gas-fired generation. These dynamics are reflected in current natural gas pricing. Over the longer- term, U.S. LNG exports and domestic consumption are expected to increase. Additional Gulf Coast LNG export capacity will come online, including projects such as Golden Pass, Port Arthur, and CP2 LNG. Data center power generation requirements continue to expand. These could add up to 6 Bcf /d of natural gas demand by 2030. In international markets, including the Middle East and Latin America, expanding gas development continues to support drilling activity.
In the Lower 48, gas-directed activity currently comprises more than 20% of our working rig count. We can respond quickly to increased demand across gas-producing basins. Next, I will share a few perspectives on Nabors' current business. In the Lower 48, the momentum that started toward the end of 2025 has continued through the first quarter. We added four rigs during the first quarter and a total of eight rigs since November 2025. This progression was a positive surprise. That brought our rig count to 66 at quarter end. Our count currently stands at 66. Since the beginning of the year, these incremental rigs have primarily come from public operators. They are spread across producing areas with four in the Permian, three in the Haynesville, and one in the Eagle Ford. We believe this diversity across basins is healthy.
Turning to SANAD, the new-build fleet in Saudi Arabia continues to expand. SANAD deployed the 15th new-build during the first quarter. Four more new rigs are planned to commence working during 2026, bringing the new build total to 19. The 20th should start up in early 2027. As planned, notwithstanding the current conflict, SANAD has also resumed operations on one of its suspended rigs. The second is scheduled to start up late this quarter. These additions, with both occurring in March, are a testament to the capability of our workforce in the kingdom. While conditions in the Middle East remain fluid, this level of activity reflects the customer's commitment to its prior development plans. Operators across the Eastern Hemisphere are advancing plans to expand activity. In Latin America, the activity improvement in Mexico continued in the quarter.
Late in the first quarter, we restarted a rig there earlier than planned. That brings our total to four working. All of these are offshore platform rigs. They're large, high-spec units with economics above the segment average. In Argentina, we started one rig in the first quarter as planned. We have another rig scheduled to work there in the third quarter. The second rig should bring our rig count in the country to 14. This further strengthens our position as the leading drilling contractor in Argentina. Now I'll turn to the U.S. market. Since the beginning of this calendar year, the Baker Hughes weekly Lower 48 land rig count has declined by three rigs. Nabors' rig count in this market has increased by four. To date, higher oil prices have had limited impact on overall market activity or our rig count. Over the same period, our rig count has moderated.
Let me add some context on our Lower 48 performance. Our count began rising in December, supported by groundwork laid earlier in the year. This performance reflects our high-spec rigs, advanced technology, experienced crews, and strong field performance. We have also grown our rig count while maintaining pricing discipline. Looking ahead, we are increasing our forecast to reflect more rigs in the current quarter. We expect to maintain that higher level through the second half of the year. We also surveyed the expected drilling activity of the largest Lower 48 operators. The group accounted for approximately 44% of this market's working rig count at the end of the quarter. The first quarter data reflects announced M&A activity. The results provide useful insight into operator behavior. In aggregate, these operators reduced their rig count during the first quarter. This is consistent with broader market trends.
Looking ahead, the group expects to add approximately 15 rigs through the end of the year. These additions are concentrated among two operators. Both have indicated they are responding to current market conditions. Beyond these operators, the overall sentiment generally favors incremental activity, though this tone is not expressed in expected rig counts. We continue to improve our ability to execute commercially and operationally. The survey shows Lower 48 industry utilization is headed higher. With this combination, we believe our rig pricing will increase progressively through 2026 and into 2027, reaching the mid-30s. I will now comment on the key drivers of our results. I'll begin with our international drilling segment. Notwithstanding disruptions in several markets, this business continues to expand. For perspective, since the end of 2023, the Baker Hughes Lower 48 rig count has declined by approximately 12%.
Nabors International rig count increased by 16% over the same period. The rig count in markets where we operate was essentially flat during this time. We achieved our growth even as we wound down operations in several countries. Canada also had rigs suspended, and it elected not to renew certain contracts. This performance demonstrates the value of our geographically diversified portfolio of businesses. Today, we see additional prospects across the Middle East, Asia Pacific, and in Latin America. In the Eastern Hemisphere, we see approximately 20 opportunities in markets where we operate or which we consider attractive. Beyond Venezuela, where I mentioned prospects to resume operations are improving, we see additional opportunities across Latin America, primarily in Argentina, with a smaller number in Colombia. We prioritize operations that utilize our innovative technology or for multi-year term contracts and generate attractive financial returns.
In Saudi Arabia, in addition to the planned rig starts through early 2027, SANAD is advancing discussions with the client for the next group of five new build rigs. We expect to conclude these discussions in the coming months. That group will bring this whole number of new builds to 25. Turning to performance in the U.S., on our previous earnings conference call, we suggested our daily gross margin in the Lower 48 was stabilizing. That proved to be the case in the first quarter. For the second quarter, we expect a modest uptick. Commercial and operational performance support this outlook. We maintain pricing integrity and control costs. Our rig count is outperforming the industry. We are well-positioned to capitalize on future opportunities to add to our working rigs fleet. Let me briefly update you on our high-end rigs, including the PACE-X Ultra.
The PACE-X Ultra rig established the benchmark as the industry's first rig with a 10 K PSI mud system. It is also equipped with expanded setback and upgraded rig components. The first unit continues to work for Cactus in South Texas. It delivers the high performance that our client and we expected. We have agreements to deploy two more PACE-X Ultras later this year, and we are in discussions with multiple operators to upgrade specific rig capabilities. These upgrades enable them to drill increasingly challenging wells. The PACE-X Ultra's economics reflect the rig's market-leading capabilities and value proposition. Including the NDS content on these rigs, the daily revenue is well above the $40,000 mark, and they work on term contracts. These developments reinforce the value of our rigs. Our solutions contribute directly to customer performance while generating attractive returns for Nabors. Next, let me discuss our technology and innovation.
We include a full Drilling Automation package from NDS on our PACE-X Ultra rig. We also include our integrated MPD package. This combination positions the PACE-X Ultra as the most capable drilling system in the U.S. market. We are committed to expanding NDS' services globally, particularly among the NOC customer base. During this quarter, we had modest international growth. We believe there's a strong appetite as operators follow the U.S. by prioritizing efficiency and performance gains. I'll conclude with our capital structure. To be clear, our highest priority remains debt reduction. On top of the substantial progress we made in 2025, during the first quarter, we redeemed the balance of the notes due in 2028. This action reduces future interest expense and supports free cash flow generation. As Miguel will detail, we outperformed our free cash flow expectation for the first quarter, largely outside of standard.
This cash flow provides capacity to further reduce debt and strengthen the balance sheet. To summarize, before turning over to Miguel, the first quarter brought unexpected volatility to the global energy industry. Our diversified portfolio across businesses and geographies helps us manage that volatility and continue to perform. Let me turn to Miguel to discuss our financial results in detail.
Thank you, Tony. Good morning, everyone. Before turning to our results, I want to briefly address the evolving market backdrop, particularly in light of the Middle East conflict. From an operational perspective, our business in the region has remained stable. We continue to operate in Saudi Arabia, Kuwait, Oman, and the Emirates without disruption, maintaining a consistent cadence of activity. As planned, our SANAD joint venture added rigs in Saudi Arabia during the first quarter. That said, the conflict did introduce some operational inefficiencies during the quarter, primarily affecting logistics, supply chain, and crew rotations. In the U.S., our customers, especially the majors and public E&Ps, have remained disciplined in their approach to activity levels. We are encouraged by the progress of our rig additions in the Lower 48. These gains reflect a strong commercial execution from the fourth quarter rather than a broad-based shift in customer behavior.
While we believe the Lower 48 market is showing early signs of improvement, overall activity levels have not yet changed meaningfully. With that context, I will review our first quarter performance and outline our guidance for the second quarter. I will then conclude with updates on capital allocation, adjusted free cash flow, and capital structure. Now turning to the first quarter. Our consolidated revenue was $784 million. The sequential decline was driven by two main factors. First, the expected seasonal reduction in our Rig Technologies segment, reflecting lower capital equipment deliveries and part sales. This was compounded by approximately $3 million of logistic disruptions in the Middle East. Second, the previously announced step-down in day rate for our marquee rig in the Gulf of America, which transitioned to a workover rate at the start of the year.
Consolidated EBITDA was $205 million, representing an EBITDA margin of 26.1%, down 164 basis points sequentially. The decline was driven primarily by our International Drilling and Rig Technology segments. Importantly, our EBITDA was consistent with the expectations we communicated during our previous earnings call. Our EBITDA results include approximately $3.5 million of adverse impact related to the Middle East conflict across our International Drilling and Rig Technology segments. Now, I will provide you with details for each of the segment results. International Drilling revenue was $419 million, a decline of $4 million or 1% sequentially. EBITDA was $121 million, decreasing $10 million or 7.6% quarter-over-quarter, yielding an EBITDA margin of 28.9%.
The sequential decline in EBITDA reflects anticipated labor costs in Saudi Arabia associated with Ramadan and the Eid holiday. In addition, time-related impacts from the on-plan transition of two rigs moving from oil-directed to gas-directed drilling. Results were also impacted by the previously announced conclusion of certain short-term high-margin activities in the Eastern Hemisphere during the fourth quarter. Continued activity disruptions in Colombia and incremental costs related to the Middle East conflict. Our average daily gross margin was $16,880, which fell below our guidance range. This was driven by several factors. The aforementioned transition of two SANAD JV rigs from oil to gas drilling, which require contractual inspections and acceptance procedures, temporarily disrupting the planned drilling schedules. While it's strategically beneficial, these transitions weighed on our first quarter results.
Operational challenges related to the Middle East conflict, including impacts on logistics, supply chain, and crew rotations, resulting in a shortfall of approximately $2 million. The continuation of activity disruptions in Colombia, combined with the adverse impact of a stronger Colombian peso weighing on our cost structure. Average rig count for the quarter was 92.6, slightly above the high- end of our guidance range. Our exit rig count was 93 rigs. Drivers of our rig count growth included the commencement of the 15 new build rig in Saudi Arabia, the resumption of one previously suspended rig, also in the Kingdom, the redeployment of one rig in Argentina, and the earlier-than-planned reactivation of an offshore platform rig in Mexico late in the quarter.
These additions were partially offset by the previously announced roll-off of three very low-margin workover rigs in Saudi Arabia, which SANAD elected not to renew for economic reasons, and a small number of contract expirations in other international markets during the quarter. Moving on to U.S. drilling. Revenue was $241 million, essentially flat sequentially. EBITDA was $88 million, representing a margin of 36.5%. EBITDA exceeded our guidance, driven by stronger-than-expected activity in the Lower 48. Alaska offshore results were in line with the expectations. Looking specifically at the Lower 48, revenue was $192 million, an increase of $11 million, up 5.9% sequentially, reflecting higher activity. Average rig count increased by 5.5 to 65.3 rigs above the top of our guidance range. During the quarter, we added rigs across several basins.
The continued robust progress in our rig additions reflects a strong coordination between our commercial and operations teams, combined with pricing discipline, excellent service quality and rigorous execution, which all have been well-supported by our high-quality customer portfolio. Currently, we have 66 rigs working. Average daily revenue declined modestly to $32,660, reflecting some repricing as rigs rolled onto new contracts. Leading edge daily revenue remains in the low $30,000 range. Average daily margin was $13,177 in line with our expectations. Turning to Alaska and U.S. offshore. On a combined basis, revenue was $49 million, EBITDA was $17 million, a decline of $9 million sequentially with EBITDA margin of 34.7%. These results were in line with our guidance and primarily reflect changes in the work scope and mix.
Turning to Drilling Solutions. NDS revenue was $106 million, largely flat sequentially. EBITDA was $39 million, resulting in a margin of 36.4%. These results were in line with our guidance, reflecting growth in our international markets, offset by a modest decline in the U.S. from third-party risks. Importantly, the segment converted approximately 94% of EBITDA to free cash flow during the quarter, a new record, and underscoring its low capital intensity. On to Rig Technologies. Revenue was $27 million, down $11 million sequentially. EBITDA was approximately $500,000 , a decrease of $4 million from the prior- quarter and below our guidance. The sequential decline was expected following a strong year-end sales in the prior- quarter.
EBITDA was further impacted by parts delivery delays related to the Middle East conflict, representing approximately $1.5 million or roughly 50% incremental. Turning to the second quarter, our EBITDA guidance assume a $6 million-$8 million impact, considering that the inefficiencies in the Middle East will persist through the quarter across our segments, but primarily within international drilling. In international drilling, we expect average rig count to range from 93 to 95 rigs. This reflects the addition of two rigs in Saudi Arabia, including the commencement of the 16 new build rig and the redeployment of a second rig previously suspended, as well as the contribution from rigs that commenced activity in Q1. Average daily gross margin is expected to improve to a range of $17,400-$17,500.
This increase reflects the benefit of the incremental rigs and a full recovery from the first quarter impacts related to Ramadan and Eid, along with a return to more stable drilling activity. Our outlook, however, does not demonstrate the full earnings power of our international franchise as it incorporates the estimated impact from inefficiencies related to the Middle East conflict. While we remain cautious regarding the evolving situation in the region, the quality of our fleet, combined with our continued superior execution and performance, position us well for a strong second half of the year. Accordingly, we expect to deliver full-year segment results firmly in line with our full-year guidance. Turning to U.S. drilling. We expect the average Lower 48 rig count to increase to a range of 67-68 rigs. This includes some level of churn, albeit at a much reduced level compared to prior- quarters.
Daily adjusted gross margin for the second quarter is expected to average approximately $13,300, a modest sequential improvement driven by pricing. While the overall market environment remains somewhat constrained, we see targeted opportunities to add our rigs. This is driven by our strong and disciplined operational and commercial execution, combined with our solid customer portfolio. We will continue to evaluate incremental opportunities based on asset availability, capital requirements and crew capacity. Therefore, we are updating our activity outlook for the Lower 48 drilling business with an improved full-year outlook. We currently expect to exit the second quarter with approximately 69 rigs and to maintain activity at or near that level through the remainder of the year.
At these utilization levels, we expect our pricing to trend higher over time, moving from the low $30,000 range to reach the mid-$30,000s as we progress through this year and into 2027. For Alaska and U.S. offshore combined, we expect EBITDA of approximately $15 million. Reflecting the conclusion of an offshore O&M contract and plant maintenance for one of our rigs, which is also offshore. Over the medium- to long- term, we expect strong operations in Alaska. Drilling Solutions EBITDA is expected to be approximately $39 million, which is in line with the first quarter. Finally, Rig Technologies EBITDA is expected to be approximately $3 million. Next, I will discuss our capital allocation, adjusted free cash flow, and liquidity.
First quarter capital expenditures totaled $159 million, below our guidance range, mainly due to timing shifts in the SANAD new build milestones. Our Q1 CapEx included $72 million related to the Kingdom new build program in Saudi Arabia. Total capital spending was closely in line with the fourth quarter, which amounted to $158 million, including $78 million of new build-related spend. Looking ahead, we will continue our disciplined and flexible approach to capital investments. For the second quarter, we anticipate capital expenditures in the range of $180 million-$190 million, including $75 million-$80 million for the SANAD new build program.
For the full- year, we expect capital expenditures to remain in line with our prior outlook of $730 million-$760 million, including $360 million-$380 million for the SANAD new builds. The timing and level of spend remains subject to market conditions and project pace. The cadence of the SANAD new build milestones may shift between quarters. Potential activity above our current guidance in the U.S. will be evaluated carefully in the context of market visibility, asset readiness and requirements, overall return and funding thresholds, and contract term. We remain firmly committed to managing capital spend at or below our guided range. Turning to free cash flow. During the first quarter, Nabors consumed $48 million of consolidated adjusted free cash flow. We exceeded our midpoint guidance range by more than $35 million.
Importantly, free cash flow outside of SANAD was nearly break-even, representing a meaningful outperformance relative to our expectations. This beat was mainly driven by a better-than-expected working capital progression and capital expenditures below plan levels. While this free cash flow outside of SANAD may be modest in absolute terms, it marks a very solid result, given that our first quarter is typically the most cash-intensive period of the year, driven by payments of cash interest, property taxes, and annual bonuses, among others. This distinction in the origin of cash is important, as free cash flow generated outside of the SANAD JV is available to Nabors for debt service and other corporate purposes. For the second quarter, we expect to generate approximately $10 million of consolidated adjusted free cash flow, with SANAD consuming approximately $10 million.
Based on the continued momentum in our Lower 48 business, a constructive outlook for our international operations, and the compounding effect of our capital discipline, we are well-positioned to exceed our full-year guidance. Finally, I would like to make a few comments regarding our continued progress on our capital structure. During the first quarter, we redeemed the remaining $379 million of senior guaranteed notes maturing in 2028, extending our nearest maturity to June 2029, leaving a very manageable $250 million maturity at that time. We remain focused on further strengthening our balance sheet and capital structure with an objective of reducing net debt leverage to approximately one time over the long- term. I will provide updates as we progress towards this goal. With that, I will turn the call back to Tony.
Thank you, Miguel. I will close with a few points. First, we continue to support our clients in the Middle East, even as the operating environment has become significantly more challenging. We've maintained operational continuity and mitigated risk with strong management. In Saudi Arabia, specifically, our SANAD JV remains on track for growth. The new build deployment schedule is unchanged. Discussions for the fifth tranche of new rigs are progressing. Each tranche is expected to generate more than $60 million in annual EBITDA. This program represents a significant, differentiated, long-term growth opportunity in our industry. Second, in the Lower 48, a strong performance has resulted in growth in our rig count as well as free cash flow. Customers continue to select our high-spec rigs and integrated NDS solutions to improve both performance and returns. We expect to deliver further progress through the year.
Third, our free cash flow reflects disciplined operations across the business. We are firmly committed to using free cash flow to reduce debt. The message today is clear. Nabors is a stronger company. We deliver. Returns are improving. The business is more resilient. We are creating value in Saudi Arabia and across our international franchise. We are expanding technology-driven earnings, and we are continuing to improve the financial quality of the business. There's more work to do, but we are on the right path, and we are confident in the value creation ahead. Thank you for your time this morning. We'll now take your questions.
Thank you. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question comes from Dan Kutz with Morgan Stanley. Please go ahead.
Hey, thanks a lot. Good morning.
Morning, Dan.
I wanted to ask, with the U.S. Lower 48 rig count where you're at today, about 66 rigs, that's up from a low of around just under 60. You guys, you know, have kind of guided to go into 69 in the second half of this year. Can you talk about how for the rigs that you've reactivated or are planning on reactivating so far, some of the mobilization or restart costs and how that's translated to, you know, maybe some pricing upside with customers. Maybe perhaps more importantly, what does the Nabors' Lower 48 supply stack look like beyond that 69 active rigs plan for the second half? I think the last time that you were at that level was roughly two years ago.
What would it take? What, what's Nabors' appetite? What's the cost involves? What's the pricing you need to see to reactivate rigs beyond the current plans for the second half of this year? Thanks.
Sure. Beyond the 69, I think I divide into two categories. The first category between the next 11 or 12 rigs on top of that tranche is a relatively digestible number. Beyond that, there's a second level, another roughly 15 rigs, which the cost gets incrementally higher. That's where we do it. The first tranche, we're ready and able, willing to execute. On both tranches, obviously, there will be price increases associated with it. You know, we don't see that as being much of a problem.
Got it. Fair enough. Maybe just one on capital allocation. Could you remind us if you've put out or what type of net leverage target you guys are targeting longer term or through cycle? Basically, what I'm driving at is there a net leverage level where you might be comfortable? I feel like you've been very clear that using free cash to reduce debt is, you know, at the top of the capital allocation priority list. That's in addition to the SANAD new build program and maintenance, obviously. I guess at what point would you be comfortable? What kind of net leverage level or liquidity level would you be comfortable moving some other capital allocation priorities up the list, whether it's shareholder returns or accelerating PACE-X Ultra upgrade investments or any other investments?
Maybe it's, you know, to upgrade and, you know, mobilize stack U.S. rigs for some international and conventional opportunities. Just how do you think about what the longer- term kind of balance sheet and liquidity level that you would need to see to consider some other uses of capital and what would potentially be on that list of capital uses? Thanks.
Thank you, Dan. Look, I mean, first of all, starting with the PACE-X Ultra, we are in the process of deploying two additional Ultras during the remainder of the year. These rigs, I want to reiterate, are the best possible rigs you can think in the entire Lower 48 market. Not only for the technology aspects on the rig itself, but the full integration with the Nabors portfolio of services. I mean, the performance of the first rig has been outstanding. And I invite you to basically look at our press releases, et cetera, around the PACE-X Ultra. But we will continue to invest on this type of integrated technologies and type of rig as we continue to see interest from our key customers. That's number one.
Number two, I think we have been clear in the fact that our medium- to long-term roadmap in terms of the net leverage is around the one time, right. This is a medium- to long-term objective. Tony and I, we remain very optimistic about our progress and the outlook, not only in 2026, but into 2027 and beyond, towards this goal. Once we get there or close, we will seriously contemplate other capital allocation initiatives. One of them will certainly be return to shareholders, whether it's in the form of share buybacks or dividends or both, for that matter. First of all, I think our shareholders will get a better benefit by us continuing to reduce gross debt. That remains the number one goal.
Great. All makes sense. Thanks a lot. I'll turn it back.
Take care.
The next question comes from Derek Podhaizer with Piper Sandler. Please go ahead.
Hey, good morning. On the Lower 48, you added eight rigs since last year, sitting at 66. You expect to move to 69 by the end of the quarter. From there, you called for a steady rig count in the back half of the year, but now you're expecting privates to add incremental rigs as the eight rigs you described were added primarily from the publics. Talked about the survey, two operators adding 15 rigs. In this setup, shouldn't we see some upside to your second half rig count above the 69 versus staying steady? Like, could you just help us maybe with the moving pieces here and how we should think about it?
Yeah. Yes. I mean, obviously, if all things click and there's no setbacks, there should be upside in the story here. We've made no secret about the fact that we have two additional rigs in process. You know, we're actually being trying to be cautious as well because this market has the ability also to turn on a dime here. We don't wanna get over our skis right now. We're real comfortable changing the guidance that we have for the year to the 69 number, but we're not yet ready to move it to the next number.
That's fair. No, I appreciate that. I guess flipping over to Saudi, you have the new build program going. You're obviously accelerating the next, the next tranche or not accelerating, but you're considering that to happen over the next couple of months. I'm just trying to think through maybe your upside torque if Saudi were to add incremental activity once we get to a world post-resolution here. It sounds like all your suspensions are going back to work. Is there any sort of ability to accelerate the new build program from the initial cadence, or is there potential for adding rigs into the JV that are outside of the country? Just some maybe thoughts around kind of upside torque to if we see Saudi add incremental rigs in a post-conflict world.
Sure. Well, first of all, let's put the whole thing in context of Saudi Arabian market as a whole. I mean, there's currently 251 operating rigs in general, 192 are onshore, 59 offshore. Of the original suspensions, 82 were onshore, 37 were offshore, and there has been a resumption of 36 offshore and four onshore. We don't think all those suspended rigs are gonna come back necessarily, maybe up to another 20 or so, and there's line of sight to at least 12. The fact is that, you know, the fact where we are and what Aramco has done so far, I think it's a very positive sign. Obviously, this market does demand incremental production from them.
They will have to reassess their plans. We are in a great position, I think, to be part of that, whether it's additional rigs within the Nabors existing fleet from other markets or not, or acceleration of a new build program. Either one we could do. Probably acceleration of a new build program won't actually solve a short-term need. My guess is if it's going to come, it'll come from Nabors other assets somewhere else. That's what I would say. The other thing I would say is that our relative position there has really improved a lot. I mean, our operating fleet is now really weighted to the natural gas development. We remarked how we actually changed in the quarter, you know, some rigs to oil to gas.
90% of our rigs are now directed at gas projects, just to give you an idea. Nabors share of the gas work is about 40%. SANAD share of the gas is about 40%. We have a very large substantial capability there. Our overall market position is obviously 28%. We really have to acknowledge Saudi Aramco's role here, and they've been steadfast in supporting SANAD, whether everything, including this current very challenging environment. The other thing is, we actually have, as part of the story there is the growth of the Saudi situation is the rollout of technology. NDS is now beginning to make inroads there as well with bringing all their performance products out there, casing running.
We're already a large casing running player in the region. In fact, this is an interesting number for you. Probably you're not aware of it. Globally, Nabors on land is now the third-largest casing running provider. In the U.S., we're the second-largest. In that region of the world, we're a really key player with a substantial operation in the UAE. When you look at this current environment and you look at what may happen post this dispute in terms of the need for these NOCs to resume activity and maybe, if you'll take into account UAE's and the recent announcement and their aspirations to grow production, I think we're really well established in the region to take advantage of all that. Does that make sense?
Right.
Does that give you any color that you wanted?
Yeah. No, that was great. Appreciate all the color. Very helpful. I'll turn it back.
The next question comes from Scott Gruber with Citigroup. Please go ahead.
Good morning. Tony, encouraging comments. Good morning. Encouraging comments obviously on the activity volumes, you know, that you've already seen and that are forthcoming, but also on the rate side in the U.S. Just curious, you know, around, you know, the drivers behind the rate inflation you see coming. You know, I assume there's a component of market tightness. But curious around, you know, if there's a component to getting compensated, you know, for these upgrades. Maybe just some color on, you know, that move, you know, into the mid-30s. Is that, you know, mainly market or is it kind of a combination of market and compensation for upgrades?
I think it's a combination of things. Absolutely, it's a combination of things. First of all, you have to remember the past two years, there's been a reduction in the overall number of marketable rigs. That's number one. Number two, if you look at well programs, the demands of well programs have actually increased, particularly amongst the larger customers where you wanna do 4 or 5-mile laterals. That involves, you know, upgrading rigs components. They all recognize that. That means extra cost, therefore extra pricing as well. All that extra stuff is actually very high return add-ons.
That actually plays into our strength at Nabors because I think we're unique amongst all the even our competitors, where our existing PACE-X rigs are more than capable of handling any of these large upgrades like the 10,000 PSI with the expanded setback and all that other stuff. I mean, that X rig was designed from day one, like when we first rolled it out, to be that kind of rig. Now it's actually, the market's finally caught up to the X rig, and so that puts us in a great position. I think, yeah, it's that combination. Of course, obviously, when you look at basins, there's different drivers in each basin in terms of the pricing, depending on which ones you're looking at. Obviously, West Texas, there's tightening.
The churn has come down, but pricing is, you know, directionally up. South Texas, I'd say, is a strong improvement in that basin. I think there the churn is cut in half, and the rapid market tightening, which has increased demand, therefore pricing is affected positively. North Dakota, it's slightly higher. There, it's more driven by pockets of customers increasing rig count, with some planned acceleration into 2027. Pricing directionally is up as well. East Texas obviously is flat, with churn still persisting and utilization's under pressure. Pricing is, I would say about flat, maybe a little bit biased up, but that's all the gas story which we're well acquainted with. Northeast is steady and flat, obviously, due to pipeline constraints still being the big overhang.
That's basically the drivers there, and that all affects the overall dynamics of the pricing. As I said, I think the combination of reduction in market size of available rigs, the demands of operators for increased capabilities, Nabors' strength of adding technology to these rigs. I think you're also right that everyone is obviously focused on performance contracts to try to recognize more value that we're providing to the operator and trying to realize that as a part of the benefit that enters the equation too. You put that all together, that's the drive for a path to increased pricing, I think, as we move forward and better, you know, returns on capital going forward. You have to exercise discipline to get there and make sure that you execute your performance that justifies it. Those are the two requirements to make it all happen.
No, that makes sense. I appreciate that color. Did I hear a comment correctly that Saudi did not renew a couple contracts on a few workover rigs? If so, can you provide a bit more color there? It's just a bit surprising in light of, you know, kind of restart needs. Generally, what are you hearing from customers in the region around, you know, calling on workover rigs for the restart process?
Yeah. I mean, if I may, I think we were very clear about these rigs coming down during our last earnings call, where we mentioned that SANAD has elected, rightly so, not to extend these workover contracts, due to pricing considerations. They were very marginal, anyway in terms of EBITDA and free cash flow contributions to the venture. You are correct. I mean, these rigs came down, we announced this during our last earnings call. What we need to continue to remain focused is in the trajectory of our additions in the international, Saudi included.
The number of rigs that we add, we added in Q1, which basically outperformed our own expectations, primarily by the late addition of Mexico, with Saudi remaining on plan, even with all the headwinds, adding to 15 as well as one of the suspended rigs coming back to work. Then in Q2, we expect really to remain on track in Saudi and elsewhere. Our outlook of reaching the 101 rigs at the end of the year remains unchanged, as a matter of fact. Q2, just to be very clear, we are going to exit at 95 rigs.
Yeah. Got it. I realize these workover rigs have, you know, always kind of contributed minimally. Just kind of given the backdrop, like is Saudi coming back, you know, to try to contract those rigs again, or are other customers calling?
I mean, definitively the, I mean, the SANAD team remains poised to put these rigs back to work, the earlier fashion. I think as Tony mentioned before, right, there are still a number of suspended rigs.
Yeah.
That, I mean, we don't know how many of those are going to come back to work.
Yeah.
I think if my memory serves me well, it's about 46 rigs that they still need to come back to work. There are probably opportunities for these workover rigs. I think if I am at Aramco, I will give priority to those that are more into gas drilling or oil drilling, right, as opposed to workover. I mean, the team is working on putting this back to work. They are not in our 101 exit by the end of the year.
Yeah, I think.
Got it.
I don't know if you're talking to. There's a separate class of rigs called workover rigs that are not drilling rigs. The class we're talking about, when a drilling rig is doing certain workover jobs, which is a different class of rigs. There is another class of rigs, workover rigs, which, you know, we're not in. SANAD's not in that business. That's a separate business. That business depends on, you know, what Saudi Aramco's plans are in terms of, you know, activating production or so whether that class of rigs will actually be increased in a market where they need to accelerate production. You could see some extra workovers actually happening in that workover class. That's a whole different class of rigs.
I got it. No, I appreciate the call. Thank you.
Thank you.
The next question comes from Keith Mackey with RBC. Please go ahead.
Hi, thanks, and good morning. Maybe just to start out on free cash flow. Miguel, you mentioned you'd be in good position to exceed your free cash flow guidance for the year. Can you just kind of run us through some of the factors there? I know you've maintained your capital guidance, but at the same time, there's some incremental rigs in the U.S. and maybe a bit of upgrade capital there or reactivation capital there that you're, you know, might not have expected to occur initially. Can you kind of just take us through some of the big pieces of free cash flow, and then to the extent that you're comfortable, kind of where you think the year might land, given how things have unfolded so far?
Yeah, sure, Keith. Look, I will not tell you where are we going to land. The only thing that I can tell you very, very clearly and firmly is that with the improved outlook in Lower 48, our constructive view around international, and the number of opportunities that we continue to see, even outside of the Middle East, and considering the headwinds around the conflict persisting, combined with a very strong capital and pricing discipline, I mean, Tony and I, we firmly believe that we are going to outperform our earlier guidance around adjusted free cash flow. Where is that going to come from? It's going to probably come from primarily by incremental EBITDA, clearly as a result of the improved activity outlook and a remaining term around the international performance.
We are maintaining, as you rightly mentioned, our CapEx range, which by itself is a testament of our discipline around where we deploy the money and what are our thresholds. Certainly, we continue to be, I mean, making a very strong progress about our working capital in general, right? Q1 is a good evidence of this, right? I mean, I think these are the key building blocks that I can give you. I'm sure you are going to run your models, and you will arrive to something that will likely make sense. We remain very robust and optimistic about the outlook in the U.S., the strength of our international franchise, and our ability to continue to manage and be disciplined around pricing and working capital and CapEx.
As your question anticipates, I think you know, obviously there's a clear focus on really optimizing incremental Capital Expenditures. As the year has gone forward, that's been an increasing priority, particularly with the aspirations of having some of these new contracts. The notion of getting more, extracting more from what we have today is a high priority here, and hopefully that translates into the numbers that you're hearing about. That is also one of the net dynamics at work here.
Got it. I appreciate the comments. Just turning to the Middle East, I'd say it's, you know, relatively impressive you're able to maintain the same operational tempo, given everything that's gone on there. You know, the broader international outlook still kind of gets to 101 rigs by the end of the year. Can you just talk about kind of what you're seeing on the ground in the Middle East, how you're able to maintain drilling operations with minimal disruptions? Just finally, you know, given that we're seeing some persistent production shut-ins, do you think customers will continue to be able to drill for the foreseeable future, or will there have to just be some slowdown in drilling programs at some point? Any color around that would be helpful.
Well, let me first give you some color on operationally what we've been navigating. Basically, it's been a huge logistic strain. On the travel side, obviously, you have the issues of crew rotation. There's fewer airlines. For example, in Saudi, Turkish Airlines, Saudia, flydubai and Emirates are just now resuming, for example. No European airlines serve Saudi, all that puts strain on the situation. Just to give you an idea, on supply side, we actually had a need for drill pipe in our current operations, and we had the drill pipe in Jebel Ali. Given the situation there, we couldn't get it out, which meant internally we had to use extra stuff from operating rigs to fill gaps, which also is a driver of costs.
You could assume there is a lot of activity now spent just trying to use up everything we have optimally to service any holes. On top of that, obviously, with our vast majority of imports coming through the Port of Dammam on the Gulf side in the Eastern Province, that has been an issue. What we are really doing now is we are shipping stuff from the Red Sea 850 miles by trucking, just to give you an idea. That is a huge time and extra expense as well. All these things are navigatable. I think one thing I would like to comment on is our people in the region have been incredibly supportive of continuing operations. Our major customers, Saudi Aramco in particular, totally supportive of everything.
Any concerns about safety and everything, they respond to that. By and large, I think all, notwithstanding all the conflict going around and rockets flying in the region, our crews don't raise their hands and say they wanna get out of there. They're all focused on doing a job every day, and they're all committed to it. I think that's a, that's a great sign of the commitment of everybody to make it all happen. That's, that's the, that's the number one thing I would say about it. You know, in general, let me just say that, together with the fact that we see a stronger 48 with pricing improving, and a bouncy improvement 26 and 27, I think we're constructive on the international despite the headwinds, and we see growth in the Middle East and outside the region of Latin America.
We think our capital discipline, well, that whole package, I think, puts us in great position to outperform and meet the free cash flow guidance that Miguel said. That's the whole package.
Got it. Thanks very much.
Great.
That's all the time we have for questions today. I would like to turn the conference call back over to William Conroy for closing remarks. Please go ahead.
Thank you very much, everyone, for joining us. If you have any questions or care to follow- up, please reach out to us. Thank you, Ashia, for hosting the call this morning.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.