NBR Q3 2025: Quail Sale Nets $625M, Debt Falls to Decade Low as International Drilling Lifts Margins
Neighbor’s Q3 marked a strategic inflection, with the $625 million Quail Tools sale slashing net debt to a ten-year low and freeing up capital for operational focus. Underlying EBITDA, excluding Quail, improved sequentially, powered by international drilling gains and cost synergies from the Parker integration. Leadership signals a measured outlook for U.S. activity but sees Saudi and global joint ventures as the next growth engine, with capital allocation now firmly tilted toward debt reduction and efficiency.
Summary
- Capital Structure Reset: Quail Tools divestiture rapidly reduced leverage and unlocked balance sheet flexibility.
- International Margin Expansion: Overseas drilling and joint ventures outperformed, offsetting U.S. softness.
- Strategic Focus Shifts: Leadership prioritizes debt paydown and international growth over near-term U.S. volume gains.
Performance Analysis
Neighbor’s Q3 results reflect a business in active transition, with the Quail Tools sale both simplifying the portfolio and delivering an immediate $625 million cash infusion. This transaction, combined with Parker Wellbore integration, enabled the company to cut net debt by over 20% year-to-date, bringing pro forma leverage to 1.8 times—its lowest in more than a decade.
International drilling emerged as the primary earnings engine, posting sequential growth in both revenue and EBITDA, with margin expansion driven by new rigs in Saudi Arabia and Kuwait. U.S. operations, especially in the lower 48, saw modest pressure from rig churn and cost absorption, but Alaska and Gulf activity provided partial offset. Drilling Solutions (NDS), excluding Quail, delivered margin improvement despite a declining U.S. land rig count, highlighting the strength of its technology and service mix.
- Debt Reduction Accelerates: Proceeds from Quail paid down $330 million of debt, with additional seller note prepayment further improving leverage.
- International Rig Count Grows: Average international rigs rose to 89, with strong contributions from Saudi joint ventures and new builds.
- U.S. Market Stabilizes: Lower 48 rig count ended at 62 but has since softened, with leadership guiding for 57–59 rigs in Q4.
Overall, Neighbor’s Q3 performance validates its pivot to international growth and disciplined capital management, setting a foundation for improved free cash flow and strategic optionality as U.S. activity remains muted.
Executive Commentary
"We are reducing net debt by more than 20% this year, and we retain a business portfolio that includes the leading casing running contractor in the Middle East."
Tony Petrello, Chairman, President, and Chief Executive Officer
"Reducing our gross debt undoubtedly remains our top priority. Our net debt leverage metric at the end of the third quarter and accounting for the receipt of the $250 million seller note on a pro forma basis stands at 1.8 times, which is the lowest it has been in more than 10 years."
Miguel Rodriguez, Chief Financial Officer
Strategic Positioning
1. Portfolio Simplification and Capital Discipline
The Quail Tools divestiture marks a decisive move toward a leaner, more focused portfolio, with the $625 million sale price representing a 4.2 times EBITDA multiple—well above the price paid for the Parker acquisition. Management’s use of proceeds for debt reduction rather than reinvestment signals a clear capital discipline, with future free cash flow now benefiting from lower interest expense and reduced leverage risk.
2. International Drilling as Growth Anchor
International operations, particularly through the SANA joint venture in Saudi Arabia, are positioned as the company’s growth anchor. The deployment of new rigs, stable activity in the Middle East, and visibility from multi-year new build programs underpin a margin-rich, long-cycle revenue base. Management highlighted the unmatched visibility and cash flow contribution from these ventures, with further growth expected as new tranches are awarded.
3. Technology-Enabled Service Differentiation
Neighbor’s Drilling Solutions (NDS) segment, focused on technology-driven services like casing running and performance software, continues to outperform the broader rig market. Penetration of NDS services per rig reached an all-time high, and the launch of the PACE-X Ultra rig demonstrates cost-effective innovation that meets evolving customer requirements. This technology edge is enabling margin resilience even as U.S. land activity softens.
4. U.S. Activity Management and Margin Preservation
Leadership is pragmatic about the near-term U.S. outlook, guiding for stable but subdued rig counts and emphasizing cost control. While daily revenue per rig is holding in the low $30,000s, cost absorption and churn are pressuring margins. The focus is on operational efficiency and maximizing realization on performance-driven contracts, rather than chasing volume in a volatile market.
5. Parker Integration and Synergy Realization
Parker Wellbore integration is tracking to plan, with $40 million in cost synergies expected for 2025 and further upside in 2026. Retained businesses from Parker are forecast to deliver $70 million in EBITDA next year, with ongoing administrative and procurement efficiencies supporting incremental cash flow.
Key Considerations
Neighbor’s Q3 underscores a business model shift toward balance sheet strength and international diversification, with several key factors for investors to watch:
Key Considerations:
- Debt Paydown Prioritization: Management’s commitment to further debt reduction is likely to constrain capital allocation to growth or shareholder returns in the near term.
- International Growth Visibility: The SANA new build program and broader Eastern Hemisphere rig demand provide multi-year revenue and margin tailwinds.
- U.S. Rig Market Volatility: Lower 48 activity remains sensitive to oil price swings and operator discipline, with limited near-term upside.
- Cash Flow Timing Risks: Delayed receivables from Pemex and divestiture impacts are weighing on free cash flow, with full-year guidance now at breakeven.
- Execution on Synergies: Realization of Parker integration benefits remains a critical driver for 2025–2026 earnings power.
Risks
Neighbor faces ongoing risks from U.S. rig market softness, delayed international collections (notably with Pemex), and the potential for further oil price or geopolitical volatility affecting global drilling demand. The company’s heavy capital expenditure commitments and reliance on timely contract awards in Saudi Arabia and other international markets could also challenge free cash flow and earnings stability if market conditions deteriorate or tenders are delayed.
Forward Outlook
For Q4 2025, Neighbor guided to:
- EBITDA essentially flat with Q3, excluding Quail Tools
- Lower 48 average rig count of 57–59, with daily gross margin around $13,000
- International rig count near 91, with incremental new builds in Saudi Arabia and Argentina
For full-year 2025, management expects:
- Adjusted free cash flow breakeven (down from prior $80 million target), reflecting Quail divestiture and Pemex delays
- Capital expenditures in the $715–$725 million range, with no major reduction expected for 2026
Management emphasized that further debt paydown and operational efficiency will remain top priorities, with the SANA joint venture and Parker integration synergies providing the main sources of earnings momentum into 2026.
- Visibility on Saudi rig awards and international market expansion will be key to the growth narrative
- U.S. activity expected to stabilize, with limited pricing erosion absent a major market downturn
Takeaways
Neighbor’s Q3 execution demonstrates a clear pivot to international growth and disciplined capital management, with the Quail sale and Parker integration acting as strategic catalysts.
- Balance Sheet Fortification: Debt reduction and improved leverage create flexibility but limit near-term capital redeployment.
- International Anchors Outperform: SANA and Middle East operations drive margin expansion and multi-year visibility, offsetting U.S. volatility.
- Execution Watchpoints: Investors should monitor Saudi tender outcomes, Parker synergy realization, and U.S. rig market stability for signs of upside or renewed headwinds.
Conclusion
Neighbor’s third quarter marks a strategic reset, with capital freed up by the Quail sale now fueling debt reduction and operational focus. International growth and technology-driven service differentiation provide the clearest path forward, while U.S. market challenges and free cash flow constraints remain near-term hurdles.
Industry Read-Through
Neighbor’s results reinforce a sector-wide pivot toward international diversification, as U.S. land rig activity remains volatile and capital discipline takes precedence. The company’s ability to extract value from asset sales and redeploy capital to balance sheet repair is a blueprint for peers facing similar market headwinds. Multi-year new build programs and joint ventures in the Middle East are emerging as the most reliable growth and margin levers for large-cap drillers, while delayed collections and capital intensity in international markets highlight persistent free cash flow risks across the sector.