Nabors Industries Ltd (NBR) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Nabors Industries Limited third-quarter 2013 earnings conference call. (Operator Instructions)

This conference is being recorded today, Wednesday, October 23, 2013. I would now like to turn the call over to Dennis Smith, Director of Corporate Development. Go ahead, sir.

Thank you, Jo, and welcome everybody to our third-quarter earnings conference call this morning. As usual we'll have about a 30 minute, 40 minute narrative by Tony on the state of the business, the quarter results, how we see the full year and how we think the near-term and longer-term stuff is shaping up.

With Tony and myself today is also Laura Doerre, our General Counsel; Clark Wood, our Principal Accounting Officer; a number of other principals of our corporate staff and all the heads of our various operating units. There's also a set of slides that is posted to our website you can access through the meeting site if you want to follow along with some Tony might refer to as we go through the narrative.

I also want to remind everybody as we're talking about the outlook things are subject to change and as such they're forward-looking statements and as per the SEC rule things may change. Anyway with that I'll hand it over to Tony.

Good morning, everyone. Welcome to our conference call for the third quarter and thank you for your participation. As Denny mentioned, we have posted the quarterly presentation slides and I will refer to them by slide number during my remarks.

Yesterday we announced our results for the third quarter. In summary the quarter came out roughly in line with our expectations at the time of our previous call. Our GAAP EPS was a loss of $0.30. However, that figure includes $208 million premium we paid to refinance our high interest rate notes, $14 million of international equipment retirements, $20 million of coil tubing equipment impairments, and $34 million of early termination income related to contracted revenue we would have earned subsequent to the third quarter. Stripping out those items equates to normalized EPS of $0.20 at a 16% effective tax rate.

I'd first like to discuss in more detail some comments from a high level. Our international segment performed very well and its results improved significantly. US drilling was roughly in line, and completion and production improved although its results were tempered in a couple of specific areas.

We also had several notable developments during the quarter that will contribute meaningfully to earnings beginning in 2014 that I would like to highlight before we go into the operating results.

As noted in the press release, and as you see on slide 4, in the third quarter Nabors was awarded 21 newbuild rig contracts with a total incremental capital commitment of approximately $800 million. These projects all meet our capital allocation metrics. 13 of these newbuild rig contracts are for international.

You'll recall that last quarter we said we believed the rig market was emerging from an extended trough. We believe these awards, in addition to 11 contract renewals and two redeployment awards, confirm our international outlook, most notably in the Middle East. The 13 international newbuild awards include 9 contracts in Saudi for 2000-horsepower rigs, and 2 contracts in Saudi for 15 (sic) horsepower rigs, all beginning in 2014 with four year durations. With these awards we will have 43 rigs working in the Saudi market.

Consistent with our strategy to extract more value from existing assets roughly 13% of the capital for these newbuilds will be supplied by high-performance components currently installed on underutilized high horsepower SCR rigs in the US. The most important consideration of the use of these components is significant acceleration of the timeline toward deployment of these rigs. This validates the point we've made previously about the benefit of the optionality of our US legacy fleet.

Beyond the Middle East I can report that we won two newbuild contract awards for 3,000-horsepower platform rigs to be used off the coast of Mexico. These contracts begin in the fourth quarter of 2014 and the first quarter of 2015, respectively, and increase our growing platform footprint in the Gulf of Mexico.

Lastly, in international contract awards Nabors secured awards for two existing platform rigs to return to work in 2014, one in Malaysia and one in Australia. This quarter's 15 rig awards in our international unit, coupled with the nine significant upgrades announced last quarter, aggregate to approximately $1.9 billion in revenue through 2018.

Additionally, we were able to renew 11 rigs, including two of our jackup rigs in the Middle East, on three year contracts at favorable day rates, the majority of which take effect in the second half of 2014. These rig renewals account for over $500 million in contract revenue throughout their duration. The new rig awards and the renewals we have announced over the past two quarters equate to contracted backlog of 117 rig years and $2.4 billion of revenue through 2018.

We are also pleased that the continued performance of our PACE-X rigs and their skilled crews have led to 8 incremental newbuild PACE-X contracts bringing the total to 29. The 8 we are announcing today validate the performance of the early PACE-X deployments, especially on more complex, multi-well pads as operators continue to transition from exploration to large scale development. Our success contracting these rigs well in advance of their completion dates, coupled with discussions for additional newbuilds, allows us to consider increasing our pace of construction.

Our growing international footprint and the continued growth of PACE-X rigs in the US are strong reminders of our unique global and technological capabilities. This volume is a direct result of Nabors' technical and operational expertise. We are unlocking the value in our international rigs as the market improves and the flexibility to redeploy rigs internationally distinguishes Nabors from our competitors.

Let me turn to comment on some acquisition activity. In addition to our organic growth both in the US drilling market and abroad, we grew our production service line with the strategic acquisition of the leading provider of a fluid management services in the California market. Our prior presence in the California fluid management market was de minimis.

This operation is a clear example of both our focus on capital deployment criteria and where we can improve our service to our customers over the life of the well. This opportunistic acquisition expands our strong position in the California well servicing business and improves the scale of our services to customers.

Turning to our debt on slide 5, as part of the continuing effort to enhance our financial flexibility, during the third quarter we took advantage of the current low interest rates and refinanced approximately $785 million of high-interest notes. In doing so we decreased the annual interest payments by roughly $45 million and our interest rate on the refinanced portion of the notes declined from 9.25% to a weighted average of 3.5%. Additionally, our total blended interest rate for all debt is now at 4.56% versus our previous rate of 5.48%.

Refinancing these notes should increase our annualized EPS by about $0.09 a share, whereas a simple share repurchase, which we looked at, at current market prices would have been less accretive by $0.04 a share. This move also allows us to spread the original maturity of the 9.25% notes out over three different time frames, including an opportunity to retire $350 million of the newly-issued notes three years earlier than originally scheduled.

We continue to be confident in our ability to fund future projects and improve our fiscal health with future cash flows. Our divestitures in the third quarter reinforce this outlook.

So, turning to the divestitures. As you may recall in our last conference call, we signaled some activity. During this quarter we completed the sale of our Eagle Ford acreage and signed a definitive agreement for the sale of Peak Oilfield Services. Peak has a strong reputation of excellence in safety and crane services, road construction and field support in Alaska and North Dakota.

Our divesture of Peak will ultimately strengthen both Nabors and Peak itself. Combined these two divestitures will provide total cash proceeds of over $225 million. Both sales reflect our commitment to divest non-core assets, improve our capital structure, and focus on our primary service offerings. We continue to actively pursue additional divestitures.

Turning to the balance sheet, during the third quarter our gross debt declined by $35 million notwithstanding the premium paid of $208 million on tendered debt, which we funded with a combination of operating cash flow, proceeds from the asset sales, and cash on hand. Our net debt increased by $82 million during the quarter. However, we anticipate closing on the Peak sale by the end of the month should bring net debt down.

During the quarter our capital spending totaled $289 million and we are now targeting approximately $1.5 billion including acquisitions that I mentioned for all of 2013, which is up from an expectation of $1.2 billion a quarter ago. This increase is attributable to the rig awards I mentioned earlier and to the fluids acquisition.

For 2014 our current plans are we are currently targeting capital spending of approximately $1.4 billion to $1.5 billion. That figure may change as we finalize our capital budgets and of course as we see what the market appetite is for additional newbuilds.

Turning to the outlook, our recent success signing large-scale contracts we believe signals the prospect of a long-awaited upturn in international rig markets. The supply of high quality, available rigs has declined and we believe rig economics in certain markets are already at levels that would support newbuilds. We expect a market strong enough to support newbuilds will pull renewal rates up as well, which we have already begun to see in our renewals that we've taken.

Aside from the Saudi market, we see the potential for near-term improvement in specific rig markets in Latin America and elsewhere in the Middle East. As with most trends, the upswing in international markets is not uniform and we do see continuing challenging markets in selected countries.

Turning to the Lower 48 land-rig market, we think the market has digested the transition to oil-directed drilling, several large operator-specific issues, and the initial impact of the gains in rig efficiencies. The latest world data from Baker Hughes shown on slide 6 confirms the continuing increase in the number of wells per rig. That translates as additional focus on rig performance and the efficiencies gained through multi-well pad operations.

As illustrated by the eight contracted newbuilds we announced yesterday, the market for highly advanced rigs remains active. We are in discussions with several customers for additional newbuilds. It is still too early to predict how those talks will conclude but we are encouraged by the interest at this stage.

Our view for the completion services market, specifically pressure pumping, is less sanguine. As you can see on slide 7 the pumping market remains significantly oversupplied. The realization of field operating efficiencies exacerbates that oversupply, as seen in our own stage counts, which, since the beginning of the year, are up 28% in the northern region and 20% overall. This market continues to experience periodic bouts of aggressive pricing.

We have withheld predictions of the timing of improvements in this market. That said, we believe the underlying profitability of some pumpers is insufficient to support a long-term presence in the market. In the near term we still see risk of an exaggerated end-of-year slowdown due to the rapid consumption of annual budgets by some customers.

Now, let me share some of our near-term expectations. We expect several items to impact our Q4 results. As was the case last year, seasonality in the completion and production services business continues to be an issue. The seasonal upticks in Canada and Alaska could be less pronounced than a year ago.

In our international segment, more normal revenue days and contract rolloffs of high-spec rigs will likely reduce income below the third-quarter level for the next few quarters. In the US Lower 48 market we anticipate additional rig deployments as we continue to roll PACE-X rigs into the field.

Further you should be aware of some specific issues we see impacting Q1 of 2014. First, in pressure pumping, the last remaining take-or-pay contracts will roll off at the beginning of the year. Second, as we'll explain later, we'll see some transitory items that impact our international business in Q1 and Q2 of 2014.

When we view, however, our business through these outlooks we conclude that the market for our drilling rigs are generally improving. The underlying trends, specifically in drilling and rig services, are mostly constructive with pockets of challenges. The completion and production services business, particularly completion services remains tenuous.

Our priorities remain to -- first, grow in US and international drilling markets with continued focus on advanced technology and operational excellence and also through targeted marketing of our legacy assets. Second, to focus action on improving operating profitability across all business lines, both internationally and domestic, and to take appropriate steps as needed. And third, to rightsize costs to current market conditions throughout our operation.

Let me turn to financial results. Our consolidated financial results are on slide number 8. Overall, operating income was $166 million compared to $226 million in the third quarter of 2012, and $90 million in the second quarter of this year. Operating cash flow was $439 million for the third quarter compared to $491 million in the third quarter of last year, and $356 million, excluding Peak, in the second quarter of this year.

These results include early termination payments of $34.3 million applicable to eight long-term contracts. On four of those contracts we will realize a total of $60 million, including an additional $30 million scheduled to be received next summer.

The improvement in EBITDA versus the June quarter also came from international, other rig services, completion and production services and a seasonal improvement in Canada. Net income from continuing operations was a loss of $91 million compared to net income of $23 million in the second quarter, and $64 million in the third quarter of last year. Operating revenue and earnings from unconsolidated affiliates for this quarter totaled $1.55 billion.

Now, I will review the results of each of our segments. First, turning to the drilling and rigs services segment, this as you know consists of our drilling rigs, our land rigs, offshore rigs, and equipment and manufacturing, drilling software, and automation and directional drilling units.

Our summarized results are on slide 10. In the third quarter this group report the operating income of $162 million, including the $34 million in early termination income, compared to $101 million in the second quarter. Strength was evident in the international business results while the balance of the group's operations came in about as expected.

Slide 11 illustrates the current status of the Nabors global rig fleet. Including the newbuild rig contracts announced today and other units scheduled to deploy, our US AC fleet totals 164 rigs. In addition to the PACE-X rigs, we currently have three platform rigs in the queue scheduled to go out in 2014 and 2015.

Slide 12 shows our utilization during the third quarter. While we think utilization is an important indicator of performance, I would point out that our international segment recorded a sequential financial improvement with one fewer rig year. Basically, what happened was everything turned right there and it shows you the power of the installed base of assets in international. That fact illustrates that we're making progress in the geographies where costs are an issue, and as we pointed out a quarter ago we have the flexibility to redeploy rigs from underutilized, underpriced markets to better markets as opportunities arise.

Our US offshore rigs normally experience a decline in Q3 utilization due to hurricane season and this year was no exception. Please keep in mind it is not the number of named storms that impact activity, but rather operators' reluctance to engage in projects that could be interrupted by such storms.

In Alaska our fleet is poised to meet an expected increase in activity. We are engaged in discussions with some customers who are contemplating projects that could lead to high-spec newbuild opportunities.

Our rig utilization in Canada rebounded from the seasonal low that is normal for the second quarter. Utilization is likely to remain challenged until LNG rig-related drilling activity commences in earnest or until natural gas prices increase enough to warrant more drilling.

As for our international fleet utilization was essentially flat through the second quarter, though the financial of the international fleet exceeded expectations as a result of average margins improving by 16%. We view our idled rigs internationally and in the US as a valuable option to support increasing international rig demand particularly if that demand is for higher capacity rigs.

Let's dig deeper into the drilling numbers, first focusing on US. The US drilling segment, which includes Lower 48 offshore and Alaska, earned operating income of $92.7 million including $34.3 million of early termination fees for revenue attributable to future periods. This is compared to $69.8 million in the June quarter.

Both Alaska and offshore dipped seasonally but were offset by the increase in the Lower 48. During the third quarter our Lower 48 rig years totaled 179, up three from the second quarter. It proved tougher than we expected to put rigs back to work during the quarter, mainly in light of the significant changes in drilling plans by a few notable operators. We expect Lower 48 rig years to increase modestly in Q4.

Our average margin for the fleet declined to $9,268 a day, normalized for the early termination revenue that would have been attributable to future periods. We expect sideways daily operating margins in the fourth quarter. We anticipated our daily margins to bottom at around the $9,000 level and it appears we were a little conservative that with forecast.

Today, we have 180 rigs on revenue including nine on stand-by rates. 150 rigs are working on term contracts and 65 are in the spot market. Of those rigs that are working, 134 are AC and 105 are pad capable. Utilization of our pad capable AC rigs is currently 98%.

You'll remember our rig count bottomed in February of 2013 at 165. From that point we have added net 12 rigs through the end of the third quarter, and three more so far in the fourth quarter. Our AC rig count now stands at 134, up from a low point of 119 in February.

Our working rigs include six PACE-X rigs and we have 23 more scheduled to deploy on long-term, take-or-pay contracts into mid 2014. Once those go into the field we will have PACE-X rigs in every major shale basin in the US.

Our fleet includes 111 rigs equipped with moving systems for pad drilling. Of those, 79 have walking systems and another 32 have skid systems.

We continue to deploy new rigs with walking systems as well as retrofit rigs with that capability. With the PACE-X rigs now in the queue and planned upgrades we anticipate 151 of our rigs will be pad capable and 119 will have multi-directional walking systems. We are by far the leader in multi-directional walking rigs.

We see operators continuing to increase the portion of their wells that are drilled on pads with more than two to three wells. Moreover, the number of wells per pad is growing and we are seeing a high occurrence of pads configured for multiple rows of wells as we have seen in the Bakken. This change includes the Texas market where currently two wells per pad is the norm with an occasional three-well pad. Our PACE-X rig with its structural design and walking system is tailor made for multi-row pad geometries.

The current trend in spot rates supports our near-term outlook for the Lower 48 business. For AC rigs, spot rate is in the low $20,000s depending on basin and rig configuration. During the September quarter spot rates generally held flat although we did see rates move up in West Texas, South Texas and the Mid-Continent. Spot rates for legacy rigs remain flat in the range of $15,000 to $21,000, again depending on region and power type. We continue to see demand in our rig count picking up in the Rockies and in West Texas.

29 rigs on term contracts expired during the third quarter. 13 of those received extensions averaging about 5.5 months at rates around the low $20,000s. 10 are now in the spot market. As we have been saying, the impact of our fleet repricing in spot was most pronounced last year. The impact of additional rig drilling off contract net of new deployments should have a limited impact on our fleet margins. For the fourth quarter we have 27 rigs expiring.

Our outlook calls for a flattish market, though one with a slight upward bias. Cash flows for our customers have been robust which tees up favorable spending as we head into 2014. Our most recent survey of our large US drilling customers indicates that the outlooks for the fourth quarter rig counts are relatively constant with current levels. Indications for 2014 at this stage of their budget cycle are for modest increases in rigs.

That said, we foresee overall rig count and rates remaining in their current ranges. We believe our margins will improve somewhat as our mix changes, thanks to the additional newbuilds going on day rate. In addition, we believe the market has digested the bulk of the rig count disruption from operator-specific early rig releases. Of those factors there is always a risk. The market is just coming through a period of abnormally high terminations from a number of large operators.

We have seen a small uptick in interest in our legacy rigs. If we are successful in putting some of these assets back to work that could dampen our fleet average-profit margin but we would certainly welcome the additional cash flow and small profit.

Finally, while a few initial PACE-X rig deployments have gone to the Haynes and the Marcellus we do not believe those represent an uptick in gas directed drilling at this point.

Turning to US offshore, our third-quarter results reflect the traditional seasonality of the offshore business as many of our customers suspend work during hurricane season. We see a little rate momentum and upward bias for platform rigs in the Gulf of Mexico, while the barge and shallow water workover jackup markets remain challenging with little upside quarter to quarter.

In the near future we anticipate a slow restart from the seasonally challenged third quarter with holidays approaching. We're anticipating a late Q1 deployment for our recently built modular platform rigs supporting the Bigfoot development in the Gulf of Mexico. That platform rig is designed to withstand the turbulent wind and wave action with spars and TLPs, and it should provide a significant boost to our offshore operations and financial results.

Turning to Alaska, our Alaska drilling operation reflects the market's highly seasonal operation. We were able to put one rig back to work this quarter and anticipate a strong winter season ahead. We are optimistic that the recent change in the tax structure there will result in further development drilling.

As it currently stands, pricing is improving and many strategic projects appear to be moving forward. These projects will likely not become meaningful contributors for a year or two but we are in a favorable position to gain additional work that generally is 3 to 4 times more profitable for rigs than similar contracts in the Lower 48.

Turning to Canada, let's go to slide 13. This shows our working Canadian fleet at 35 rigs and their rig locations. Canada rebounded from its seasonally low second quarter posting operating income of $12 million, up from $4 million. Rig years in the third quarter increased though our rig years were constrained below our expectations due to both mix and decline in the Canadian rig count.

The third quarter results confirm that the Canadian market shares many of the characteristics of the Lower 48 market, constrained by customer budgets and steady pricing. We do anticipate traditionally strong fourth and first quarters, and each quarter that passes brings us closer to anticipated LNG related drilling work in 2015.

Slide 14 shows international and the countries where we are working currently. Our international operations continue to perform well, posting $54 million in operating income which is up from $32 million in the second quarter and is 79% higher than the third quarter of last year. The improved number reflects a 16% increase in average margin to $14,397 per rig per day with the full contribution of earlier startups, fewer unexpected revenue days which are unlikely to repeat, and improved efficiencies in certain geographies.

We continue to focus on improving profitability in stressed markets with full mitigation not expected until the end of next year. Moreover we are seeing a continued improvement in pricing in several international markets. We find ourselves in a good position to put rigs back to work at higher day rates in core markets.

However, there is a lag in the pace and magnitude of financial impact. Operating results for the next two quarters will likely be lower than for the quarter just reported. This decrease is transitory and results in part from planned downtime for maintenance in the first half of 2014 on rig 650, our flagship jackup in the Middle East.

Also one of our other Arabian Gulf jackups is set to roll off contract in Q1. Even if our efforts to reup it are successful it will likely spend some time off day rate. We foresee geographically redeploying several rigs which also could result in time off day rates.

That being said we are optimistic about some upcoming tenders and several renewals despite less than perfect clarity in their timing. And when you talk about timing I think when you think about the third quarter versus the second quarter it's that kind of things all working together that accounts for the large increase in the third quarter to the second quarter.

That being said, we are optimistic about some upcoming tenders and several renewals despite less than perfect clarity in the timing. Over the last two quarters we have secured 26 long-term contracts, including newbuilds, extensions and restarts, in addition to the six rigs in Argentina and three rigs in northern Iraq and Kazakhstan announced last quarter. All evidence of the improving market environment.

Though there will be some challenges in the near term, we expect long-term growth in our international segment. The rig count is increasing and the supply of auto rigs appears to be mostly exhausted, which leads us to believe that rates will increase and newbuilds or rig locations will begin to fill the supply gap in the future. We intend to use our unique domestic and global operations to maximize our rig utilization across all markets.

Turning to rig services, this segment includes our Canrig equipment and technology business as well as Ryan directional drilling. Results in Canrig rebounded from their performance in Q2. Services and rental revenue, third-party topdrive shipments, total revenue and operating income all increased versus the second quarter. Beginning with Q3 our results exclude Peak which we have an agreement to sell.

Business in Canrig is down significantly versus the year ago. However this quarter we have received an increase in international orders. We remain cautious on the domestic market as it lacks clear visibility particularly for third-party equipment sales.

We have been pursuing a number of technology initiatives within Canrig consistent with our view of the evolution of the drilling markets. We will continue to focus efforts to augment Canrig's technology offerings while improving its cost structure.

Let's now turn to completion and production services. This unit, as you know, consists of maintaining wells including pressure pumping, well servicing, workover, and coil tubing and fluids management. Operating income for this division is tabled on slide 16.

Completion and production services posted operating income of $39 million, up from $30 million in the second quarter. We suggested a quarter ago that the disappointing results for the second quarter were in large part due to the adverse operating environment in North Dakota. The September quarter results bear that out.

Completion services recovered from its second quarter results to post operating income of $13 million, up nearly 90% from this last quarter. Challenges in the coil tubing and Canadian pressure pumping market and intense competition in West Texas stimulation market prevented a full recovery to expected operating levels. Mitigation of these challenges is a priority of ours and would have a material impact on an ongoing basis.

Also job scheduling at the request of operators did slide somewhat from Q3 into Q4. Of our 18 frac fleets active in the US 11 are currently working on 24-hour schedules.

We divide the pressure-pumping market into northern and southern regions. Though both regions are competitive, the southern region which includes South Texas and West Texas remains particularly intense.

Recently the market in general has seen even more aggressive pricing. Efficiency gains in pressure pumping continue to increase the industry's effective capacity. Even in these tough conditions we are making headway in the market. We will begin working for four new stimulation customers this quarter.

Let me speak to the outlook for this business. We expect continued down pressure on pricing as a result of the new familiar themes of aggressive competition, the oversupply of pressure-pumping capacity, and operating efficiencies which further compound the oversupply of equipment.

We expect the fourth quarter results to reflect holidays, the onset of winter weather and reduced activity levels by some operators as they curtail operations ahead of year end, and as annual budgets are spent. We have however seen operators increasing their tender activity so this may reflect a desire to lock in current pricing as opposed to meaningful increases in activity.

We continue to focus on extracting cost savings in our completion business. We were able to consolidate our yards in several areas. In addition we are ceasing operations in our Canadian pressure pumping and in selected areas of our Lower 48 coil-tubing business.

We are relocating the Canadian pressure-pumping fleets to the US. In the meantime we expect to quickly stem the losses in these two areas.

As we look farther out and into 2014 we expect a significant drop in operating results beginning in Q1.

Our last, large take-for-pay contract rolled off at the beginning of the year. Market pricing has declined significantly since we entered those contracts resulting in a decline of per-stage pricing on the order of 40%. While our results have reflected these spreads working at contractual minimums or lower for about a year, we are less certain about the forward impact on activity levels.

Lastly, we expect a slowdown in the fourth and first quarters due to seasonal weather, shorter delays and budget constraints. In response to customer interest demand, we recently introduced our first full spread of dual-field frac pumps which is cost effective and reflects our environmentally conscious operations. These conversions are simply the latest in our continued initiatives to improve our cost structure and efficiency. The dual-fuel technology benefits our cost of fuel and our customers' emissions profile.

Turning to production services. Our production services segment posted operating income of $26 million, up sequentially from $23 million in the second quarter primarily due to the seasonal increase in activity in Canada. In the US rig releases have impacted the overall market and stalled pricing momentum. We experienced pricing declines in daylight rates and lower rental rates on frac tanks as well as a decline in P&A activity.

As I mentioned earlier in the call we finalized our acquisition of the leading fluid service provider in the California market in the third quarter. By bringing it into Nabors' fold we have bolstered our overall trucking fleet by roughly 40%, placed Nabors trucks in every major Lower 48 market, and gained significant market share in the California market where we formerly had no meaningful trucking presence. That share is a credit to the hard work of the people who are now joining Nabors.

We expect to see a slight increase in workover rig activity, however we do not see any pricing trend changes in the near term. Much like our Lower 48 outlook however, we do expect customer budgets to increase in 2014 and we are simultaneously consolidating yards to further improve our efficiency and cost structure.

Let me conclude our outlook with our estimates for our effective income tax rate. For 2013 we still anticipate a full-year effective rate of 16% on normalized income before taxes. For 2014 we anticipate an effective tax rate in the low 20%s. Keep in mind our rate will vary with geographic mix of our income. This concludes my prepared remarks on the third-quarter results and our outlook.

I would like to take a moment to bring you up to date on our strategic initiatives. Last March we announced that we would undertake a review to evaluate strategies that enhance shareholder value including optimizing the capital structure, reviewing the mix of Nabors' businesses, and improving operational performance.

During the course of the summer the Board reviewed numerous options to enhance shareholder value. That review has resulted in the Board identifying and now focusing on certain specific initiatives that are impactful, viable and executable. We are now in the process of proceeding with an implementation plan. We will disclose details on the specific initiatives taken when the implementation process matures.

We have also undertaken a comprehensive review of our operations with the goal of improving operational efficiency and reducing expenses. Efforts are underway in that regard and we anticipate those efforts being reflected in financial results beginning in 2014.

In summary, let me summarize where I think we stand. We view the global drilling markets in the aggregate as having bottomed. Not in every market, but when we tally them we believe the resulting direction is upwards. Our rig awards discussed on this call support this conclusion.

The sequential impact on those trends on our income statement will be uneven. Although we are optimistic on international markets, near-term disruption will likely persist and we will temper the underlying increase in trends.

We remain focused on operations that are within our control. We are consolidating functions at facilities where that make sense and closing operations where that makes sense.

Finally, we remain committed to streamlining the Company's activities. We sold the Eagle Ford acreage range in the third quarter and are selling Peak in the third quarter. We are making progress in our actively continued efforts to shed additional non-core assets. With that, thank you for your time and we'll open it up to questions.

(Operator Instructions) Our first question is from the line of Jim Wickland with Credit Suisse. Go ahead, please.

Good morning, gentlemen. You gave us a lot to digest. So having the first question is probably a liability on this one.

Let me ask you, the 23 PACE-X rigs, which are fabulous rigs, 23 PACE-X rigs will go to work next year. Will they cannibalize your existing fleet? Will they displace existing Nabors rigs or will they be additive to the overall rig count for Nabors?

I think they will be additive. The market for those rigs generally compared to legacy rigs is a different market. So I don't see the type of market that those rigs would be would be markets that typically we would take our legacy rigs.

The only exception is we have some legacy rigs that we have retrofitted with pad capability, like our SCR plus rigs and those are working in those markets. But with that I don't think generally there's cannibalization of our existing stuff which is one of the reasons why we're pursuing it.

Okay, that's positive. Everybody is building new rigs and everybody insists it won't be their rigs that are cannibalized, so we're just trying to figure out if the overall rig count doesn't go up by as many as new rigs as we add next year, then obviously somebody will lose. We're just trying to figure out who.

The second question is internationally. You talk about Saudi and that 43 rigs is impressive. Can you tell us where the markets aren't as good? Is Argentina good or bad these days? Where are the markets you warned us about, without mentioning countries?

Well, in terms of the markets when you say not as good, I mean, I think international, in Argentina in particular, I think we see that as a market which has turned and opened up, and as you know we are sending additional rigs down there.

In terms of markets that have challenges from the cost point of view, as you know Iraq continues to be one of those challenges for us. Other markets where there's challenges include -- Siggi?

Algeria, for example. There's still various markets where we still don't see the uptrend but it's in discussions and probably a time lag.

Understand. And how many rigs do you have in Iraq now?

This moment six rigs.

Okay, gentlemen. Thank you very much.

And our next question comes from the line of Waqar Syed with Goldman Sachs. Go ahead, please.

Thank you. In terms of your PACE-X rigs deployment in the US land business, the Lower 48, could you talk about the timing of deployment, how many rigs get deployed each quarter?

Sure. I think in the PACE-X we actually have a pretty active fourth quarter. We're aiming to put 13 of those rigs into the market throughout the fourth quarter, and six in the first quarter, and then probably two thereafter. So we've been working hard to get these out into the markets quickly as possible. So it should hit on that kind of schedule.

Okay, that's great. And then in terms of your operating income from international business you provide some color of some of the challenges. Could you quantify for us like what kind of detriment percentage wise are we looking at into the fourth quarter and perhaps in the first half of next year?

Yes. I think, first of all let me just give you some color here. In terms of the new rigs being deployed there's basically one scheduled for the first quarter, about five or six in the second quarter, the same about in the third quarter and then 13 or so in the fourth quarter and one of the additional ones in 2015. So it's going to be quite a ramp up.

In terms of the incremental number I think, you know, we've given you the dollar amount of the CapEx. We've told you the metrics and I think you guys can back into some numbers. We're still in process frankly, of having more discussions in both these -- in all the markets we've talked about of additional contracts, and so we don't want to get into specific margins.

Okay. And then the two platform rigs that you're adding into Mexico, are those the traditional SUNDOWNER type, or those are some of the bigger ones like you have for the Bigfoot project?

Yes, the rigs, the 3,000-horsepower platform rigs, they're known as MACE rigs which is Nabors' trademarked modular, minimal-area spacing, self-elevating rig, and PEMEX has specifically specked that kind of requirement for their needs. And these are two, and just I think it's known in the marketplace PEMEX is looking for quite a number of additional such platform rigs.

Okay. And your international, other international land rigs that you're adding, do they primarily have camps with them or they're just -- you're sending them just with the basic drilling unit?

No. They will have camps with them. I don't think you should underestimate the magnitude of the task here in terms of the ramp-up in Saudi.

These 11 rigs are going to require an enormous amount of equipment and just the number of people, we need about 1,000 additional people just to staff these rigs. So it's a very substantial effort that's going to be undertaken.

Great. Thank you very much. That's all I have.

And our next question is from the line of Robin Shoemaker with Citi. Go ahead, please.

Thank you. So, Tony, with the legacy contracts -- sorry, the term contracts expiration you mentioned, I believe, 29 in the third quarter, 27 in the fourth quarter, that's a big chunk of your AC drive fleet. I assume those term contracts are with AC drive rigs.

So trying to -- are those typically staying with the same operator? A lot of them go back to work, some on spot, some on term? I was just interested in some color around what happens typically in terms of movement between regions or between operators to keep these rigs employed as the term contracts expire.

Okay. I'll let Joe give you some color, but the term contracts apply not just to the AC rates. So, our -- some legacy rigs are on term contracts as well. So as I mentioned in this quarter we have been able to roll over a bunch of expiring contracts to short term, additional-term contracts, but Joe maybe you have some more color.

Yes, it's a combination of both. I don't have the specific breakdown, but there is, you know, at this point in time as the operators see the efficiency gains out of these rigs a lot of the operators want to maintain the asset they have. They don't want to lose the efficiency gain by picking something else up.

So we're seeing where the operator wants to reterm the contract or maintain the operation that it typically has stayed with the operator. Now we had redeployed some assets from areas that are, you know, a little less robust in activity, i.e., the northeast, to the Niobrara. I mean, I think we moved three or four across that area and actually termed those contracts up.

So it's a mixture, but I think we're still seeing the operator likes the rig, likes the crew, likes the efficiency and he's sticking with the contract.

Okay. So just on your overall then US land rig margin, it ticked up in the third quarter. I think that's because of the revenue from the early termination. But prior to that it was in the $9,000 to $10,000 a day range, and with the renewal rates you're seeing have we bottomed there, you know, excluding early-termination revenues or anything like that?

Yes.

Yes, I think that's (multiple speakers)

You got three of us to answer that one.

Yes, that's a fair comment.

Robin, earlier we had indicated we thought margins could drift as low as $9,000, $8,800 range. I think Tony tried to point out in the call that this quarter's margins when you normalize it's about $9,300 and change and that's about where we expect it to stabilize now.

Okay. For, you know, it would stablize at that level incorporating the renewal pricing that you're getting today on AC drive and legacy rigs?

We think it's stable for a couple quarters, then starts to progress as more of the big rigs roll out, and we're actually seeing slight tickups in some of the spot market renewals and some of the contract renewals.

Okay, all right. Thank you.

And our next question is from the line of Jim Crandell with Cowen. Go ahead, please.

Good morning. Tony, are the dayrates and terms of your new PACE-X contracts both in line with previous contracts that you signed on the PACE-X rigs?

Let me answer it this way. I think they're attractive terms and rates; and with respect to rates in particular, I would say they're not too different from the rates that we've been historically enjoying, so --

So a little bit below, is what you would say?

A little bit, correct.

Okay. And are those generally, Tony, for the ones that you're winning are they bid or negotiated?

Well, really I would say a majority are negotiated. We've had high traffic through our Crosby yard, through our both Rockwell we're building these rigs, a lot of traffic with operators. Up in the Haynesville area which I know some of the folks from the analyst community have seen, and there we're getting a pretty good demand.

So it's not really being awarded through an effective tender quite honestly. It's a lot of negotiations involved.

I've seen five of your PACE-X rigs now, Joe. So I think I might be in the lead in that category.

In Canada, Tony, how quickly do you see the LNG market unfolding both in terms of when you see the contract signed, I guess, and when you expect rig awards there? And are you expecting Nabors to be a major player there?

I think LNG we're looking at 2018, but you have to -- given that that [date] kind of pulls, I think people are going to start in 2015 or so, really start to gear up, and yes, we're interested. I think that kind of rig is definitely on the fairway for us, and as you know, we went into that region a long time ago including in the E&P, in the E&P distraction as well.

So yes, I think it's a market that is going to be there and I think it will become more visible in about a year and a half.

Okay. Well, I think there's been sort of four awards for Canadian LNG so far, and at least one of your Canadian players is talking about another four to eight awarded this year. Are you looking at opportunities and do you see the things unfolding that quickly?

Yes, Jim. Eventually we're probably looking at a market that will approach 40 incremental rigs we think, for those projects in aggregate. So, this is kind of the early beginnings of that. But we think 2015 is where you'll see things start.

I think per our prior conversations on this topic you know we still are sensitive to returns on capital, want to make sure that the numbers all there make sense. With the short season--typically short season it's been hard to get those kind of returns, and that's still something we have to focus on.

Okay. My last question, Tony. Given your emphasis on return on capital, are the international contracts you're signing, how does the given -- well, all the things you take into consideration there, are the returns on capital on your international contracts as good or better than the PACE-X rigs you're signing in the US?

Better.

Better. Even given extra costs?

On the Saudi contracts they should be better. The only thing I would say is it's also better, but it comes at a price and the price is the complexity and the herculean effort it's going to take.

Just to give you some idea, if you take all these rigs together it's probably on a normalized basis equal to about 53 PACE-X rigs we're talking about putting out there into the marketplace. Just to give you an idea of the dimension of what we're talking about. But yes it would be better.

And is that in part, Tony, the fact that you're using a lot of equipment that's been on some of your SCR rigs?

Correct. As I signaled, I think we have about 8 SCR rigs in the US the foundations of which we're transferring to international. And that as we have signaled to people before, we've always used the SCR rigs as an optionality benefit and this is a prime example of that.

And the benefit to the customer of course is the massive substructures which he can use are already in existence and therefore cuts the timeline time to market, and I think they saw value in that with us.

Jim, these are largely 3,000 horsepower and 2,000 horsepower which are weak demand in the US market right now.

Okay, great. Thank you.

We'll just take one more question given the time constraints we have, please.

Okay. Our next question is from the line of Marshall Adkins with Raymond James. Go ahead, please.

Morning, guys.

Good morning.

I'll try to keep two questions for the final question. International, it seems like we've been waiting a couple years for this thing to turn, and this is the first real sense I have of a meaningful turn in that market. So it clearly looks like 2014 is going to ramp up over the course of the year, particularly later. But it's hard for us analysts to gauge the near-term issues.

You had a lot of swirling issues short term that are going to affect margins and utilization. Can you give me a little more color just on the next couple of quarters on how we should think about margin trends and utilization trends there?

Here's one way of thinking about it, Marshall. In the second quarter I think our operating income from international was about $32 million. In the third quarter, as we said, unexpectedly, maybe, everything went right and you saw the power of what we have translated to the number there, which was a little early from what the scale is.

So I think when we look at the fourth quarter, I think in terms of, you know, continue a pace off of the 32 number moving forward into the fourth quarter as the base; still increasing from that, but off that number as opposed to having already set a high-water mark with the 50. And then the only caveat looking at that when you go into Q1 is that those major, large income-swinging items that I mentioned, it's basically the jackups.

The jackups, they're going to go into a shipyard and as you know the rates are very high. Therefore those one or two rigs have a big, meaningful impact and that's where the Q1 number can be reduced somewhat, or more significantly, depending on how long it takes to get those things in the shipyard. So that's the way we think about it. For that reason that's why I refer to these things as transitory, not emblematic of the overall situation.

Right. I got that sense, so just be conservative in Q1.

All right, so just summarizing everything I've heard because you got a lot of moving parts here, international business over the course of the year let's, call it just in 2014 gets better. Completion business should get better over time, recognizing there's some contract rollover issues there.

Production business, you know, modestly better now that the large operators are back in. US land flat, maybe slightly up as you go into the second half. I add all that up and 2014 looks, you know, meaningfully better.

What about Q4? I still have Q4 down in 2013. Does that make sense?

Q4 more flattish, Marshall, so maybe. Part of it's the acquisition of the trucking company.

Okay. So, I was just thinking all the early termination benefits you got this quarter go away, you know, plus the daylight hours and all that kind of stuff.

Well, yes, a lot of those rigs are recommitted already.

Good, wow, all right. Well, great job, guys. Thank you all.

Thank you.

Thank you and I will now turn it back to management for any closing remarks.

We want to thank everybody for joining us today and if you didn't get your questions answered or want to follow up, just feel free to give us a call. We'll be available the rest of today and through most of tomorrow. Thanks for participating.

Ladies and gentlemen, that does conclude your call for today. Thank you for your participation. You may now disconnect.