Nabors Industries Ltd (NBR) 2014 Q2 法說會逐字稿

Hello and welcome to the Nabors second quarter 2014 earnings teleconference. At the request of Nabors, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question-and-answer session.

(Operator Instructions)

I'd now like to turn the conference over to Mr. Denny Smith, Director of Corporate Development. Sir, you may begin.

Good morning, everyone, and thank you for joining Nabors earnings teleconference. Today we will follow our customary format with Chairman, President, and Chief Executive Officer, Tony Petrello, and William Restrepo, our Chief Financial Officer, providing our perspective on the quarter's results along with some insight into the trends we are seeing in our markets and how we expect Nabors to benefit from these trends.

In support of these remarks, we have posted some slides to our website which you can access to follow along with the presentation if you so desire. They are accessible in two ways. If you are participating by webcast, they are available as a download within the webcast. Alternatively, you can download the slides from within the Investor Relations section of Nabors.com under the events calendar sub menu where you will find them listed as supporting materials under the conference call listing.

With us today, in addition to Tony, William, and myself are Laura Doerre, our General Counsel; Clark Wood, our Chief Accounting Officer, and the heads of all our various operating units. Since much of our commentary today will concern our expectations of the future, 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 its filing with the Securities and Exchange Commission. As a result of these factors, our actual results may differ materially from those indicated or implied by such forward-looking statements.

Finally, I'd like to point out that a recording of this call will be available by telephone beginning at 2:00 p.m. Eastern Time today until 9.00 a.m. Eastern Time on September 22. You can access the call by calling 1-877-344-7529 in the United States and (412) 317-0088 outside of the US. The replay conference number is 10048528. I'll repeat that. It's 10048528. Now I'll turn the call over to Tony to begin.

Good morning and welcome to the Nabors Industries conference call to review results for the second quarter of 2014. Thank you for participating this morning. As Denny mentioned, we have posted the quarterly presentation slides on Nabors.com. I will begin with my opening remarks. William will then follow with discussion of financial results for the second quarter, and then I will wrap up to take some questions.

Yesterday, we announced our results for the second quarter. Our EPS from continuing operations totaled $0.21. The quarter's results included several items related to businesses in the process of being disposed which net to a loss of approximately $0.03 a share. Before we detail our financial results and the outlook, I think it would be timely to share some of our strategic comparatives.

First, as we previously announced, during the second quarter we signed an agreement to combine our completion of Production Services businesses with C&J Energy Services. This agreement marks the culmination of our strategic review process. This combination creates an oil field service provider with critical mass and multiple service lines across many geographic regions. At the same time, the new company will have significant growth opportunities.

We are also entering into a global strategic alliance with C&J to accelerate its entry into international markets. Nabors retains more than half the equity ownership in the new company. This retained equity position should allow us to benefit from the upside we see emerging in these businesses. Nabors will also receive over $900 million in cash which will enhance our financial flexibility.

Second, with the future of our completion of production businesses now spelled out by the agreement with C&J, Nabors will sharpen our focus on the global drilling business. I would like to share with you what this means to Nabors.

First, we view the rig as the key mechanism to apply the expertise that ultimately enhances well productivity. We are working both on the surface and in the well to develop and deploy technology that increases the efficiency and the precision of the drilling process while automating manual processes. Second, to facilitate those improvements on the rig we have recently combined multiple rig engineering organizations into a single streamlined group. We expect several benefits from this structure, including a lower capital cost for our new rigs, quicker time to market for new rig designs, and greater component commonality across our rig types.

Third, once the transaction with C&J closes, we will concentrate virtually all of Nabors' human and financial capital on our drilling and related businesses. We are on target to double our new build rig production schedule for the US land market by the end of 2014. Our aim is to bolster Nabors' position as the preeminent land driller in the global industry. We believe we have the resources, the focus, and the momentum to improve that position.

Third, and finally, the transaction will further enhance our financial flexibility. You have already seen us take significant steps in that direction. We have emphasized adherence to a disciplined process to review capital projects and we have steadily reduced net debt and we have reduced the cost of our remaining debt.

Now let me turn to a business review. Let me speak to our results. In the aggregate we were very pleased with the results. Across the board our drilling businesses delivered strong performance throughout the quarter. The completions business rebounded from the operating loss in Q1. However, its profitability was restrained by the tight industry supply of proppant and adverse weather in the first half of the quarter.

We are encouraged that the quarter saw a record for stage count. Year over year, our stage count was up 45%. Compared to the first quarter, the sequential revenue improvement was roughly split between volume and pricing. We believe increasing utilization of pricing are leading to better profitability in the near future.

Our second quarter earnings were driven primarily by a strong performance in our US lower 48 business, higher utilization in the initial realization of pricing in the Completion Services segment, and continued progression into the international drilling segment.

Our Rig Services, which consists mainly of Canrig, eclipsed its first quarter performance which, at that time, was its best performance in over a year. Results in the segment benefited from both strong revenue and margins, especially for third-party equipment, and were aided by a restrained level of product development expenses. I will discuss these factors as well as our outlook in a few moments.

Let me turn to a few recent highlights. Before we get into the details of each operation, I would like to highlight the quarter's notable operational accomplishments. First, during the quarter we entered into agreements for eight PACE-X rigs to be deployed later in 2014. We are now seeing the benefit of building rigs at a steady pace rather than starting to build only after signing a contract. The X rigs' excellent performance is driving strong customer interest and we are looking forward to fulfilling the market's growing demand for them.

Second, we completed deployment number two of 11 previously announced new build rigs into Saudi Arabia on time and on budget. We anticipate deploying the remaining nine rigs of the substantial new build program during the remainder of 2014. The full impact of all of 11 rigs should be evident beginning in 2015. Additionally, our jack-up rig 660 resumes its operations on full-day rate during the second quarter, slightly ahead of schedule and also on budget.

Third, we completed the startup of the final rig of the six previously announced upgrade rigs in Argentina. The Saudi Arabia and Argentine projects are examples of Nabors' ability to execute very large complicated capital projects in drilling markets across the globe.

Finally, during the quarter we completed the sale of four of our Gulf of Mexico rigs including three barge rigs and a jack-up. We also signed an agreement for the sale of our North Slope E&P acreage. Altogether, we expect cash proceeds from these sales to approach $100 million. More importantly, these transactions mark additional milestones as we sharpen our focus back on the global drilling business.

Let me now turn to our outlook. Nearly every element of the business continues to look positive in the near to intermediate term. I will start with the US lower 48 market where we identify several positive trends. First, as I mentioned, we see a high level of customer interest in our PACE-X rig. We deployed the first X rig in early 2013 and field performance has been outstanding. We rolled out four X rigs in the second quarter. We now have 25 in the field working in all major shale plays in the US. Our 26th X rig is scheduled to go out this week. Our plans call for eight additional X rig deployments during 2014, all of which already have contracts.

Second, the market for high performance AC rigs continues to improve. Industry utilization for such rigs, including our fleet, is quite high as operators realize the value of our advanced rigs to deliver a improved total well cost we are realizing broad rate increases across major basins. We are also seeing substantial improvements in leading edge rates for AC rigs and our legacy fleet, although utilization of our legacy rigs remains challenged.

Third, the trend toward higher density drilling pads continues to march onward. We think this trend is partially responsible for the strong customer interest in our X rig which is the premiere rig available today for drilling large well arrays on a single pad.

For our international business, the near-term outlook is driven by two main factors. First, continued deployments of the new and substantially upgraded rig awards we announced last year and, second, improving pricing momentum as existing contracts roll forward. We expect the balance of the new build land rigs for Aramco to deploy by the end of the year. With all of our Argentine awards now deployed, we should realize that full impact beginning this quarter. Our largest jack-up rig 660 came back on rate during the second quarter and we expect a full quarter's contribution from that rig in the third quarter.

As well, four of the renewals in Saudi Arabia, which we signed last year, commenced their new contracts in the second quarter and the balance started the new contracts by the end of the year. As you look beyond our current backlog, the market upturn we previously identified remains intact. We see opportunities for additional meaningful rig awards in the Middle East and Latin America. We are pursuing those awards aggressively. At the same time we continue our disciplined approach to returns on capital which mark our recent contract awards.

A couple of items partially offset these positive factors. As we called out last quarter, the market for land rigs in Mexico has softened as a result of reduced activity and more aggressive competition. We see limited prospects for those rigs to return to work until the new year. In India we are marketing the two platform workover rigs which came off contract. We currently have two jack-ups which are off rate in the Middle East.

Rig 655 also came into the yard for repairs, though it remains under contract during the yard visit which we expect to last about a month. Rig 240, which went into the yard during the second quarter for repairs, was released by the customer and we expect it to return to work during 2014. We are taking advantage of the current yard stay to complete a special survey ahead of its due date early next year.

The Alaska rig market remains highly prospective. We are on track to add slightly more than a full rig year in 2014 versus 2013 and potentially two more rig years in 2015. Discussions with customers for large projects in Alaska are continuing. Those talks are for projects which would potentially require significant capital investments but which we believe also will generate returns on capital consistent with our capital allocation criteria.

Within our US offshore operations we have begun to rationalize the Gulf of Mexico jack-up and barge fleets and we are looking at alternatives for the remaining rigs. We are committed to the platform market where utilization is firm. We anticipate that the rig supporting the Bigfoot Project will mobilize very late this year and come full operating day rate late in 2015.

In our Canadian drilling operation we are already seeing the seasonal increase in activity. While we expect higher utilization than a year ago, our margins remain challenged in that market. We are seeing reasonably healthy activity in the liquids rich basins and the early phase of the drilling ramp to support LNG.

Within our Rig Services business, backlog of Canrig continues to build both with third party and Nabors' internal business. Canrig's backlog now sits at an all-time record. Since bottoming in the second quarter of last year, total backlog is up 250%. With the current backlog competition, we expect a slight shift in Canrig's business mix between third parties and internal needs. We also anticipate an investment in necessary resources to support the expected ramp up in production in light of this growing backlog.

In the Completion Services business, the second quarter rebound and the financial performance of this sector from the first quarter level is encouraging. While we are not yet satisfied with this operating performance, we are optimistic for improvement throughout 2014. We began implementing price increases in most basins during the second quarter. So the full effect of those should be evident in the third quarter. The challenge in this business currently is the availability of proppant. We have taken steps to improve our supplies of proppant which should improve our utilization further.

For our Production Services business we expect rig and trucking hours to increase seasonally. While the business remains solid, so far this year we have seen less acceleration than we anticipated. For the rest of the year we would not expect better performance than normal seasonality would indicate. I will conclude this outlook with our near-term expectations. Several specific factors will impact our results in the third quarter.

First, we anticipate booking $30 million in early termination revenue into the lower 48 business in the third quarter. This amount is the second half of the large early termination payment we announced almost a year ago. Second, we expect a normal seasonal uptick into Canada and Alaska markets while the US Offshore business should decline as we enter hurricane season.

Third, two of the smaller jack-ups in the Arabian Gulf will spend time off day rate. We have a high expectation for rig 240 to return to work this year and rig 655 should go back on day rate this quarter. In the lower 48 drilling business, we expect higher quarterly rig years as we add additional PACE-X rigs. Those rigs should have a positive impact on margins as should the day rate increases we are realizing elsewhere in the fleet.

In the international segment, we expect stable rig years but an improving mix with new build deployments and renewals to push daily margins higher. Demand and Completion Services and Pressure Pumping in particular is quite strong and the market is tight enough to support price increases. We are currently running 19 frac crews out of a total of 24. Our utilization is constrained by the limited availability of proppant, though we anticipate improvements in our supply chain will enable us to pump a full calendar through the end of the year.

Now, I will turn the call to William who will detail our financial results.

Thank you, Tony, and good morning, everyone. Net income from continuing operations was $66 million or $0.21 per diluted share compared to $28 million or $0.08 per share in the second quarter of 2013 and $49 million or $0.16 in the first quarter of 2014. The above earnings per share included certain charges in the second quarter related to assets and businesses that we divested during the quarter or that we're in the process of divesting as well as tax benefits related to filing our 2013 returns in foreign jurisdictions. Excluding net charges, earnings per share for the quarter were $0.24.

The sequential increase, excluding these net charges, was principally driven by the falling five after tax items. First, a $0.09 per share improvement in Completion Services driven mainly by higher utilization, increased pricing, and reduced costs for consumables. Second, a $0.06 per share improvement in lower 48 drilling due to incremental rig years and wider daily margins. Third, a $0.01 combined improvement due to high results in Canrig and Ryan. Fourth, a $0.01 reduction in income taxes. And, finally, offsetting the above, an $0.08 per share decline in the Canada and Alaska drilling businesses driven by normal seasonal breakup conditions.

Gains on sales of financial assets during the quarter of $4.9 million essentially offset equivalent currency losses in various operating locations. Operating revenue and earnings from unconsolidated affiliates of $1.6 billion increased 2% sequentially and 11% year-on-year with all our major segments contributing to the sequential growth with the exception of Canada drilling which experienced its usual severe seasonal downturn.

Completion of Production Services led the way. Revenue of $535 million grew by $32 million or 6% sequentially on a sharp rebound in fracturing. drilling revenue of $533 million increased by $22 million or 4% sequentially reflecting the strengthening market in the lower 48 while international revenue of $391 million improved by $16 million or 4% as additional rigs were deployed in Saudi and Argentina. Other Rig Services at $162 million grew by $18 million or 13% sequentially primarily due to Canrig internal and third party sales.

On the negative side, Canada drilling revenue of $55 million fell by 51%. Total operating income of $133 million increased 22% sequentially and 49% year-on-year, again with all segments contributing sequentially with the exception of Canada. Total operating margin was 8.3%, a sequential improvement of 140 basis points. US drilling operating income of $90 million increased 26% sequentially. Operating margin was 16.9%, a sequential increase of 270 basis points driven by a strong performance in the lower 48.

US offshore operating income and margins were stable while Alaska margins fell by 210 basis points on seasonal weakness. The lower 48 had an operating margin of 15.9% and a sequential increase of 410 basis points which reflected a higher number of active rigs as well as increasing revenue per rig from higher pricing with all rig categories improving.

Average active rigs were 199 and 11 rigs or 6% sequential increase. The growth was evenly split between our legacy fleet and our AC rigs. Today, we have 202 rigs on revenue including one on stand-by rate. Our AC rig count stands at 148. Utilization of our AC rigs in the second quarter was 94% and utilization for pad-capable AC rigs was even higher at 96%.

During the second quarter contracts on 34 of our rigs expired. 14 of those received extensions for new terms averaging 7.3 months at rates that are up meaningfully. The remaining rigs converted to well-to-well operations where they can benefit from rising spot rates. For the third quarter we have 26 rig contracts expiring.

As we look across basins, demand in pricing is currently strongest in the Permian followed by the Eagle Ford. Our northern markets remain stable. Daily drilling margin per rig for the lower 48 was $10,031, an improvement of $608 or 6%. Virtually all our rig categories in the lower 48 delivered increases in drilling margins as compared to the first quarter.

At the end of the second quarter, 117 of our rigs were working under term contracts and 82 were on the spot market. As we deploy additional PACE-X rigs, our rig mix improves which should progressively contributes to higher daily revenue and margins.

International operating income of $50.6 million increased 5% sequentially. Operating margin was 12.9%, essentially in line with the first quarter. Operating income increased sharply in Saudi as two more rigs were deployed, and in Argentina as all of our recently contracted rigs started drilling operations. Additionally, rig 660 went back on day rate during the quarter after concluding its stay in the shipyard. These increases were partially offset by lower revenue in Venezuela and weakness in Mexico's land market.

As we had already anticipated in our prior call, two of our platform rigs in India were released during the quarter as was our small jack-up in the Arabian Gulf. Our quarter's results illustrate the level of execution that has characterized this business recently and that we expect to accelerate during the second half of the year.

Canada drilling operating income of $0.2 million fell by $24.9 million sequentially, reflecting the normal seasonal breakup. As compared to the same quarter of 2013, operating margins declined by 560 basis points driven by a weaker market environment with lower pricing. Also compared to the prior year, despite four more active rigs, some of our longer duration contracts have rolled to lower market rates and heavy tele-doubles have replaced triples on some projects.

Rig services operating income of $9.1 million increased 4% sequentially despite incurring certain drilling project costs and experiencing a $3.4 million loss in the soon-to-be divested Alaska construction businesses. Canrig and Ryan contributed with healthy operating income increases during the quarter. Demand for rig equipment and drilling optimization services increased as well as improving demand for directional drilling services.

Operating income for completion of Production Services of $29.3 million increased $32.4 million sequentially. Operating margin of 5.5% increased 610 basis points sequentially driven by Completion Services with an increase of 15 percentage points to essentially break even. This improvement reflected the rebound in our fracturing operations from the harsh weather conditions in the first quarter while starting to benefit from price increases and targeted cost reductions.

Utilization improved significantly as our stage count increased sequentially by over 10%. At this point, we have filled the frac calendar through the end of year. We have also implemented price increases in most of our operating regions and expect those to be fully realized during the third quarter. Even so, operations were hampered by inclement weather that impacted operations into May and proppant and shortages that impacted our work flow.

At this point 16 of our Pressure Pumping fleets are working on 24-hour schedules, another three are on 12-hour schedules. An additional spread is currently being retrofitted with dual fuel capability and we are currently refurbishing our remaining idle equipment so it can work on high pumping intensity wells and provide relief horsepower for the existing crews. Reductions in chemical and guar costs are starting to contribute and should be more evident beginning in the current quarter.

Operating income for Production Services in the US of $31.2 million increased 9.3% sequentially. US Production Services operating margins were 13%, an increase of 110 basis points. Canada Production Services fell by $3.4 million as a result of the spring breakup. This compares favorably to the $6.3 million seasonal decline in 2013.

In terms of outlook, I would like to provide some metrics that may be useful for financial modeling purposes. As a result of gearing up our PACE-X new build program and with expectations of further international rig awards, we anticipate 2014 capital spending of roughly $1.8 billion. Capital spending in the quarter was $458 million.

We estimate full-year depreciation and amortization of approximately $1.2 billion. We should assume a full-year effective income tax rate of 17% to 20% for 2014, though our ultimate geographic mix of income could cause that to vary somewhat.

In conclusion, we have started to see the impact of the market trends we had anticipated. We also continue to work on various profitability improvement initiatives across business lines, specifically aimed at realizing the full value for our services while we reduce purchase costs and have experienced some improvements already from these projects. Our efforts are paying off and we expect continued progress throughout the year. That wraps up my review of our second quarter results and now I'll turn the call back to Tony for his concluding remarks.

Thank you, William. Let me summarize our views and priorities. First, the global drilling market continues to improve. We believe the fastest growing segment of the market is for high-spec drilling which is our focus. We are already seeing the benefits of this environment in our earnings stream and we believe there is more to come.

Second, we have taken significant steps recently to reposition our portfolio businesses while we strengthen our operational execution and improve our financial strength. Having taken those steps, Nabors is poised to grow in the US and international drilling markets.

Third, we have reported steady progress at pruning non-core assets, streamlining operations, and improving our financial flexibility. While those initiatives continue we are now taking a more intensive look at the operational efficiency of our business segments. We fully expect to identify and realize additional meaningful reductions in our cost structure by the end of this year.

Last quarter our outlook called for earnings to improve as the year progressed. As of this call, that view is fully intact. As we look out farther, we see a growing opportunity set within our core drilling business. We have positioned the Company to capitalize on those opportunities and we look forward to reporting our progress.

Thank you for your time this morning. With that, I'll take your questions. Operator, please open the line.

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Doug Becker of Bank of America Merrill Lynch. Please go ahead.

Thanks; a lot to cover. Tony, you mentioned the availability of proppant to pump. You now have enough to pump a full schedule. When you mentioned that the frac calendar was full through year end, does this mean for the 19 crews or for the 24 crews? And what does this mean for profitability given that sand costs seem to be rising?

Okay. I'm going to let Ronnie answer those questions.

Yes. So, I think the full calendar -- let me get through the 19 crews and 24 crews as far as utilization. Right now every piece of our horsepower is being utilized with the exception of one crew that is being retrofitted for dual fuel and the other crew is being refurbished. All of the remaining -- logically, you think there are two more crews remaining. Those two crews have basically been built in to extend the size of larger crews that have to be larger now to meet job requirements given by our customer demand. So, when we say the calendar is full throughout the year, that's our entire fleet of horsepower, outside of the one that's being refurbished and the one that's the dual fuel that will be deployed in the first part of Q4.

Just to clarify on that front, just kind of simplistically, we're thinking 19 crews let's say currently. We should be going to 22 as we think about 3Q and 4Q?

Doug, what's happened is the concentration horsepower per crew has shifted. So, those other crews have been melded in, so the average horsepower is a lot higher than it was.

Effectively, that's correct, Doug. Yes.

Okay. Yes. Okay. And just anything on the cost inflation?

Repeat the question, Doug?

Just anything on the cost inflation of sand?

Yes. I think right now again all market indicators look solid. As far as our biggest challenges right now, it's more along the logistic side, and I think that's going to continue to plague us because I think we're going to continue to see the high activity levels. And our team has done a great job of providing alternatives with our clients if we have shortages in sands or are hampered by certain logistic efforts and our clients have received this well.

However, it does cause scheduling changes, and you got to flip a job here, flip a job there. All of this leads to circumstances that could cause you to have exposure and some increased flat time. Outside of that, we don't see anything out of the ordinary.

Okay. And then maybe just one on lower 48 land drilling. Daily margins increased by $600 or so. Let's say $200 of that was just seasonal because of the payroll taxes that we see in the first quarter or so, a net of $400. Is it reasonable to see this number accelerating as we go into 3Q and 4Q given the profitability improvements and just higher pricing?

Of that increase, I would say most of it was revenue increase. And going into the next two quarters, I think we're going to see a steady increase, but whether it's at that pace or not, I can't tell you right now. It's going to depend on what we roll things over at. Most of the increase was due to revenue.

Okay. Fair enough. Thank you.

Our next question comes from Jim Rollyson of Raymond James.

Hey, good morning, everyone.

Good morning.

Tony, following up on Doug's line of questioning on the completion side, when you think about having a full schedule finally for the back half of the year, and the pricing increases you alluded to, how do you think about the margin progression? You had obviously first quarter hit with weather and contract rollovers and all kinds of stuff. Second quarter back more or less to break even. Is that going to the low- or mid-single digits as you go through the back half of the year when you get pricing going and utilization up?

Well, let me answer the question this way. Obviously, Q1 was a disappointment, and Q2 the way it's worked out is I think it shows steady progress. We're nowhere near where we want to be, and I think as we march into Q3 and Q4 we still have a lot of initiatives. Ronnie has talked about the proppant side. Also, on other chemicals, we have some initiatives to lower our cost of sales there, and pushing the pricing across the board.

So, one metric I would say to you is, if you actually look, I think, William, you can confirm this, if you look at our incremental revenue second quarter versus first quarter in terms of what dropped to the bottom line, it was almost 68%. So, that's obviously at the margin, but that gives you an idea of where we're at. And we just got to keep working on these factors as to march forward, and I think we're going to be up there by the fourth quarter.

We're not close to where we want to be. Obviously, there is a lot of hard work ahead of us, but we expect to be there by year end.

Okay. That's helpful. And then as a follow-up, Tony, on the international side, I think you said overall about flattish rig years in 3Q versus 2Q, but obviously you've got some ups and downs of moving parts in various rigs. Two questions around that.

One, where does that total rig year number go over the next three or four quarters when you get all these rigs that are in different places right now into effect, either with contracts or hopeful contracts, would be first question. And how do we think about international margins given that you'll have the rig 660 in for a full quarter in 3Q and you'll have the six Argentina rigs in for a full quarter? I imagine those are higher margin contracts and so the margins get skewed towards improving operating margins in the back half of the year?

Sure. First, with respect to the -- I think there will be a steady progression of change in the international rig count. It's going to be a modest number but a steady one as we march towards the end of the year. Just give you an example of how the Saudi rigs flow in, we had one in the first quarter, one in the second quarter. We have two in the third quarter and seven in the fourth quarter of those new builds.

The other factor that you got to think about in terms of margin expansion for existing rigs is the rollovers of contracts. We have already alluded to the fact that the Saudi rigs have been rolling over -- will roll over. So, I think that's what -- it's those two factors that are also going to contribute to the margin expansion. So, that's where it will come from.

Any sense of how much margin expansion might be from what you see with your contracts right now?

It's definitely more. And I don't want to put a number on it, but it's definitely more.

Fair enough. Thanks, guys.

Our next question comes from Waqar Syed of Goldman Sachs.

Thank you very much. Tony, could you talk about what's your capacity to build PACE-X on an annual basis and are you -- can that increase?

Yes. So, here's the story. Right now we've been doing about -- right about two a month. You should also understand, Nabors as a whole is also doing another two. So, we're actually building about four a month right now. Canrig, in terms of its components, certain components like top drives, it actually has the capability of turning out about 15 a month.

So, what we're in the process of doing is increasing our capacity for X rigs to go to a run rate of about -- go to a pace, let's say, of around four by January of this year, and I think we're going to get there. But as much as the increase in capacity, I'm also spending time, as we alluded to in our remarks, in improving the efficiency of the building process. One of our missions now is to focus on optimizing what we have and extract more, which you can translate into trying to lower the overall capital cost of these things as we move to a more repeatable model.

Okay. And could you tell us what's the current active rig count in the US lower 48, and where do you expect it to average maybe in the third and fourth quarters?

I think it's 203 today. I think it went up since the release. And I think there will be a steady progression the next two quarters.

Okay. And then, could you also talk about the industry's ability to deliver rigs on an annual basis -- what do you think that number is?

Yes, I think around 100, 150, something like that, that range.

And would that be like a global number for a kind of high spec tier 1 type of rig or is that just delivering to the lower 48?

I think it's more to just lower 48. I think there is still more rigs that could be delivered internationally and probably will be.

Okay. Great. That's very helpful. And is that all limited by the number of top drives that the industry can deliver, or is there some other limiting factor?

Well, I think there is a limiting factor in terms of -- there is a whole set of supply chain challenges now. BOPs, engines are all -- I think unless you're in the mode that we're in, there are some challenges out there. So, nothing that is a show stopper, but I think there are challenges, and as this market continues along this way, those challenges could get exacerbated.

I think one of the things you should be aware of with the internal manufacturing capacity that we have is I think we're in a unique position to modulate the whole thing and optimize it, because as you know, the draw works, the top drive, and the catwalks are things that we are selling to third parties. And so we have the ability to sort of ramp up. And if we decide we don't want to, we will supply those to other people in the sector. So, I think we're proceeding with a planned ramp up here, but I think on the other hand, we also have alternatives to turn it around if the market isn't there to support it.

Okay. And were I to order a top drive today from Canrig, what's kind of the waiting time?

About what is it, six months? About six months.

Okay. And just one final question. One of your Canadian competitors has signed kind of an agreement with Schlumberger. How does that change the competitive landscape, and does that force Nabors or others or your peers to do something similar? What's the strategy against that agreement?

Well, I have looked at the agreement. I am not sure it meaningfully moves anything, but I think from Nabors' point of view, we're interested in doing anything that will create value for our customers, and that's our strategy. And if that includes an alliance with somebody to make that happen, we're open to it. But right now we think the greatest value to our customers, particularly in North America, is producing the best rig for pad drilling, and I think we have it. And you're going to see it augmented with other things around that rig to improve overall performance during the next couple of quarters, and that's our strategy.

Okay. Thank you very much.

Our next question comes from Jim Crandell of Cowen.

Hi, Tony. I wanted to follow up just on that last statement that you made about your strategy is to provide the best rig for pad drilling, and there would be some enhancements coming up. Are you at the point now where you can make judgments on the performance of PACE-X versus other AC drive rigs? And are those coming out very favorable for the PACE-X?

Well, I think the first thing I'm pleased to report is that we just did a site survey visiting some customers, particularly in south Texas where we've had other strong competitors. And one company man that had operated two of our leading competitors' rigs has anecdotally said to us that the PACE-X is leaving the other rigs in the dust, and we're trying to convert that to tangible data.

I think one of the things that people don't focus on when we talk about the pad drilling is, yes, we're XY, but we're also 360, and so PACE-X moves on a 360 basis. And when you think about moving from well to well, it's not just the time moving well to well. I think one of the things that is probably going to be more tapped as a potential is the notion of batch drilling. And the batch drilling with a PACE-X rig has a unique advantage because of its racking capacity. It never has to lay down pipe.

So, the opportunity to be really productive as you move from well to well on a PACE-X rig is really quite sizable. And those are the things that operators are beginning to understand and figure out ways to make it even more useful. And so with all of this anecdotal stuff coming in now, now we look at the PACE-X and we'll look and see what can be enhanced and what's working well, et cetera. And as I said, we'll also be looking at how we can build it more cost effectively.

So you are thinking -- so, initially you were selling the rig based on these enhanced number of features that PACE-X rigs had there, and what you're saying is you have moved beyond now from just where you have the features to now where customers are selecting you based on performance of the rig itself in the field?

Correct. Correct.

Okay. So, as you look at the demand for PACE-X rigs in the US, Tony, is the primary new build orders coming from repeat orders from existing customers? Are you seeing quite a broadening out in the numbers of companies who are ordering new PACE-X rigs?

Actually, I'll let Joe speak to it, but I think we had some new people come back into the fold. So, it's -- I think as people become more aware of the rig, it's actually becoming a calling card for us. And I think it will have the effect of broadening out our client base, and particularly with some of the larger independents, expanding those relationships.

Jim, the recent contracts, eight rig contracts, were five different operators.

Okay.

Four different basins.

Interesting. And my last question, for Tony or Siggi. As you look at the international business and the international demand for the rig, is there a significant demand or will be for the fast moving rig up and rig down benefits that the PACE-X has? And over the next two to three years, if the answer to that is yes, as I suspect it is in many regions, what do you think the percentage of the rigs that could go outside of North America could be over the next two to three years of just the PACE-X?

Well, a PACE-X style rig I think is going to have some applicability internationally. Clearly, in Argentina where we're sending down some F rigs right now for pad drilling, PACE-X rig would be an ideal rig. And one of the other strategies here as part of the common engineering group I've alluded to is the fact that the X rig is being, especially with Siggi now running the entire engineering group, the X rig will be set up in a way to be a-national. In other words, its components will be set up so the rig can move between the US and Canada, or Canada and international markets. So, we definitely see that potential out there for the X type rig to gain attraction.

Okay. Great. Thank you very much.

Thank you.

The next question is from Jim Wicklund of Credit Suisse.

Good morning, guys.

Good morning.

Tony, you're talking about increased pricing in C&P across the US. Is that because you were priced lower than competitors before, or are we seeing that much of a broad based improvement in completion and production services pricing in the US?

All we can say is that all market indicators look solid right now, and I think if you look at the type of job requirements, they've expanded in scope. It requires more horsepower. So, we've seen a tightness that's evolved across now pretty much the entire US, and so we're seeing pricing opportunities.

We were able to move pricing towards the second quarter, and, as Tony and William alluded to earlier, we will be able to realize some of that in the third quarter going forward. But right now what we're doing is really trying to get some of these cost pass throughs based on the logistical challenges we're having, and some of the interruptions we're having there pass through in a timely manner to our clients. But even with that said, the overall fundamentals of the market seem to be leading us to even further increased pricing above those cost pass throughs.

Okay. And on land rigs in the US, we had assumed that this year you'd see $1,500, maybe as much as $2,000 worth of direct improvement from January through December this year. Listening to you guys, over the next 4 to 18 months, and I know we never know, but over the next 18 months that would appear to be tame. Is that right?

You said it. You said it. You said it exactly.

Well, I mean, I know that Independence is coming public, and they are talking about signing three-year contracts above $30,000. Are you guys seeing anything close to that or like to that? Even if you're not getting it, are we seeing it in the market?

So, Independence is saying they're signing what?

Well, they're talking about day rates over $30,000 on contracted rigs, and I was just wondering, if they see it, then everybody is going to eventually see it and I just wondered if you guys have seen it?

With add-ons and things like that, you've got to really normalize the rates, but something could go above $30,000 in today's market. Something could go above $30,000 depending on what the add-ons are.

So, that's clearly not the norm though. Right now that's not where we're at. And I think as what we are seeing as we roll over existing AC rigs into new contracts, we are getting meaningfully increased numbers in day rate improvement, and we think that environment is here for a while now.

I know nobody ever likes to give real hard numbers or anything, but can you give us an idea of what a normal or the average PACE rig day rate is today?

No. We're negotiating contracts right now with lots of people. I can just tell you they're really attractive numbers. Operators are looking at the value proposition, and they're willing to pay up for it, but it is above where the market has been. That's all I can tell you.

All right. I'll take that. And if I could, one last one: Saudi Arabia -- that clearly has been everybody's big growth engine. You'll have a lot more rigs there. I'm trying to get an idea if we're trying to model this how much more meaningfully above current averages the new rigs going into the Saudi market might be?

The new rigs are rolling over at substantial increases in day rates -- very substantial increases in day rates.

I'll take very substantial. That's all right.

What we have said in the past is that the margins in international contracts that we signed recently, a couple of -- 2.5 times or so higher than your average US rate. That's what we have said.

Perfect. That's helpful. Thanks, guys. Appreciate it.

Our next question is from Brad Handler of Jefferies.

Thanks. Good morning, all.

Good morning.

I'd like to try to hit on a couple of topics that haven't gotten as much coverage in the Q&A, on production. Can you put into perspective what happened in California in the quarter, and what weight that may or may not have on the second half of the year?

Yes. There is no question that there is a major operator out there, and maybe not just one, that looks at -- they constantly have allocation of capital issues. And the question is: At what point do you want to spend more of your dollars in drilling new wells versus spending money on working over existing wells?

I think what's happened out there has been a shift recently by at least one main participant to more toward the new wells than the existing wells, and that has had some repercussions for certain people, certainly one of our big competitors. It has had an effect on us, but probably not to the same extent. And those kind of allocation of capital issues go back and forth. And I think as we get toward the end of the year, we may see that revisited. But that's as much color as I can put on it for you.

Okay. That's helpful. Maybe just a follow up on that topic. So, it sounds like your strategy, your approach would be stay the course in terms of keeping assets in place, and then let's see how that demand evolves into 2015?

I think that's exactly right.

Okay. Okay. That's helpful.

And then, turning to, I guess turning to G&A expense, which has been -- you've identified that you're going to refocus on your cost base in general terms. But I'm wondering, maybe as we look into 2015 and you've let -- you've given your -- you've sold your C&P businesses off, what kind of percentage of revenue might we be able to see on a G&A basis? What's a normalized number or target for you?

The one thing I'd ask you to do is, first, off the public documents, you can run numbers that look -- if you break down the component of our portfolio by line of work, and then you apply the SG&A percentage for us by component that you do with the blended average compared to best-in-class or top three for any of our competitors, you're going to see that the blended average is right there with everybody else. So, one reason for the high percentage is because of the mix of businesses.

As we change now, as I alluded to, as we change, we have the chance to optimize our own structure for obviously a much more streamlined operation. I think there are cost numbers to be had there, and that is going to be a priority. First priority was to get the mix of businesses, get the portfolio right. Next priority is now we have that direction established, and try to basically extract more, and do it with less.

And, as I said, with respect to the capital side of that equation, we already have some visibility, and we think when you're spending the kind of capital we're going to be spending, a 5% decrease in capital cost is a really meaningful number to the bottom line. So, we see visibility in that area very clearly, and that -- by the first quarter of next year, we should be making meaningful reductions there.

Got it. But just to be clear, I understand your perception of your mix of business today, but there is no reason why, as you streamline then, you wouldn't think you'd be able to mirror your leading peers' G&A proportions? That's what I hear you saying, right?

Yes. In fact, what I'm telling you is: Today, we do. If you do the calculation, you are going to find out we do. And that's just -- but I think there's two factors.

One, it gets masked by the composition of our Business. And, number two, I think some of the good effort we've done, for example in the NCPS we've taken out more than $30 million of cost in the overhead in NCPS during this downturn the past 18 months, but it hasn't really shown up as meaningful to the bottom-line number.

So, it's not like I've been waiting to get something done before focusing on this. We actually have had a lot of initiatives there. It's just that the good efforts have been overshadowed by bigger factors, but I do see the opportunity to bring more to the table in this arena.

Understand. Thank you very much. I'll turn it back.

Thank you.

Say, Chad, since we're running up about getting close to our termination time, maybe we'll just take one more question, and then if anybody has any remaining questions, feel free to give us a call at the office here.

Thank you. Our final question is from John Daniel of Simmons. Please go ahead.

Hey, guys. Thank you for squeezing me in. Just two for me. You mentioned the intent to double the manufacturing capacity, which I believe takes you to a cadence of about four rigs per month. One, is that correct? And then, two, is there enough demand or visibility for 2015 that you think that that cadence could last all year? And then, if so, what's the split between US versus international deliveries -- just a guess.

Well, as I said, we're already up four for Nabors. So, I'm saying we are going to move at least two -- another two for US. That would be at a rate of four starting in January. And right now, our planning is to be prepared to have that pretty close to that kind of run rate, three to four, for 2015 right now, depending on how we see things develop during the remainder of this year. But we're going to be in the capacity to do that of the three to four for the US alone by the end of this year.

Okay. All right. And then just a housekeeping one. You mentioned that you've got 117 of the rigs that are under term contract today. Can you tell us what the average was in Q2?

I don't know if you heard that, John. Joe said it was roughly 48% of the rig count was termed out the average for the quarter; probably about the same number, I would guess.

Okay. Thank you. And then just the last one. The frac fleet that's being refurbished, when that process is complete and the fleet is redeployed, will you then recycle another to come in for the rebuild process?

Again, the way the Business has evolved and changed, we will continue to have a continuous revolving refurb program just so we can keep up with horsepower because we don't have the ability and we're trying to maximize pump hours per day every calendar day of the month. So, we don't have the ability to shut down for five or six, seven maintenance days as you did historically in the past. So, with the paradigm shift and the onset of the shales, we're making sure that we have that rotational refurb program so we can keep up with our maintenance, and make sure that we can continue to keep the service quality up across all the fleets for our clients.

That's all I had. Thanks, guys. Good quarter.

Thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

As I said, thank you for participating today. If we didn't get to your questions, feel free to give us a call at the office and we'd be happy to accommodate you. Thanks again for participating.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Take care.