Nabors Industries Ltd (NBR) 2014 Q3 法說會逐字稿

Good morning and welcome to the Nabors Industries third quarter 2014 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Denny Smith, Director of Corporate Development. Please go ahead.

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 perspectives 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 the 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 desire.

They are accessible in two ways. If you're 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 www.nabors.com under the events calendar sub menu where you'll find them listed as supporting materials under the conference call listing. Instructions for the replay are posted on the website.

With us today in addition to Tony, William and myself are Laura Doerre, our General Counsel, and the heads of our various operating units. Since much of our commentary today will concern our expectations for 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 filings 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. Now I'll turn the call over to Tony to begin.

Good morning. Welcome to the Nabors Industries conference call to review the results for the third quarter of 2014. We appreciate your participation this morning. As Denny mentioned, we have posted the quarterly presentation slides on our website. I will begin with some opening remarks. William will then follow with a discussion of the third quarter financial results, and I will wrap up and take questions.

Before discussing our results, I would like to comment on our performance for the third quarter. Following a solid second quarter we saw an improvement in the combined performance of our drilling businesses. The drilling solutions we bring to the market in both the US and international rig markets and from Canrig continue to gain acceptance, particularly in our customers' most challenging well. Together with our margin improvement initiatives we see this acceptance evidenced in our financial results.

Now, to our results. Revenue for the third quarter of $1.8 billion increased by 12% compared to the prior quarter. The quarter benefited from strong demand for our US drilling and completion assets, a strong seasonal rebound in Canadian activity, and improved results in multiple international markets. The current high demand for higher specification drilling rigs also strengthened demand for Canrig products, particularly in third party sales. The above improvements were slightly offset by a seasonal reduction in Alaska. We also had weaker than expected revenues in Production Services, specifically due to a single major customer cutback in the California market and to reduced work over activity.

Third quarter operating income increased by over 50% to $203 million with margins improving by nearly 300 basis points. And EBITDA was approximately $490 million, up 18% versus the second quarter. We are also announcing nine significant contracts for new build and substantially upgraded rigs. The awards are for rigs in our international and lower 48 operations. In aggregate the awards added over $625 million to our contracted backlog. I will discuss these awards a bit later in our highlights.

I will begin my detailed comments with an update on the pending merger transaction with C&J Energy Services. Since our last earnings conference call in July, together with C&J, we filed the registration statement with the SEC. This marks a significant milestone towards closing the transaction. We anticipate closing to occur around the end of the year. The integration planning is proceeding as appropriate at this stage of the transaction. Both teams are working diligently to plan for our smooth transition after the closing. We are pleased with the progress made thus far. There are a few major steps ahead of us. The SEC is now reviewing our registration statement. We anticipate that review will generate comments and questions. Once the SEC is satisfied with our filing, the next major step will be the shareholder vote for the C&J shareholders.

Now, I will speak to our strategic direction. A quarter ago I listed three of the ways we would sharpen our focus on the drilling business. We have made progress in each of these. First, our combined engineering organization has completed a thorough review of both the design of the PACE-X rig and our concurrent practices supporting the new build program. For the rigs to be delivered beginning in 2015 we have implemented cuts that we expect will deliver a substantial reduction in capital costs per rig. On the design side the engineering team has made refinements resulting in improvements and lower costs. And in procurement we levered our higher volume more level build plan to obtain meaningful cost reductions from our suppliers.

Second, our initiatives to improve surface and sub-surface drilling performance are starting to pay off. We have new equipment coming out of Canrig. We are also expanding the capabilities of our directional drilling business. We have new NWD and LWD tools that are now in the commercialization process. These tools are specifically designed for the shale plays, and they focus on well placement and increased drilling efficiency. We are also taking steps to deploy our rotary steerable platform. Notably we recently completed a development stage acquisition in this mark. This purchase is consistent with our strategy and complements our acquisition of Navigant last year.

Third, we are on track to increase the build capability of our X rig new build program beginning of the new year. In light of the current outlook for the lower 48 rig market, we expect to reach four X rigs per month sometime during the first quarter. This plan is supported by strong customer demand for the PACE-X rig in line with the expansion of multi-well pad activity.

Finally, during the quarter, we took advantage of the opportunity to repurchase approximately 10.375 million common shares of Nabors and approximately $22 million of our high coupon debt. These purchases were facilitated in part by the expectation of receiving over $900 million in cash proceeds from the transaction with C&J. They also illustrate our confidence in our financial future and our focus on shareholder return. All of the items I just mentioned are aligned with our strategic initiatives. In addition we continue to make progress with divestitures of non-core businesses. We're beginning to realize tangible results from all of these efforts, and I look forward to updating you in the future on our progress.

Next, I will review our businesses starting with the rig awards I mentioned earlier. Since our last earnings conference call, we have signed contracts for nine new or substantially upgraded drilling rigs. Our international segment was recently awarded six rigs. Four of these rigs are destined for Saudi Arabia. Three of these four Saudi rigs are essentially new builds, utilizing base components from idle high horsepower US SCR land rigs. The fourth Saudi unit is an upgrade of a rig that we will relocate from Iraq where it is currently idle. These four awards bring our expected total in country Saudi rig count to 47 by the end of 2015. The other two new build rigs will deploy to Kazakhstan with one to be sold to our joint venture partner. Both rigs will be operated by the joint venture in which we will hold a 50% interest. These rigs add 20 rig years to our backlog and are all expected to commence working in 2015 to a mid- 2016.

Our lower 48 segment was awarded contracts for three new build PACE-X rigs from three different customers. Our customers intend to deploy them into the Eagle Ford and Tuscaloosa marine shales. We are in advanced negotiations with multiple customers for additional X rigs. We will report the results of those discussions when they are completed.

Now, let me turn to our results. Our third quarter earnings were driven primarily by first price and volume increases in our US lower 48 billing business. Second, a continued progression in the international drilling segment as additional rigs were put to work. And, third, a strong performance in our Canrig subsidiary particularly in third party sales. I will discuss these factors as well as our outlook in a few moments.

Let me turn to a few recent highlights in addition to the rig awards before we get into the details of each operation. First, we completed the third and fourth deployments of 11 previously announced new build rigs into Saudi Arabia on time and on budget. We anticipate deploying the remaining 7 rigs of this substantial new build program during the remainder of 2014. The full impact of all 11 rigs should be evident beginning in 2015. Second, during the quarter we completed the sale of our E&P acreage on the north slope of Alaska and the two remaining Gulf of Mexico barge rigs. All together we expect cash proceeds from these sales to approach $100 million with the potential for additional up side. 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. Most of the businesses continue to look positive in the near to intermediate term notwithstanding the current oil price environment. At the current oil price, we do not see a material change in current activity levels in this time frame. I will start with the US lower 48 market where we identify several trends. First, our customer base is now in the process of setting budgets for 2015. The outcome of that process will largely determine their demand for additional rigs. At the same time, the pipeline of customer interest in the PACE-X rig, which can eventually lead to new contract signings, remains full well into next year.

Second, we now have 28 PACE-X rigs in the field working in all major shale plays in the US. Our 29th X rig is scheduled to go up by the end of this month. Our plans call for five additional X rig deployments during 2014, all of which have contracts. Third, the overall market for high performance AC rigs remains strong. Industry utilization for such rigs including our fleet is still high as we and our competitors add new rigs. These assets increase in importance in a lower priced commodity environment.

Finally, 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. As you can see on slide 14, the percentage of wells drilled on pads has increased significantly since 2010, and it is expected to increase further through 2018.

Moving to our international business, the near term outlook is driven by two main factors, first, continued deployment of the new and substantially upgraded rig awards we announced last year, and second, improving pricing momentum as existing contracts roll forward. We still expect the seven remaining new build land rigs for Aramco which were awarded last year to deploy by the end of this year. Of the 10 renewals in Saudi Arabia expected by the end of the year five are already in place. The remaining five take place in the fourth quarter.

The awards we announced yesterday are scheduled to deploy beginning in the second half of 2015. In Kurdistan our two rigs there are on stand by and should return to full day rate as soon as the situation permits. As we 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. At the same time, we continue our disciplined approach to returns on capital which marks our recent contract awards.

A few items have an impact on our outlook. Rig 656, a Jack up in the Middle East is due for an underwater inspection this quarter. It remains under contract, and at this point we expect it to spend approximately half of the quarter off day rate. Rig 655 which was NDR for all of the third quarter came back on rate in early together October. Our rig 240, one of the other Jack ups in the Arabian gulf looks for opportunities to go back to work, now likely 2015 at the earliest.

The land market in Mexico remains soft. One of our land rigs has gone back to work. We see limited prospects for our other land rigs there to return to work until the new year. In India we are marketing the two platform work over rigs which came off contract a quarter ago. We expect the first of the new previously announced platform rigs in Mexico to start up in the fourth quarter. The second platform rig should follow in the first quarter of 2015.

Moving on to our other operations, the Alaska rig market remains highly prospective for Nabors. We are still on track to add 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 still continuing. In our US offshore operations we expect the rigs deployed in the Bigfoot project to mobilize very late this year at the earliest and come off full operating day rate in 2015. Our Canadian drilling operation began its seasonal increase in activity during the quarter. Our margins have not improved in that market, and we still expect higher utilization versus a year ago.

Within our Rig Services business, Canrig's third party backlog increased nearly 29%. With this backlog we are gaining visibility well into next year. In the Completion Services business, increasing well counts and frac intensity are driving demand higher. In this environment we continue to realize price increases across basins and have reached an all time record for stages in a quarter and in a month. The price increases have been substantially offset by the challenging logistics environment especially for profit and asset.

During the third quarter we also started a significant program for our customer in the northeast. In addition, we are scheduled to deploy our second dual fuel frac spread in the next several weeks. These two deployments should positively impact utilization during the fourth quarter. With pricing improvements in hand, we expect EBITDA margins to widen in the fourth quarter notwithstanding normal seasonality. For our Production Services business, the fourth quarter is normally impacted by holidays and shorter daylight hours. Some of the seasonal declines could be offset by work delays from the third quarter into the fourth quarter.

These delays resulted from wet weather in Texas and Oklahoma during September. Further, we are seeing some key customers adjust their production budgets. In turn this has had an impact on our Production Services segment. At the same time we are beginning to field increasing inquiries for our 24-hour rigs. We think this could signal an upturn for horizontal oil wells.

To summarize, several specific factors could impact our results in the fourth quarter. First, we are working to affect closing the merger transaction around the end of the fourth quarter. Second, as I mentioned, in Production Services we expect a seasonal decline as fourth quarter holidays and shorter daylight hours impact results. This could be partially offset by some catch up work after the rain we had in September. Third, we expect a continuation of the normal seasonal rebound in Canada. Fourth, we anticipate two of the smaller Jack ups in the Arabian gulf who have spent time off day rate in the fourth quarter. Rig 655 which was already on down time all of the third quarter came back on revenue earlier in the fourth quarter.

In the US lower 48 drilling business, we expect higher quarterly rig years as we realize a full quarter contribution from the three PACE-X rigs deployed in the third quarter plus a partial quarter from the seven planned for the fourth quarter. The addition of those rigs should also have a positive impact on margins.

In the international segment, an improving margin mix with new build deployments and renewals should push daily margins higher. This positive trend could be dampened by a modest decline in rig years. Demand in Completion Services and pressure pumping in particular is quite strong. Our total pumping fleet is currently configured into 19 frac crews plus one spread which is being retrofit with dual fuel capability. Excluding that one spread all of our fracking horsepower is now deployed in the field. We have a full pumping calendar into next year. While demand appears robust, margin progression is constrained by the availability of profit and asset as well as logistics.

This concludes my comments. Now, I will turn the call to William who will detail our financial results.

Thank you, Tony, and good morning, everyone. Our third quarter results were marked by increased activity and improved operating margins in almost all of our segments. The quarter also included certain items related to our strategic alternatives that we've excluded from our adjusted earnings. In addition to being non-operational and linked to large transactions closed during the quarter or that we expect to close by the end of the year, these items also distort our operating results and the comparability over time periods. The largest items are related to our upcoming transaction with C&J Energy Services.

First, we incurred $13 million in after tax expenses, principally related to fees for investment bankers, legal counsel, and accounting firms. Second, during the quarter we restructured various legal entities for our Completions and Productions business in preparation for the merger. The restructuring generated tax charges of $63.3 million during the quarter of which the majority, approximately $58 million, was non-cash. Offsetting these charges, we generated a $17 million after tax gain from the divestiture of our Alaska E&P business. The net impact of these items was a $0.20 reduction in our earnings per diluted share.

Income from continuing operations, excluding the above net charges, was $116.3 million or $0.39 per diluted share compared to $74.2 million or $0.24 per share excluding charges during the second quarter. For the third quarter included in our adjusted earnings we had four other items of note that help explain our results. These items combined for a positive net impact of $0.02 per share as follows.

First, we frequently benefit from early termination payments on our drilling contracts. In fact, managing our long-term contracts and ensuring they have teeth is part of our business model. In the third quarter, as mentioned by Tony, and as we disclosed last quarter, we received the second and final installment of a major contract cancellation from last year for an after tax gain of $23 million. Second, our effective tax rate excluding net charges reached 27% for the quarter. A provision for income taxes on our effective tax rate exceeded expectations by a significant margin.

During the quarter we incurred returns of provision tax expenses of $6.5 million following the filing of our annual tax return in various jurisdictions. In addition due to changes in our mix of earnings towards higher tax regimes we adjusted upwards our year-to-date tax rate. As a result, the third quarter included an additional tax expense of approximately $4.6 million resulting from the application of the higher tax rate to the first half results. Third, we retired $22 million face value of our outstanding senior notes during the quarter incurring a loss of $2.5 million after taxes. Finally, we booked a reserve from litigation expenses of $2.4 million after taxes.

I would now like to focus on the progress made by our Company as well as some of the key metrics for the segments. Within the US drilling segment our lower 48 daily operating margin increased by $1800 to $11,833 per day. I want to clarify though that this increase includes the effect of the $30 million early termination payment. Without this payment, the lower 48 daily margin increased by $191 to $10,222 per day. Solid price increases in all of our rig categories were somewhat tempered by extra costs incurred in pre-positioning operational crews for the rigs to be delivered during the fourth quarter and by targeted compensation adjustments for field personnel.

Active rigs in the lower 48 averaged 202, up 4 from the previous quarter. As of today we have 205 rigs on revenue with our AC rig count at 153 rigs. Utilization of the AC rigs was 96%. For pad capable SCR rigs utilization was 83%. During the third quarter, contracts on 40 of our rigs expired. 24 of those received extensions or new term contracts averaging 8.5 months at materially higher day rates. Of the remaining rigs, 14 converted to well to well.

The US offshore market was flat to down as a result of the usual seasonal downturn during the hurricane period in the gulf. Alaska drilling decreased sharply again for seasonal reasons as the softer ground significantly impacts drilling activity. Looking across basins demand and pricing remains strongest in the Permian. Our other markets are either stable or improving slightly.

In our international drilling business, the improved performance was driven by increases in rigs and margins. Rig years increased by 3 to 130 while daily rig margins increased by $1366 to $15,490 per day. Operating margins improved sequentially by 320 basis points to 16.1%. The improvement was driven by rig start-ups in Saudi Arabia, Bahrain, Oman, and Russia as well as better performance by our operations in Latin America.

Two of our Jack ups spent time off rate during the quarter. Rig 655 was in the yard while on contract and returned to full day rate earlier this month. Rig 240 remains actively marketed. The quarter's performance demonstrates the acceleration we had been expecting for the second half of 2014. Planned new build deployments and contracted day rate increases should bolster results in the fourth quarter.

In Canada, third quarter results benefited from the expected seasonal improvement in drilling activity with a revenue increase of 47% and operating margins increasing from 0.4% in the second quarter to 14.3% in the third. Our average rig count increased by 13 rigs and has expanded further thus far in the fourth quarter.

Results in our Rig Services segment were driven primarily by an improvement in Canrig. Canrig's revenue increased by 20% from both third party customers and Nabors own drilling operations reaching an operating margin of 14.2%, a sequential increase of 190 basis points.

Completion and Production Services improved compared to the second quarter. Completion Services drove all of the improvement with its revenue increasing by 27% versus the second quarter and operating margin increasing by 420 basis points to approximately 4%. Our stage count in the pressure pumping business increased by 24% quarter-over-quarter and was up 46% versus the third quarter of a year ago. Our aggressive move to 24 hour operations has driven this increase towards an unprecedented number of stages. 17 of the 19 spreads now operate on 24-hour schedules.

Production Services on the other hand was essentially flat. Operating margin declined by 340 basis points to 8.2% driven by weather issues in the south and budget cuts by a major client in one of our highest margin areas.

Looking forward, I would like to share our expectations for some of the important metrics and the operating income outlook. We expect full year 2014 capital spending of approximately $1.9 billion. The projected increase in the fourth quarter supports a ramp up in PACE-X construction and our international new build deployment which given the latest awards now stretch well into 2015. We estimate full year depreciation and amortization of approximately $1.2 billion. Our full year effective income tax rate is now estimated at 20% on normalized pre-tax earnings. With respect to the C&J transaction, we expect the deconsolidate our completions and productions business after the merger and to account for our investment using the equity method.

I also want to make some comments on our operating income for the fourth quarter. Given the uncertain commodity environment, providing guidance on our fourth quarter results has become more challenging. Nonetheless, what I can say is that we expect operating income to continue to improve in our drilling business as we deploy more rigs in the US and international markets and as the Canadian activity approaches its seasonal peak.

On the other hand, our completions business has little room to expand in the near term given its current full utilization. The addition of a contracted dual field crew during the quarter should be offset by end of the year holiday disruptions. We anticipate our Production Services to continue to be hampered by the previously mentioned budget cuts during the remainder of the year. We also expect Canrig operating income to decrease somewhat due to mix of sales and because the fourth quarter holidays normally cut into our production schedule. For our Company as a whole on a normalized basis, and absent of further material reduction in the price of crude, we expect the operating income on earnings of our business to continue improving as compared to the third quarter.

In concluding, our comments for the third quarter demonstrated that we continue our steady progress and transformation of our Company. In the quarter we realized further benefits from our programs to improve profitability. We also benefited from cost reductions and made material progress on our project to reduce the capital cost of our PACE-X rigs. Finally, during the quarter we further demonstrated that we remain focused on improving cash returns to our shareholders by completing a $250 million share buyback, following last quarter's 50% dividend increase.

And to finalize I want to confirm that we remain committed to executing a strategy of refocusing on our core, improving returns on capital deployed, introducing innovation in drilling performance and automation and returning cash to shareholders. That wraps up my review of our third quarter. Now I will turn the call back to Tony for his concluding remarks.

Thank you, William. Let me finish with a summary of our overview and outlook. First, the global drilling market continues to improve. Yesterday's announcement of our nine new builds once again validates this view. Looking ahead, we are pursuing additional opportunities to add rigs in high spec drilling markets around the globe while also improving utilization of our legacy fleet. Second, we are keenly aware of the commodity price environment. We have largely restored our financial flexibility, and we can react on a number of fronts if market conditions warrant.

Third, we are intensifying our efforts to improve our operating efficiency further as our initiatives to prune non-core assets and streamline operations wind down. We expect to identify and realize enhanced revenue opportunities and additional meaningful reductions in our cost structure by the end of this year and into 2015. The third quarter's results reflect improving execution in our drilling businesses. We are working to extended that standard of performance into an expanding opportunity set. With our efforts over the last few years, Nabors is extremely well positioned to capitalize on those opportunities.

Thank you for the time this morning. With that I will take your questions.

(Operator Instructions)

Ole Slorer, Morgan Stanley.

Thank you very much and congrats with good performance.

Thank you.

I wonder whether you could -- it sounds as if you're just stepping up the rates at which you're adding your rigs. You've added quarter-over-quarter or year-over-year into the fourth quarter about 20 PACE-X rigs. How should we think -- could you just recap what you said about the speed at which you'll add this new technology to your fleet over the next say medium term run rate?

I think we've said that by the end of the fourth quarter, we're going to exit with a four month build rate. And right now given where we are in terms of awards, we're probably pretty spoken up through the second quarter of next year. And we're obviously going to keep a tight look at it given what the market is. And I think, we'll constantly assess on an almost a six month window.

One of the things in this market that we uniquely have the advantage for is that all the long lead items are stuff that -- the [smart iron] is stuff that Canrig produces and therefore it gives us the added optionality. I think we're in a good position to maximize that. But as we indicated in the comments, given where things are in discussions, we don't see a reason to adjust down from that yet. So that's where we are.

Thanks for repeating that. Could you talk a little bit about the payback in today's environment for that type of an investment.

Roughly, we've been shooting for a 3.5 to -- 3.5 to 4-year payout basically.

And Ole with the 15% reduction that we will get from next year's deliveries, clearly that number should improve.

Internationally, those numbers are better actually.

So the new investments -- long-term contracts to Saudi Arabia are even better than that?

Yes, sir.

And at what point do you think you'll see -- clearly today you're seeing an improvement in utilization across all the [razor rig e] classes that you operate. At what point in time do you think there's be cannibalization where you will start to displace older rigs? Maybe you can talk a little bit about the returns that you are seeing on older rigs or the spread and day rates or any kind of way we can get a handle on it.

We're all smiling because we thought someone was going to ask that question right out of the box. In terms of cannibalization, clearly the mechanical rigs as a class have a limited life. And our theory there is we're just going to keep operating them until they're not effective for an operator.

But interestingly, in certain locations the mechanical rigs offer a good value proposition for the operator especially in certain areas like North Dakota. They actually perform real well. We've been operating with continuous crews and those operators get performance almost equal to a new rig in terms of efficiency. The theory on those is that we'll just roll them out.

On the SCR rigs I think our strategy, Ole, has been -- and you've seen it with what's happening internationally is a constant trying to get the utilization up.

And if you look at our SCR plus units which we've taken SCR rigs to make them to function like an AC rig. An SCR plus rig has pad capability. I think the utilization on that is like 70% -- 86%. So, that has great life in it so long in this market. The remainder of the SCR rigs that are not plus, that are not pad capable, we've been using that as the pool for the foundation for the international deployments like the rigs that have gone to Saudi Arabia.

And the announcement today as I said in this announcement, we'll continue to do that. We can use that as a core. Our customers internationally benefit from that, because in today's tight supply chain market we can use the subs and [mass] structures and take six months off the lead time, versus anybody else in terms of getting going using that legacy assets. So that's strategy and while the rigs are in the US market to make them pad capable, make them AC like with SCR plus and try to get more utilization out of them; and mechanical just keep running them as long as they perform a useful value to the customers.

Thank you very much for clarifying. I'll hand it back.

Thank you.

Robin Shoemaker, Keybanc Capital Markets.

I wanted to stay on the rig new build side for a second and in terms of the last few years, the AC drive rigs have been generally getting contracts. We've talked term contracts two to three years. Are those -- is that what you had in the three you signed in the fourth quarter and in your conversations with potential customers for new additional PACE-X rig orders? Is the contract term typically going to be three years or two years?

I think it's closer to the latter than the former right now. But I would also emphasize that the rates are very attractive rates, and because with (inaudible) the recent performance of the X rig is the value proposition to the operator. It's interesting today everyone is talking about pad drilling. If you look at these wells, operators can put more wells on a pad and move to batch drilling; batch drilling offers a whole other level of additional sort of drilling efficiency, and the X rig is ideally suited for that. So the operators today as that message is going through more and more, they're getting more attracted to the X rig as a concept. And therefore that's helping us get the kind of pricing we need to support the new build program.

Also, on the 40 contracts that you said expired in the third quarter, 24 renewed with term, 14 well to well. Was the choice of -- was that your choice on the well to well contracts? Or would you have preferred to kind of have term contract extensions on all of them?

Well, between having term versus not having term, I would be remiss if I said I always prefer term. But the question also is, term at what rate. And we're not necessarily going to lock in term contracts at low rates either. So there's a balance, and some of those reflect that kind of balance in terms of where people want to go versus what we're willing to do. That's the way I would answer it.

Just in the current environment, obviously, with the weaker oil price backdrop, do you see any inclination of your customers to sort of want to shorten up the contract length on either a renewal or a new term versus what they might have wanted a year ago?

I think that's clearly a topic of consideration by them. I think they have to measure it against the well program and understand how long their commitments are, because it cuts two ways. Especially for programs that are going to be a couple years, and I think they all realize sometimes it makes more sense to go longer. In some cases, obviously, the operator wants to minimize his obligation as much as possible. But I would say that the rollover -- even in the spot market, the rollover rates have been very healthy, reflecting generally the demand we're talking about.

Great. Thank you, Tony.

Angie Sedita, UBS.

Good morning, guys. Tony, based on your comments, I guess you can elaborate $80 or low $80 oil prices. You're obviously seeing good demand on the PACE-X rigs so far. Do you think at these low $80 prices that we'll still see that incremental demand for these rigs to come into the market in 2015? And if so, where do you think that starts to slow on a commodity price side?

Obviously, we watch the commodity price with great interest. If I could -- the key driver to the operator is cash flow. I can't predict the commodity price. If I could I wouldn't do this job. I'd just trade in the futures market. I'd get rich that way. This is a lot harder work. But we do listen to our customers, and we've actually recently did a survey of 19 customers and with today's environment. About 85% of them said they see today steady to increases, in their current programs. So, that's a survey as of a week ago.

There's obviously, many of the customers are in budget talks right now and I think they will be reassessing. Generally, people refer to $80 as sort of a number that is kind of level core number that things break below $80. I think what then might happens is you may not see utilization affected as much as operators focus on cost and trying to [high rate] their projects, in terms of returns and a real focus on drilling efficiency, and probably trying to squeeze more out of the service companies. That from my point of view, as the Nabors specific, I think we're probably more prepared for that today than before.

Because as I said, our new X rig platform is ideally the kind of tool they need to get that drilling efficiency on their high rate of return projects. I think that should actually, at the margin, help drive work to us. The other point I'd make, at least that's Nabors specific, many of you have done an analysis of kind of the break even where you get concerned about rig counts by region. And I'll give you some statistics on that.

In the Tuscaloosa marine shale we only have two rigs operating. One is on the term that goes two years, and one is on a well to well, so that one is exposed. The Mississippi line, we have no rigs operating. In the Permian, we have no rigs that are drilling vertical well. In the Eagle Ford we have 20 rigs operating and 20 rigs that are either on term or that are not tier three. And in the Bakken, we have 57 rigs operating, 50 of those rigs are either on term or not in tier three.

And the remaining seven, three are AC with the [vulcan] packages. One is an SCR plus with a skid system. One is an SCR and two are mechanical. So, during the past year or so, one of the things we've tried to do is only invest in a proper platform but also think about the opportunities where we want to be working. And we think we're pretty well positioned now to -- we can't eliminate the risk but we can try to do our best to minimize it. That's been a part of our thinking.

That's very helpful. We have already seen the high spec new builds see a little bit of flattening out in the day rates. But you were seeing, you had been at least seeing, some nice move in day rates for even your legacy rigs [versus] the mechanical rigs and the SCR rigs. What are you seeing on that side here in Q4? And is it your thought that this starts to all flatten out in Q1, given current commodity prices and the delivery schedule? Give us a little color there.

Currently, given the demand and given where we are on the pricing and the overall value proposition on the X rig in particular, we haven't seen any real pushback on the rate. The rate is in the high $20s. And the SCRs and spot rates are both rolling over at good rates right now.

So we really haven't seen the pushback yet. And as I said, people are in budget discussions, and I think there's a lot still yet to be worked out in the system. But it hasn't happened yet.

Okay. And then finally on Saudi, I think it was very interesting to hear that you think there could be some upside to the orders. Could you give us a little color there?

The market there as you know, they have an incredibly ambitious program to increase their rig count. And I think the orders that we just got; we got some and some other contractors got some as well. I think if they follow through on that there's quite a number of additional rigs they need to satisfy. And I think the neighboring countries as well, there's some opportunity for additional rigs as well. We're very keen on expansion opportunities in both Saudi and its neighbors.

Thanks. I'll turn it over.

Kurt Hallead, RBC Capital Markets.

Good morning. I was curious on the international outlook. Nabors has had some struggles in the past with timing and other things that kind of pushed the positive outlook going forward. Looks like the current dynamic is quite a bit different. Just wanted to get a sense from you as to how much confidence and conviction you have in the execution on these international contracts and the timing going out into next year?

I have [Ziggy's] first born, second born, and third born all under my desk, chained. (laughter) I think we are keenly aware of those executionists in the past. We've done a bunch of things to try to address them.

First of all, as you know, we announced this common engineering group. And the common engineering group actually has an aspect of a new project management team. Everyone has gone through project management training, and all these new deployments are all being managed by their official project manager. And that's really helped us get the kind of visibility into the project and helped us really manage it.

And that's one of the reason why the Saudi Arabians are going much better than they have in the past. And that was institutionalized now. I think that's a good thing. The other thing is we have a lot more visibility into Nabors' assets given that reorganization and in terms of access to things. We've spent a lot more time on the procurement side up front, in terms of maximizing our cloud, as the largest buyer of everything. On the drilling side of things we are still the largest buyer of everything even compared to the offshore guys. We buy more pipe, more engines, more everything than anybody. I think converting that to a deliverability advantage has also been one of our priorities.

The other issue is I've tried to instill the culture here of not hiding away from problems and trying to get them on the table quickly and address them. It doesn't do anybody any good to not confront them. And I think that culture is now getting through the Company here. International -- it's endemic in the international business -- these externalities -- a customs issues, a labor union issue.

Even the NOCs -- each NOC has their own peculiarities and stuff all of which results in delays. And then you've got currency issues. You've got a whole bunch of different issues. I can't eliminate them. What I can do is have our guys try to think about them and do the best we can to plan around them and hopefully you'll see a better performance there. That's the mission, and I can tell you it's a priority addressing it, and we'll see how well we do as the next few quarters continue.

Hey, that's great. That's it for me. Thanks.

Marshall Adkins, Raymond James.

I just want to follow up on Kurt's question. Obviously, you have improved the international side significantly this last year. I want to get insight into next year. How much of an improvement can we see through 2015 on the international side?

Who is going to laugh on that one? Well, I think there should be meaningful improvement. If you're trying to tie me down to a number, I'm not going to do it, Marshall. We already anticipated that question, you were going to be the one to try and get the number out of us. There should be meaningful improvement as all these things start up on January.

And I think the only issue is there are bad things that happen internationally, and so the robustness of how big that incline is and how soon it kicks in, is subject to that. But starting in January, that should happen. When the Saudis get all on day rate and the renewals are all done, that's the first step. The Mexico platform rig gets -- the two Mexico platform rigs get on the payroll in the first quarter.

By the end of the first quarter, those things should be humming, and each of those should be pretty meaningful steps as we march forward from where we are today. I do see a meaningful increase from today's numbers in terms of operating income.

That's what I was getting at. It does seem like there's a lot of things that are in place, pricing and contracts and what not, that is better year over year, despite coming off a pretty darn good improvement this year.

Exactly right.

Should I worry about contract rollovers through the year? Is that a risk to the international side?

I think most of the rollovers, at least right now, they've been positive, they haven't been negative. So, that's one of the good things about the market right today. Most of the NOCs that are in the game now they really need access to the equipment and the rigs. And one of the things that's occurred is part of the last three years, under-performance was due to the fact, as you all know, that those term contracts they were under were all entered into in the lean years of 2009 and 2010 where the day rates were really super suppressed.

As those things roll over and they get closer to today's market rate on the rollover, there's actually uplifts on most of them today, as opposed to the other way. Generally, we're looking at rollovers as an opportunity to improve our position as opposed to something that's at risk right now.

That's good news. Last question for me. The Canrig stuff -- what type of equipment -- seems like there's a lot of third party interest here. What type of equipment are they buying? And what percent of that business is outside; is not captive for you right now?

So about half of the business is not captive. Let me -- I'll just boast a little bit. I'll have Chris talk a little bit. We have top drives for this year in the backlog number I referred to. We already have orders for top drives back to next year 10% above of our total that we're expecting to deliver this year. Just to give you an idea. He'll talk about the quoting of the backlog and what we're doing.

So it's about a 50/50 split. We've added over the past few years products in addition to the top drive. And some of these are coming across as packages. And a package can be a [driller's cabin] power house which is all the controls, the top drive, a wrench, a catwalk, and a draw works. So those are becoming more meaningful pieces of the overall revenue just because of the package is much bigger. And so we're seeing demand really across domestically and internationally in the third party customer base.

And also, given we've been at this for a while, I think, Chris a couple months ago he had his number 1000 top drive; so he has a pretty big install base of customers. One of the opportunities is to focus on the existing customers in terms of recertifying top drives which are on a three-year cycle. I think there's about 500 third party top drives in the marketplace something like that. So mining that customer base and taking care of it is now a meaningful exercise. Whereas, before when he was in the growing mode this wasn't something he could do. Whereas today, it's a new focus area for him. So, all good as they say.

Thank you.

John Daniel, Simmons & Company.

Thank you for taking my call. Just a couple -- first a clarification. You mentioned the drilling operating income is expected to improve in Q4. Is that an improvement over the Q3 result of $218 million which included the $30 million contract termination payment?

Normalized out.

Is that an improvement over the, call $170ish?

I'm not going into specific numbers.

I'm just trying to understand if it's inclusive or noninclusive.

We're comparing to the $0.37 number.

Got it. The other question relates to the new build awards. So you've got 43 awards on PACE-X of which 28 are deployed. Thus,15 still under construction, 7 get delivered in Q4. And that implies eight for 2015. At the same time, you mentioned that you're well spoken up in terms of the construction pace. When you guys talk about building four rigs per month going to that cadence, is that just PACE-X, or is that the PACE-X plus the international new builds and upgrades? Just trying to understand.

It's PACE-X, but the numbers that are announced are actually totally signed contracts whereas we also have a huge number of things that have been awarded and we're still in the documentation phase.

Okay.

So, that's the gap that you're looking at.

Got it.

If you look at the first two quarters, that's what makes it up. We're real conservative on this issue.

Okay, that's fine. Just trying to understand. And the last one for me is the comment you made about the workover business, the increase in inquiries for 24-hour work. Is there any way you can help us quantify the level of the inquiries. Is it material? Because it seems like with the seasonality, hours are going down, despite perhaps the inquiries for 24 hour work.

I'll let Larry Heidt give you some color on that. The one thing I've noticed, notwithstanding the weather related issues and the single major customer, if you look at the rate, rate actually increased a little bit quarter to quarter. But the activity did go down for those two reasons. So, Larry, would you (inaudible)

John, on the 24-hour rigs, we put out a number in the third quarter, and we see in the -- obviously, looking out into the fourth, we expect to put out a number more of those rigs. There is a demand there for them. They are larger capacity rigs.

Yes, okay. That's all for me. I'll turn it over.

Operator since we're approaching the one hour time limit. Let's take one more question and wrap up the call, please.

Brad Handler, Jefferies.

Thanks. Good morning, Guys. Let me follow up on the Production Services side just for some perspective, please. So, you've got roughly a quarter of your 445 work over rigs of 500-horsepower or larger, is that the pool that we should be thinking of that are capable of doing the 24-hour work? Is it a smaller pool? Just some perspective would be helpful.

There are a number of the 500 horsepower rigs that are on the 24 hour operations. But we also have some larger mass sized rigs which are in the 600-horsepower plus range with the larger mass capacities that we'll deploy into those operations. And these are the ones that we put in just recently, and we see out further rigs in the fourth quarter.

Okay. Yes, and then an unrelated follow-up if I may. Forgive me if I'm asking you to retrace steps. Beyond the procurement and the engineering related cost savings on the PACE-X, I think you made reference to identifying further cost [age] or cost savings by the end of this year. Have you told us about those? Or have I just missed it? Can you identify where you're identifying these cost savings, even if you can't quantify it yet.

We have a bunch of internal initiatives that are people related costs and we have another initiative that's on revenue enhancement, showing to the operator, for example, the suite of Canrig products, upgrade products that's available. So between those things that's the part where we're focusing on additional margin, between those two things.

And we continue pushing on the cost of the PACE-X, of course. It's going to be our biggest investment next year, so we will try to go for an incremental cost reduction beyond the15 that's been achieved by the team already.

Okay, and as we get closer to year end, you'll be able to identify the people related stuff? Or is that a fourth quarter call conversation?

I don't know if it's a fourth quarter call, but hopefully, the numbers will be apparent one way or the other.

We'll comment on the fourth quarter earnings. We won't do a special call for that.

No, no. Perhaps on the earnings call that would be identified as part of your target setting for 2015 or what the cost savings are for next year.

Right. That's right.

Very good, guys.

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

Thank you, Emily, and I want to thank everybody for participating today. We apologize if we didn't get to your question, or if you have questions you want to answer, feel free to call us or e-mail us, and we'll get back to you as promptly as possible.

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