Nabors Industries Ltd (NBR) 2015 Q3 法說會逐字稿

Good morning, and welcome to the Nabors Industries third quarter 2015 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Dennis Smith. Please go ahead.

Good morning, everyone. Thank you for joining Nabors earnings teleconference to review our third quarter results. 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 what we are seeing in our markets and how we expect Nabors to perform in these markets.

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. One, 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 sections of nabors.com under the events calendar submenu, where you will find them listed in supporting materials under the conference call listing. Instructions for the replay are posted on the website. With us today in addition to Tony, myself, and William, are Laura Doerre, our General Counsel; Siggi Meissner, our Head of Global Drilling; and Chris Papouras, our President of Nabors Drilling Solutions.

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 and Exchange 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.

Also during the call, we may discuss certain non-GAAP financial measures, such as adjusted EBITDA, and adjusted income derived from operating activities, or adjusted income. We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. Now I will turn the call over to Tony.

Good morning, everyone. Welcome to the call. We appreciate your participation as we review our results for the third quarter of 2015. As Denny mentioned, we have posted the accompanying presentation slides on our website. I will begin with a brief summary and then comment on our performance in the quarter. William will follow with a review of the quarter's financials. I will then wrap up and take some questions.

The third quarter was challenging, particularly for the US drilling industry. Nabors's results for the quarter demonstrate the value of our international operation in a difficult environment. In the US, our results declined along with industry activity and pricing. We also saw the impact of rig rates resetting to the current market. Margins were also impacted by a reduction in the number of rigs stacked on rate. Our international results were more resilient both in rig years and in daily margin.

Now, I will provide a brief rundown of the quarter's results. Revenues of $847 million were down 2% sequentially. Worldwide rig activity declined to 242 rig years in the third quarter, from 256 in the previous quarter. Adjusted EBITDA totaled $248 million, down 14% sequentially. The primary driver of that decline was a 31% reduction in cash flow in our US drilling operation. In light of the current market condition, and our outlook, we impaired the value of several assets in the third quarter. The most significant of these was our investment in C&J Energy Services. William will discuss these items in more detail shortly.

During the quarter, we had several notable accomplishments. First, we completed the deployment of three previously announced high specification rigs into Saudi Arabia. We built these rigs on time and on budget, and they are all drilling on multi-year contracts. Second, all six of the announced PACE-X rigs destined for Colombia are in country. During the third quarter we began drilling operations with three of the six. The other three are starting up this quarter. We also deployed a new PACE-X rig to a customer in the South Texas market.

Third, we took advantage of the favorable credit markets and secured a new $325 million term loan. The loan was intended to provide us with additional financial flexibility. The current interest rate is 1.175%, which is lower than the rate on our revolver. We intend to use the proceeds mainly to fund the debt maturity scheduled for next year. More immediately, we paid down a portion of our outstanding commercial paper. Finally, the equity market's recent volatility presented us with the opportunity to repurchase shares of Nabors. During the quarter we bought back 8.3 million shares.

Next, I would like to share our view of the market, our strategies to manage in the current market, and the near-term outlook. We saw two distinct phases to the third quarter. At the start of the quarter, WTI was approaching $60. Through the first couple of weeks of August, optimism was building at least among some customers. The Lower 48 land rig count increased by nearly 25 rigs during that time. From mid-August through the end of September, the rig count declined 71 rigs or 9%. Nabors' market share held up during this time. Our rig count declined by 7%. That decline in market utilization, which has continued through last week, has led to additional declines in spot pricing. For the rigs that are continuing to work after existing contracts roll off, the downward reset in pricing is significant. You can see this impact in the decrease in our Lower 48 daily margin.

As we look ahead in the near term, several factors will impact our Lower 48 results. First, commodity prices remain low. WTI is bouncing between $45 and $50. Natural gas remains below $3. Second, we expect that pricing environment will impact operator cash flows and their capital spending, especially as we approach the typically slower end of the year and the exhaustion of budgets. Third, going into 2016, we assume operator budgets will be set later rather than sooner. This delay could potentially create a further deceleration in drilling activity and the rig count.

For the international segment, we foresee relative stability in both activity and pricing. However, international markets are not immune from the effects of weak commodity prices, especially in Latin America. We will continue to pursue additional opportunities to add rigs with long-term contracts at attractive returns. At this point, however, these opportunities are limited and concentrated in a few markets. With this backdrop I will discuss the strategies we have adopted to navigate through this environment.

First, we continue to aggressively and prudently pursue revenue opportunities. Our aim is to create an advantage in the market by increasing our service content while remaining competitive on pricing. Customers are responding positively to our additional service offerings.

Second, we continue to rationalize our expense structure. The team has held direct field expenses in line with activity. Among our operating segments, staffing is down 29% since the fourth quarter of 2014. Segment revenue over that same period is down slightly more at 33%. In light of the activity decline since the summer we have implemented another round of G&A reductions. As of the third quarter, the first round resulted in annualized savings of over $115 million versus the fourth quarter of 2014. For this next round we are targeting an additional $30 million of annualized savings. We are also working with our vendors to further optimize our supply chain by an additional $100 million annually.

Third, we remain dedicated to our stewardship of the Company's capital. We are also committed to remain free cash flow positive. For 2015 we now expect capital spending for our current portfolio of businesses to finish below the $900 million threshold. Looking into 2016, our new build programs are scaling down. Along with rig activity, we should realize reductions in our maintenance capital spending as well. We are still developing our 2016 budget. We could see total CapEx below $700 million if necessary to maintain positive free cash flow.

Fourth, our investment in new technology continues at prudent levels. We are in the advanced stages of development of innovative new rig designs. Our efforts to integrate downhole sensing with surface automation are also progressing. This downturn reinforces our vision which is to fundamentally improve the drilling process and ultimately improve well productivity for our customers.

Finally, we are committed to operational excellence. Our safety record continues to improve. We are again on track for another record safety year. We are achieving repeatable improvements in rig performance metrics such as move time. These achievements clearly benefit our rig hands, our customers, and ultimately our Company.

Our performance in the field is also improving. Our PACE-X rig, which was designed for multi-well pad drilling, is now regularly completing pad-to-pad moves in less than 3 1/2 days and in some cases less than 3 days. This performance should increase the marketability of the X rig for smaller pad drilling programs.

Now I will discuss the outlook. With commodity prices where they are, we believe US drilling activity will continue to deteriorate into next year. Our visibility in this current market is limited. At the same time, US oil production has begun to decline. That trend should eventually support higher commodity prices and ultimately increase oil field activity. Before the increase incurs, operators will have to become convinced that higher cash flows are sustainable. That level of confidence is not yet evident among our customer base.

Internationally, we see two scenarios unfolding. With few exceptions, our customers in countries with ample fiscal reserves are largely holding activity levels at a steady pace. This suggests status quo in those markets. The other scenario includes customers in geographies where fiscal stress exists or is emerging. Those customers are increasingly challenged to hold drilling activity at its current level and are likely to curtail activity. We continue to experience pricing pressure in most international markets.

With that backdrop I will now make a few comments regarding the outlook for our larger businesses. In the Lower 48, our rig count today stands at 82 rigs including 6 rigs on rate. We exited the third quarter at 86 total including 6 stacked on rate. Of the 86, 60 rigs were working on term contracts. For the fourth quarter, our rig count could average in the mid-70s and exit the quarter somewhat below that range. We also expect the fourth quarter average daily margin to decline by approximately $1,000 as the fleet increasingly re-prices to current market.

For our international segment, rig years totaled 121 in the third quarter. Given current trends in our outlook, we could drop by as many as 5 rigs in the fourth quarter. That incorporates the positive impact of the deployments in Saudi Arabia and Colombia. Our daily rig margin could contract by $1,000 to $1,500 per day. Several impactful projects are winding down including Papua New Guinea and offshore Australia. We also expect some erosion in other markets.

To summarize, several factors could further impact our results in the coming quarters. First, with a potentially weak finish to 2015 industry activity, our rig counts and revenue are likely to deteriorate. Based on the number of well-to-well contracts and longer-term contract expirations, we are seeing average rig margins reset rapidly towards current spot market pricing. Second, the drilling market in Canada remains depressed along with commodity prices. An early start to the usual holiday related pause in rig activity could challenge sequential growth in the Canadian market in the fourth quarter.

Third, in our international segment, we still expect an improvement in full-year results over 2014. As we look ahead, we anticipate some deterioration on our rig count in the fourth quarter. Finally, we remain firmly committed to maintain breakeven or higher free cash flow. We will scale our cost structure to the size of our operations as warranted. We will remain extremely focused on initiatives to reduce overhead and optimize our supply chain.

Our capital spending remains highly disciplined and scalable. These strategies should mitigate the effects of the current downturn and better position the Company for an eventual upturn. This concludes my outlook comments.

Before I turn the call over to William for his comments, I will address a couple other topics. First, the Big Foot platform floated out last spring. Subsequently, the platform's tendons experienced significant buoyancy issues. The platform was moved away from the intended location and it is now back in Corpus Christi. We still anticipate an extended delay before the rig commences drilling.

Second, the recent turmoil I mentioned earlier is another step in the active management of our debt structure. That structure benefits from investment grade ratings and covenant terms attractive to our Company. Currently we have only one financial covenant in the entire debt schedule. That is a net debt to total capital metric which only applies to the revolver. The next maturity of $350 million of notes due in September of 2016. With the proceeds from the term loan we recently did we have effectively refinanced a large portion of those notes.

Finally, long-term followers of Nabors know very well that the Company was built on acquisitions. Specifically, Nabors has a good record of acquiring assets at attractive valuations. The current market conditions could once again bring such assets to market. Although we have evaluated several packages recently, we have not yet seen the fit or the valuations that makes sense to us. I assure you we look at everything and we apply rigorous criteria in our evaluation process. We are committed to completing deals only if there is a clear expectation of value creation for Nabors shareholders.

This concludes my comments. William will now review the quarter's financial results in more detail and provide additional thoughts on the outlook.

Thank you, Tony. And thanks, everybody, for joining us today.

Net income from continuing operations for the third quarter was a loss of $250.9 million, or $0.86 per diluted share. Excluding exceptional items, essentially related to the current market downturn, the net loss from continuing operations was $44.9 million or $0.14 per diluted share. Included in the above loss was our share of C&J's earnings with a one quarter lag, in effect a loss of $35.1 million, or $0.12 per diluted share. Our core drilling business delivered a loss of $0.02 per diluted share.

For purposes of this discussion we excluded from our earnings the following items. First, the current industry environment resulted in several charges, mainly from asset impairments, sale of assets at a loss, severance costs, and currency exchange losses, for a total of $250.9 million before tax, which translates into $225.1 million after taxes or $0.79 per diluted share. Included in these charges is a $180.6 million impairment on the value of our C&J shares.

Second, we recorded several one-time items related to income taxes that resulted in a $19.1 million benefit to our third-quarter earnings, or $0.07 per diluted share. The largest of these items reflected a reduction in our forecast annual effective tax rate used for the allocation of income taxes between quarters. This required a favorable adjustment in the third quarter to the tax expense we recorded for the first half of the year.

Moving on to our results. Revenue for the quarter of $848 million decreased by $16 million, or 2% sequentially. Revenue in our international segment increased sequentially by 13%, primarily due to the full quarter effect of the Saudi JV consolidation, partial payment for the new build rig we are selling to a customer in Kazakhstan, and improved operating results in Venezuela.

Our revenue in the North American drilling market fell by 15%, driven primarily by the falling rig count and weaker pricing in the Lower 48. This decrease was exacerbated by seasonal factors in Alaska but partially offset by the seasonal uptick in Canada. Revenue for other rig services decreased by 27% as new rig building decelerated further and demand for Ryan Directional Drilling services continued to trend down, albeit at a couple of percentage points better than our drilling revenue reduction in the Lower 48 market.

Consolidated operating income dropped sequentially by $62.5 million to $7.5 million. The current market conditions resulted in declines in operating income in all units with the exception of Canada and the US offshore market. Operating income margins for the Company of 0.9% fell by 720 basis points sequentially. Adjusted EBITDA held up better at $247.6 million, for a margin of 29.2%, which represented a sequential reduction of $40.6 million and 420 basis points, respectively.

I will now cover the key performance metrics from the third quarter and then discuss two third quarter financial transactions. First, the US drilling business. The quarterly average Baker Hughes land rig count declined by 43 rigs or 5%. Our own Lower 48 rig years declined to 89, a 14% decrease. This reduction resulted mostly from the expiration of contracts for rigs previously stacked on rate, although our working rigs also decreased during the quarter.

Daily gross margin in the Lower 48 decreased to $8,609, from $11,205 in Q2. However, the second quarter figure includes some level of lump sum early termination revenue. If we adjust the second quarter daily margin for the full amount of early termination payments, the normalized daily margin for the second quarter was approximately $10,200 per day.

The normalized sequential reduction of $1,600 per day was attributable to a reduction in average day rates and an increase in daily cost per rig, driven by higher compensation per rig as the rig count increase we expected in August did not materialize, and by an 8 rig reduction of higher margin rigs which were stacked on rate with minimal costs. Given the current environment, we anticipate a further reduction in drilling margins of up to $1,000 per day.

While results in the Alaska business declined seasonally, we continued to run approximately two rigs more than last year. The US offshore business did somewhat better than last quarter, essentially reflecting a construction related payment. Utilization in the Lower 48 continues to vary significantly by rig type with the highest utilization in our most capable rigs. At the end of the third quarter 92% of our PACE-X rigs were on revenue. In Canada, the normal seasonal ramp was muted by the severe contraction in drilling overall. Adjusted EBITDA in this segment doubled sequentially to $7.5 million. But operating income, although improved as compared to the breakup second quarter, closed at a loss of $4.1 million.

In our international segment, third quarter rig count totaled 121.3 rig years, down from 127.1 in the second quarter, translating into a 5% decrease, somewhat less than the decline we anticipated a quarter ago. Average daily cash margin in international business widened by $1,350, principally reflecting the impact of new rig deployments and strong operational execution. We expect fourth quarter margin to decrease somewhat towards more normal levels.

In our rig services segment, which consists of Canrig and the Ryan Directional business, operating income decreased by $8.8 million as drilling activity and the industry's new build deliveries both declined. That vast majority of the decline came from our Canrig business as deliveries for third-party top drives dropped by 90%.

Despite the difficult operating environment in the US we continue to focus in our initiatives to remain free cash flow neutral. First we retain strict control over capital spending. For 2015 we are still on track to invest approximately $900 million in our drilling-related businesses. For the third quarter capital spending totaled $166 million and year-to-date we have spent $648 million in our drilling businesses plus our corporate investment.

Second, we are beginning another round of G&A expense reduction. From the fourth quarter of last year through the third quarter, our initial efforts resulted in a reduction in quarterly spending of just under $30 million on a comparable basis. That is excluding the impact of the completion and production segment in the fourth quarter, as well as the impact of severance costs and the acquisition of the Saudi JV during 2015. On an annualized basis that savings amounts to approximately $115 million. We are now targeting another $30 million in annualized G&A savings on top of the amounts already realized.

Third, the largest reduction activity has taken place in our Lower 48 operations. We are focused on aligning direct operating costs with activity levels. Since the end of December we have reduced our Lower 48 staffing by 54%.

Finally, we are fully engaged in a second round of discussions with our vendors, as well as other internal initiatives, which together target $120 million in CapEx and OpEx reductions over the 12 month period following August 2015. These efforts have already yielded a projected $22 million reduction in purchasing costs.

Next I will detail two financial transactions that we have completed during the third quarter. Given favorable terms in the credit markets just before the end of the quarter we entered into a $325 million term loan with a group of banks to provide us with additional financial flexibility. The term loan matures in two equal tranches of three and five years. We intend to use the total availability provided by the term loan and our undrawn revolving credit facility to support investment opportunities that may present themselves and to retire over time some of our fixed income debt instruments. In the interim we have partially paid down our outstanding commercial paper.

Also during the third quarter we took advantage of volatility in the equity markets and repurchased 8.3 million shares of Nabors common stock, approximately 3% of our shares at an average price of $9.46. Looking forward in this near-term unfavorable US environment, we will continue to remain focused on generating free cash flow through 2016.

Although we cannot control the fundamentals in the market for drilling rigs, we have multiple levers who can apply to stay free cash flow positive during 2016. We can reduce our CapEx by an increment of $250 million. We will continue to align our overhead to the new reality by implementing additional reductions before year-end. We will continue to work with our vendors to further reduce our costs and we will remain vigilant on our activity levels to ensure we keep the direct cost on our rigs in line with the anticipated activity levels. With that I will turn the call back to Tony for his concluding remarks.

Thank you, William. I want to conclude my remarks this morning by reiterating the four pillars that form the foundation of our operational strategy. As this downturn progresses we think they are increasingly critical.

First, capitalize on the existing asset base. Nabors has a worldwide fleet of over 500 rigs. Our goal is to increase the returns on our existing assets. We are finding creative ways to use the equipment we already own. A prime example is our use of [mass and substructures] from idle high horsepower rigs in the high specification units we have built for the Middle East.

Second, differentiate our service offering. We are adding additional services to our standard rig offering. These services clearly complement the rig itself and in some cases we are replacing third parties. In addition, we are nearing completion of innovative new rig models and rig components. These developments should facilitate our vision of more intelligent drilling.

Third, improve operational excellence. The metric I am most proud of is our safety record. With the improvement year-to-date we are on the way to the safest year in the history of the Company on the heels of the records achieved in the two previous years. Finally, enhance our financial flexibility. As mentioned earlier, we added a new term loan that allows us to effectively refinance the next maturity of debt. This is the latest in a series of steps we have taken over the past couple of years. We will focus on additional opportunities to increase the Company's cash generation and meaningfully impact our financial flexibility.

This concludes our remarks this morning. Thank you for the time. With that I will take your questions.

(Operator Instructions)

Byron Pope, Tudor, Pickering, Holt.

Good morning, guys. I appreciate all the color, really helpful. Tony, on the international side you guys were pretty specific in terms of laying out how we should be thinking about Q4.

Conceptually as I think about heading into 2016, what I heard from you was continued pricing pressure and maybe activity in some geo markets continues to trend down but I didn't hear anything that made me feel like we're looking at 2016 overall activity or revenues down dramatically for you guys, realizing it's a fairly limited visibility at this point. I was just wondering if you could share your thoughts about international moving pieces as we head into 2016?

Sure. I think that's a pretty fair description of how we see it. Like we said, right now about a 5 rig decline and some pressure on the day rate. And, obviously -- international is a big basket of moving pieces. You've got to understand that.

We have things moving in, things moving off and obviously the big unknown is how long this oil pressure is going to stay particularly on the NOCs in these various countries. But as we sit here now for the next six months we don't see -- we see that is where the activity levels should be right now.

Okay. And then just a follow-up. I won't ask you to get into any details but you did mention that you are in advanced stages of new rig models and components and just was wondering if you could give us a feel as to whether these are targeting more than North America unconventionals or international -- I assume the answer might be both but any incremental color there would be helpful.

Yes, I think as you've seen from our last go around, the X rig, we are trying to design rigs that are much more ubiquitous applying to large opportunities. I think one of the benefits of the Company and the strength is the fact that we operate in a diversified geographical market and what we want to have is an asset base that can be optimized across geographies. So that's going to be a key component of what we're trying to design in this new approach. It will be something that applies to multiple markets.

Okay. Thanks guys. Appreciate it.

Marshall Adkins, Raymond James.

Good morning, Tony. You mentioned you are adding to your suite of services or trying to market more services around the rig. Can you give us some more detail on that? What exactly are you thinking, or what services are you talking about?

Sure. As you know, within the Canrig operation we already had some performance tools like ROCKIT which improves drilling in the horizontal section of a well. We actually have a product called REVIT, which is a product that improves for the operator stick slip. We have our new set of MWD tools which has downhole sensor information and frankly only -- most in the current market except for the big boys, most of the GE tools do not have these sensors.

And we are going to be marketing capability of additional control of the drilling process with these tools. That's what we're referring to as the new control system. There are also some third-party services that are currently done on a rig, like BOP testing that we are providing, and there are some other third-party services that third parties provide today that we're also integrating back into our operation. It is a suite of a bunch of things that are on a rig today as well as some new things that we think are going to be performance enhancing.

Performance enhancing, that's really the big driver here, right?

We have -- we are as a new group -- and as we've said Nabors Drilling Solutions is focused on bringing these to market now.

Along those lines does that mean you may be in the running for Sperry? Or since Lowe's products will be similar and/or with C&J and everything that's going on there with their balance sheet, is there a chance you are willing to put more money into that one looking down the road?

Acquisitions? I will just refer back to my opening remarks, which is we do look at everything. As of now we haven't found something that meets the hurdles that we like -- but I won't comment on any specific acquisition.

Obviously the space is something that we are in right now in terms of directional. In fact I think we've previously talked about -- we have in development a rotary steerable tool which we think will be a real viable tool in the North American market and competitive with the best of the best that is out there. That's probably a year away from being fully commercial. That space is something that we do see the possibility of getting into our performance suite.

In terms of C&J, I think we're still happy with the current structure and very happy with the response Josh is making to this incredibly difficult market. I think it's a testament to what they've done over there and if you look today at the number of frac spreads they are working I think he has as many frac spreads as anybody in the whole sector including Halliburton on the payroll right now and is doing better than some of the other big boys as well.

Obviously, there's a lot of stress but I think we're doing the right thing. I think what we'll look to do is to optimize the best of what we both have. We haven't yet really scratched the surface on optimizing international stuff with him yet, but that is something on the game plan. We have drilled at least one project in the US jointly for an operator to see if there is some ways we can bring value to an operator -- that is something we may also put more energy into. But so far that's where we see things.

Thanks, Tony. Appreciate the color.

Angie Sedita, UBS.

Thanks, good morning guys. Tony, could you give us a little further color on leading edge day rates? You mentioned it briefly at the top of the call but a little bit more color on what you are seeing for leading edge for both high specs and [SDR] clearly there's not a lot of rigs being renewed. Any color that you can share. And it sounds by your comments it does sound as if competition is becoming a little bit more heated versus the discipline we had seen earlier.

Sure. Do I really have to? ( Laughter )

Sorry. (Laughter)

As I mentioned, pricing is down significantly. But to figure out what a real price is there's so much variation between customers and their specific requirements, it's really hard to have a normalized price. Generally I would say that the ultra-premium and -- 1500 horsepower and premium AC rigs in the high teens, and then the lesser, the 1000 horsepower class AC rigs in the mid-teens is kind of where the market is today.

But that really does not take into account a lot of things because there are so many different configurations now of what goes in a basket. And frankly our mission today is to try to add more content into the package to change the economics and create a better value proposition. But that's where we see things right now.

Are you seeing sharper price declines for today for the high spec rigs or is it -- previously it was SDR and now how has that moved now to the higher spec rigs as far as the sharpness of decline?

In the ultrahigh, what we refer to as the PACE-X style, we have not seen further big pricing declines. Clearly, there's pressure going on and as the whole market rolls, that pressure I expect to increase.

I expect the spreads to narrow more like it happens in general in all rig markets -- even in the jack-ups you can see when utilization goes down, the ultra spec and the lower commodity rigs move in a narrower spread. I think there is that possibility as more rigs come off term and spot unless there is some change in the underlying demand for drilling given where we are in the supply situation.

Okay. That's very helpful. Is it fair to assume that this pressure is going to continue as long as the rig count is under pressure? So it's throughout Q4 and into Q1?

I have no crystal ball compared to anybody else and there's so many write ups about people guessing where things are going to end up. I can give you a sense.

I did a survey of 10 customers, and the 10 customers which account for a large chunk of US drilling, and of the 10 customers only 2 of the 10 referred to any possibility of an uptick in rig count over the next six months. 6 were flat, and 2 were down, and 3 of the 10 had some rigs on contract they were trying to farm out if that gives you a sense of where we think we are. I think that is a sense of 10 of the real players in the marketplace.

Great. That's very helpful. I will turn it over. Thanks, Tony.

Sean Meakim, JPMorgan. Ole Slorer, Morgan Stanley.

Can you give us a little bit more color on what you actually see at the moment? Everything is clearly very opaque but based on what you now see into the fourth quarter you suggest your rig count down 15%. Does that -- am I understanding that correctly and if so is that in line with how you see the overall rig count down? Or do you think you'll do slightly better than the overall rig count because of contract backlog or other reasons?

We have not said international will fall by 15%. It fell by 5% in the third quarter.

And five more rigs we're saying in the fourth quarter.

Sorry. I meant the domestic Lower 48.

Oh, okay. So I don't think we gave specific numbers I guess, but we are going to be expecting some more rigs in the fourth quarter.

I think you suggested mid-70s, right?

Mid-70s.

Is that 15% down?

We have 81 today.

Okay. On average for the quarter. Does that mean that you believe you are doing better than the industry as a whole?

Not necessarily. I think certainly some of our competitors that have a higher proportion of contracted day rates I think are more sticky on their rig count than we've been because we have had more expirations of contracts. But compared to everybody else I think there we should be doing as well as everybody else.

We're roughly in line with market in terms of volume and I think we are holding our own on day rates given the quality of the rigs. The majority of our rigs operating there are PACE-Xs and those are higher-priced rigs. In that sense we are doing much better than the average.

The utilization on PACE-X rigs are still up close to 90%.

Have you repriced any PACE-Xs lately? Can you give any kind of indication of the spread that a customer is willing to pay on recent data points?

Points on alignment is what you said.

We have at the price indication that I said which is in the near 20 number.

Okay. So that is still remarkably robust compared to the carnage that is going on in the mid-tier segment.

I would say that is the case. I would say also that -- one of the things I would want to emphasize on the PACE-X rig is it was designed for multi-pad moves. As I said in my remarks, we originally fill out those multi-pads, the rigs would stay there a long time.

It was not really designed for move to move pads -- move to move between pads, and some of the competition had been marketing against us that they can move a rig faster pad to pad. But with some process changes we've now come up with -- we have figured out to move a PACE-X rig in 3 to 3 1/2 days which makes the rig very competitive on a move basis with the other alternatives, but when it's on a pad there's no comparison for any rig in the marketplace today, PACE-X out shows everybody on a pad. So that's part of the strategy right now and that's one of the things we are selling to the customer.

In addition, we see in some areas we actually see more wells per pad.

Yes.

Which enhances this concept as well.

Thanks for that. Second question on the Middle East; there have been some contract awards in Kuwait lately. There seems to be a pretty tight market at least on the supply side for the largest 3000 horsepower rigs. Can you give us a little bit of what you are seeing when it comes to Iraq where their rig count has gone from 100 to 40 or Kuwait and Saudi, Oman, or other areas where there seems to be a little bit more of a robust outlook?

I think the outlook in those areas that you talked, namely Oman, Kuwait, and Saudi in terms of [gas], and Algeria as well, still could be a viable market. Iraq for us, we are down to one rig.

And the plan is to move the rig out. In Iraq, we only have one rig at the moment and we had our exit strategy for awhile to get out of it. And in Oman we continue steady. It's just pricing, pricing pressure and what other countries did you mention?

Kuwait is one of the areas where we had a couple of tenders and as you know, other people have been awarded, and we have been awarded, and we are trying to pick the ones with the high returns. I think that's really what we're saying. There is more opportunities to come.

Are you able to reallocate existing idle assets to those contracts? Or are the rigs of a different type?

In Kuwait we relocated one rig from Bahrain into Kuwait that's going to start in Q1. So it's not a new build and we have plans for the rigs that are coming off in other countries as well. They have spots potentially in other areas where they can fit.

Just finally do you see any light at the end of the tunnel in Iraq or -- is it a Company specific reason to take the rigs out or is it that you just take a very dim view of the entire market?

So I think first of all it's very dark and we don't see anything, and it has been very difficult to operate there for us and I'm talking about southern Iraq. So we basically decided to move out.

You will recall we went in thinking we would have the best team there. We worked for Exxon and Shell and we partnered with Halliburton on a project and we thought with that kind of team we could navigate Iraq, and I think it was fair to say everybody had their clock handed to them and we've decided that that's not where we want to play. We are up in Kurdistan, which is a different environment. (Multiple speakers) But southern Iraq has just been a problem.

Thanks for that clarification and color. I will hand it back.

Waqar Syed, Goldman Sachs.

Thank you for taking my question. Tony, you had decent share buyback in the quarter. Should we expect that to continue or this was one time in the quarter that you initiated that?

This is the second buyback that we have done in a year and as I said before, we are always trying to figure out what the best use for our capital is. There was an element of opportunistic here. It's an interesting aspect to this particular buyback. If you look at the spread on the interest rate versus our dividend, we actually had a positive free cash flow on the trade, which is interesting given that we are borrowing at 117 basis points, and the dividend is at 2.5, 117 over LIBOR versus 2.5, so we actually had a positive impact in cash flow.

I think our main priority still has to be obviously in this kind of market to be careful about the balance sheet and our investment grade rating. In my dreams I would like to buy back some of our debt and be able to do that at a discount but that really hasn't occurred, that opportunity.

But we will constantly reevaluate whether that opportunity against what our best -- other uses of capital are and you will see -- we'll execute it and when we do you will see the numbers. Right now that's where we see it. So that's the priorities.

Good. And then on the additional services that you are offering on the drilling rig and that you plan to additionally provide in the future, is this just a domestic strategy or do you plan to offer such services in the international market as well?

International as well. Absolutely.

And are you offering any of those services right now internationally?

We are in discussions with a couple of NOCs right now. They have proposals in front of them right now.

Okay, great. Thank you very much.

Scott Gruber, Citigroup.

Good morning, gentlemen. I may have missed this in the prepared remarks. Were there any early termination payments that benefited the international segment during the quarter?

No. Not this quarter, no.

Even better performance then. And William, you highlighted that the international rig count could be down as much as 4%. Given the mix shift, how do we think about the revenue trajectory in light of the activity decline?

Obviously there is a huge mix potential, negative mix potential, depending on which countries go down. There are high-performance rigs in certain countries. So for example, the [stuff] in Indonesia that was working -- Papua New Guinea, excuse me -- working for Exxon was very performance rigs which we are looking for a home for those kinds of rigs. We have two Saudi jack-ups that are subject to renewal that are going to come up, and there is pricing risk on those renewals obviously in this market.

So yes it depends which -- so it's hard. That's why we've been trying to be very careful saying we have a downside exposure here and it is very difficult to predict which country this is going to occur given the mix and the effects of the mix.

The only thing we know is in the fourth quarter we had full quarter impact of Saudi deployment and some rigs we deployed in Colombia and those are reasonable contracts with good returns. We also have predicted or planned some reductions in other places that we feel are lower margins than those particular contracts, however, as Tony pointed out we do have some exposures in higher margin type activities and those contracts may either not be renewed or we may have some pricing movement on those as well. At this point, what we've been saying is that we expect the fourth-quarter to be somewhat less than -- not as favorable as we saw in the third quarter.

Net, net it sounds like the revenue trajectory should be biased a little bit more negative than the activity if activity is down 3% or 4% revenue is doing a little bit worse than that? Is that fair?

We think activity and revenue should stay pretty close to each other and it's probably a 4% like you said, reduction.

Okay. And then you walked through the outlook for the Middle East in response to Ole's question. Could you provide some color on the LatAm market? Should demand onshore stabilize there around the year exit point or is there risk of further deterioration across LatAm?

I think across the line was what Tony said that a lot of these NOCs are very stressed for funds. I think the market is very challenging in Latin America.

Colombia has been a bright spot for us.

Except Colombia.

Except for Colombia. PEMEX in Mexico continues to be problematic, in Argentina, there's a lot of stress going on there. There's not much going on in Ecuador, and Venezuela we've been fortunate that our mix of customer base has changed away from PDVSA to the joint venture companies, which accounts for the reference to the improvement there.

The execution certainly has improved on the international front so congratulations there.

Thank you for noticing. (Laughter)

That's all for me.

Jud Bailey, Wells Fargo.

Thanks, good morning. A question on margin per rig day in the Lower 48. Given your rig count is declining, as you think, probably into the first quarter, you are expecting about $1,000 a day of decline in 4Q. Help us think about early 2016. Do the declines in margin per rig day start to soften as more of your rigs are under term contracts? I apologize if you've given any color on your term contract coverage for 4Q or for 2016 in the Lower 48.

Jud, I think as we mentioned in the remarks, the third quarter was slightly penalized. The market gave us a bit of a pump fake. We thought we'd have 10 rigs more than we do today and in fact the clients backed out. We did adjust our direct cost pretty quickly after we realized those rigs would disappear. In September we did see a little bit better margin per day than we saw as the average of the quarter. But some things are going to continue happening.

We see that more rigs are going to be rolling into lower day rates as contracts expire. More of our rigs stacked on rate which tend to be a little bit more high-margin and in fact have a mixed impact on the cost as well because those are very minimal costs. Those are going to be rolling off. That's where the $1,000 per day are going to be coming from and, you are right though, a lot of the steadier work and the more continuous work that we have now is composed from like (inaudible) Texas, that are performing better than the average.

So that helps temper a little bit the down trend on our daily margins. As Tony mentioned we think the impact could be as much as $1,000 per day but it all depends on which rigs go down during the fourth quarter.

And just to clarify for maybe thinking about the first quarter of 2016 we should not expect a similar amount of decline? I would assume something maybe half that or so? How should we think about that?

I did not get the question. Specifically you said 2016?

First quarter of 2016.

I think we could see a little bit more. Denny has always had his rule of thumb. Daily margin he says in a downturn, at the bottom we get to $7,000. We are not there yet, and we don't expect to be there in the fourth quarter, so is there a possibility for more, for a further downturn? Yes there is.

Thanks. My follow-up is to follow up on the international pricing environment. It sounds like spot rates or new contract opportunities -- there is a lot of pricing pressure. Is there any discussion on another round of re-negotiation of existing contracts? Is it that weak or do you think what you have under contract is good for now?

I think what we have right now is good.

Okay. Thank you.

Robin Shoemaker, KeyBanc Capital Markets.

Thank you. Did you mention in your comments that you have -- in the US rig business, that you've had a labor increase in the third quarter?

No. But we did say was in the third quarter we did not cut as sharply early in the quarter as maybe we would've done because we had verbal requests from customers to provide incremental rigs. As you well know when the commodity price headed back down towards $40 those incremental requests disappeared. So in fact we had a few extra heads per rig, a couple of extra heads per rig during the early part of the third quarter, but that was corrected in September though.

So it sounds like your kind of current run rate or third quarter was like two thirds term and one third spot. You had 60 on term? Is that correct?

Yes.

Yes. So when we get closer to all on spot or if we get to that point, is that where Denny's $7,000 day margin kicks in? Or is that -- ?

Denny can comment. ( Laughter )

It depends upon how long the duration is, right? The utilization -- and price always lags utilization, right? Last time it was two quarters later. If the rig count continues to dribble down you're probably still going to see more pricing pressure. If it flattens out, pricing will still probably overshoot it a little bit for a couple quarters, and then you really need a rising market to pull prices back up.

Yes. Okay. But your percentage of rigs on spot it's just going to continually grow through next year. I think Jud asked the question, what is the number -- the average number of rigs on term? But you did not answer that. Do you have that figure for 2016, I mean?

We do. Our exit is 20 rigs on contract by year end, 40 at the beginning of the year in 2016. Now, that may change. At some point clients may start wanting to get some term and that's always a discussion we can have down the road. Based on today's contracts those are the numbers.

Robin, those are how many rigs we have contracted through 2016 currently. We are constantly signing new ones for six month term and things like that. When we get there it will be more than 20, but that is what is in force right now.

And some of those are the legacy contracts that were signed at the peak of the market, I assume?

Yes. That's just about all of them, probably.

Thank you.

Operator, I think we are bumping up against our hour here, so if we can take just one more question please.

Kurt Hallead, RBC Capital Markets.

Good morning. A couple of questions here. What is your outlook on Alaska and in Canada, typically there's a seasonal uptick in Canada, and this year probably is going to be a lot more muted than it's been in the past. But if you could provide some perspectives on that that would be great.

Joe? Are you on the call?

Yes. I would think that Q4 is probably muted. Similar to Q3 we are negotiating some contracts at this time that will lead through into Q1 but not too far into outlook at this point.

Okay and then follow up on the cash flow, kind of getting back to cash flow break -- cash flow neutral or whatever the terminology was. Is that more dominated by a reduction in CapEx or increase in -- a reduction in net working capital? Can you give us a little more color on how you guys see you getting to that point?

The way we see it as we try to keep a fairly generous cushion between our EBITDA and our CapEx to allow us to meet our other obligations, like interest rates, dividends, and taxes. So yes, one of the levers has been CapEx and we are comfortable that we can control CapEx in the numbers we have given you through year-end. And we are also comfortable that we have another lever to pull there next year and as Tony mentioned we could see $700 million or even below $700 million CapEx next year. That's part of the equation, but it's not the only part.

A big one, of course, has been the overhead which I think we have cut around 30% of our SG&A and in terms of field support those cuts have been even larger. So all the overhead in the organization has been compressed. We still have some room to work on that if need be.

Finally we did address our supply chain with the consolidation of the Company. One building organization under Siggi; it has been much easier to implement all the supply chain initiatives that we have put in place and that should give us another, we expect, $100 million-plus reduction in cost over the year to come.

There is a lot of leverage; we are going to be very focused on making sure first that if the activity goes down we do keep our direct costs in line and that is the first step but all of the other initiatives that we have in place today are incremental to that. We are comfortable that next year we will not require increasing our debt levels to fund our operations and our CapEx and so forth.

We also believe that if the environment is even worse than we envision it today, and we think we're one of the more bearish companies out there, but even if it's worse than we envision, we are ready to take some more action if need be to avoid increasing our debt levels and certainly we've done everything we can to avoid going to the capital markets in this environment.

That's what the revolver extension and expansion was about, that's what's the term loan was about, is to make sure that whatever happens in this environment, even if it's twice as worse as we think it's going to be, we don't really have to go to the capital markets but we are pretty self-sustaining throughout this downturn.

The only thing I would add is on the working capital management the targets we give the business units is EBITDA less their CapEx -- the working capital management, and what we squeeze out of that is actually for our benefit on top of that. The target of positive free cash flow is before what we are able to squeeze out on working capital management.

Okay. That's great, thank you.

Operator that will wind up our call. If you could close out the call please.

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