Nabors Industries Ltd (NBR) 2016 Q2 法說會逐字稿

Good morning and welcome to the Nabors second-quarter earnings results conference call.

(Operator Instructions)

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

Good morning, everyone, and thank you for joining Nabors earnings teleconference to review our second-quarter results. Today we will follow our customary format, with Tony Petrello, our Chairman, President and Chief Executive Officer; and William Restrepo, our Chief Financial Officer, providing perspectives on the results along with insights into 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're participating by webcast, they are available as a download within the webcast. Alternatively, you can download the slides from the investor relations section of Nabors.com under the events calendar sub menu where you will find them listed as supporting materials under the conference call listing. Instructions for the replay are posted on the website.

With us today in addition to Tony, William and myself, are Chris Papouras, our President of Nabors Drilling Solutions; John Sanchez, our Chief Operating Officer for Canrig; and Laura Doerre, our General Counsel, and some other members of our senior management team.

Since much of our commentary today will concern our expectations of the future, they may constitute forward-looking statements within the meaning of the Securities 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 operating income, EBITDA, adjusted EBITDA, operating income loss and free cash flow. 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 second quarter of 2016. I will begin with a brief summary and then comment on our performance. William will follow with a review of the quarter's financials. I will then wrap up and take some questions.

The second quarter marked a turning point in customer sentiment. Despite the recent drop in commodity prices, our customers remain more positive than they were as the year began. Two main factors that drove second-quarter sentiment include: first, the price of WTI crude which during the second quarter increased by $10 a barrel; and second, the Baker Hughes Land rig count which declined to 374 rigs in May before increasing to 397 by quarter end and further to 440 last week.

We believe our US customers have reached their targeted spending levels during the second quarter. Activity in this market has begun to increase. Some operators are following through on drilling plans made earlier in the year. Others have decided that current economics justifies drilling.

In our international segment the rig count declined in the second quarter. We expect declines in activity in the third and fourth quarter, leading to a bottom at approximately year end. Keep in mind that while the international cycle typically lags the US, it is also usually less volatile as a whole.

In the second quarter we generated adjusted EBITDA of $166 million. Revenue was $572 million. Despite deteriorating global markets, net debt decreased by nearly $140 million year to date. This is mainly attributable to strict control over operating expenses and capital spending.

Results from the lower 48 drilling business declined versus the first quarter. That decrease was mainly due to the quarterly reduction in our rig count from 54 to 44 rigs. We realized nominal lump-sum early termination revenue on two of our rigs. Our rig count was basically flat through the part of May. The rig count moved up gradually through the end of the quarter as we put rigs back to work.

Financial results in our international segment increased slightly. Primarily, this was due to early termination of a rig in Asia and a negotiated resolution related to standby revenue. Nabors total revenues for the quarter were down 4% sequentially. Worldwide rig activity declined to 159 rigs in the second quarter and 188 rigs in the first quarter. The rig year drop was spread across the lower 48, international and Canadian operations.

Adjusted EBITDA was up 2% sequentially. We booked lump-sum early termination revenue on a total of three rigs. In this environment we are aggressively collecting all potential sources of EBITDA. We were successful in this effort with a couple of offshore rigs in second quarter. Excluding these items, adjusted EBITDA declined across all of our reporting segments.

Next, I will update you on several noteworthy developments since our last conference call. First, we reached agreement with our customer for the MODS 400 rig. This is the rig that was destined for our deepwater TLP in the Gulf of Mexico. The agreement includes a five-year initial term with a drop-dead date of April 15, 2018 to commence full rate. The rig is going to work for an important customer. We look forward to starting operations. Given the magnitude of the investment in the project and the state of the offshore market, the conclusion of this agreement is a significant milestone.

Second, we signed a contract for the M800 rig and it is now mobilizing to West Texas. Customers continue to express strong interest in this rig. For pads with up to four wells, we believe it is the highest performance rig available today. Given indications received thus far from customers, we have authorized building another 3 units. With the rig components we have already in hand, the incremental cash spent to complete these three units is less than half of the [full] cost.

Third, we signed a contract for a newbuild PACE-X rig with a key customer in the lower 48 under a term contract. The rig deployed to West Texas at the end of the quarter. The customer also opted for several additional services on this rig.

Fourth, we began mobilizing newbuild rigs to the north slope on a five-year contract and to Kazakhstan on a six-year contract. These projects are impactful, on time and on budget. We expect both will go [on rate] around the end of the third quarter. These contracts illustrate the benefit of a global drilling franchise which Nabors has uniquely developed.

Finally, our second-quarter results reflect continued focus on stringent cost control, resulting in an 8% sequential decline in SG&A spending.

Now I will share our view of the market, our strategies to manage in the current market and the near-term outlook. As you will recall from our last conference call, based on survey data from customers, we expected our North American customer base to reach its targeted activity levels at approximately mid year. With the benefit of hindsight, it was a bit earlier than we anticipated. Our own lower 48 rig count and the broader industry counts bottomed during the second quarter. Since then it has been a slow climb upwards.

In the international markets, spending cuts have resulted in lower rig activity levels. The largest sequential decline in our activity took place in Colombia and Russia. We experienced minor declines in several other countries as well.

With this backdrop, let me next share our view of the future. We assume operators will react cautiously to the current environment, particularly in light of the recent drop in oil prices. Balance sheets are still in need of repair and capital availability remains questionable. Although there been early signals indicating the global oil market is moving back into balance, high inventory levels persist and large-scale activity increases are unlikely for the rest of 2016.

I will now discuss our outlook. While directionally there is positive sentiment, we continue to lack full clarity regarding the rate of utilization increase and the timing of pricing increases. We note the recent oil price pullback. That drop makes it difficult for operators to get clear traction on cash flow improvements now, making it harder to increase activity in the next two quarters.

As you know, we survey our customers' sentiment each quarter. Last quarter we told you that six planned to reduced rigs by the end of the year, two planned to add and the remaining 12 were flat. It turned out for that operator group, the results were about in line. Eight reduced rig activity, four were up and eight were flat.

Anecdotally, customer interest has increased the past several weeks. We again surveyed the larger lower 48 customers following quarter end when oil prices were higher. These represent approximately 30% of the total rig count. Of those, about two-thirds have planned to add rigs by the end of the year, only one has indicated a reduction by year end and the balance is flat.

This positive shift indicates an improvement in sentiment among our customers versus the survey we conducted a quarter ago. Directionally, as I noted, there is a clear shift in positive sentiment. However, given the past week's pullback in oil prices, we remain cautious.

In the lower 48 our rig count currently stands at 49 rigs, including 7 rigs stacked on rate. We exited the second quarter at 48 rigs in total, including 7 stacked on rate. Of the 48 at the end of the quarter, 33 rigs were working on term contracts. For the third quarter we expect a modest increase in the second-quarter exit rate. We also expect the third-quarter average daily rig margin to approach the $5,500 level.

In international markets, customers remain challenged by the current environment, most notably in Latin America. Their reaction, by and large, has been to reduce drilling activity. In light of the upward move in oil prices during the second quarter, some of their concern has abated. In certain markets in the Middle East, tendering activity is already increasing.

For our international segment, rig years totaled 101 in the second quarter. Given current trends and our outlook, adjusted EBITDA could decline somewhat modestly in the third quarter. As in the second quarter, we will continue to focus on sweeping up sources of miscellaneous EBITDA opportunities we have available.

We anticipate realizing catch-up revenue in the third quarter. This is included in our adjusted EBITDA outlook. As for our rig count, the most significant expected reduction in rigs is concentrated in Mexico where we do not currently have any rigs working. We expect our reported daily margin to decline again modestly in the third quarter by around 5%.

To summarize, several factors could further impact our results in the coming quarters. First, US customers appear to have reached their targeted spending levels during the second quarter. The tempo of rig releases has slowed significantly. The tepid pace of rig additions more than offsets the releases so rig counts are generally rising. Our customers' plans to add rigs are still determined by commodity prices. At this point our outlook for the US market remains cautiously optimistic.

Second, in our international segment, we expect activity to decline further in both the third and fourth quarters. In time, we expect sequential declines in adjusted EBITDA in both quarters, more significantly in the fourth quarter.

Third, the Canadian market remains very weak. We expect third-quarter activity to increase sequentially, but from a low base number in the second quarter.

This downturn is approaching its second anniversary. As I've previously highlighted, lower 48 rig counts have begun to move higher. While we are encouraged by the apparent turn, we're certain our customers' plans depend on commodity prices. The recent retreat in WTI reinforces our outlook for a modest recovery for the balance of 2016 and potential acceleration thereafter if commodity markets rebalance.

In the US, the increase in our rig count has been across basins and a number of our AC rig models. Ultimately we believe demand will be strongest for high-performance pad-optimal rates in lower cost basins.

For our international business we expect customers to reach their targeted spending levels by approximately year end. Some are already planning their activity for next year. As is the case for the US, plans are predicated upon commodity prices. Based on tendering activity and indications from customers, we expect increases in their activity after the first of the year.

Having said that, I want to note that we have tried in these calls to be very transparent to utilization and price movements in the international portfolio. By its nature, international market is not a monolith. However, it is also clear that by its nature, it does not have the immediate highs and lows that we see in North America.

During this past cycle, while the US rig count plummeted 80% from its high, the international rig count dropped only 33%. Accordingly, the effect on companies like ours is also dampened. This is a core long-term benefit we believe to the strength and resilience of our operations and the soundness of our business model. It sets us apart from others in our space. This concludes my outlook comments.

Before I turn the call over to William for his comments I would like to address some other topics. First, C&J Energy Services. As you know, C&J commenced a voluntary reorganization in July. The equity value of the company has been substantially impaired and existing common shareholders will likely be wiped out.

Second, Nabors balance sheet and liquidity. I mentioned earlier the Company reduced net debt year to date by more than $140 million. We continue to target net-debt-neutral or better performance for the full year.

Third, the market is validating our initiatives in rig technology and complementary services. We now have the first signed contract for the M800 rig. Customer interest is building for this new rig. We have committed to finishing an additional three units by year end for a total of six rigs.

The M800 is the second stage in our current technology development initiative. We're developing further stages now and we expect more announcements in the next two or three quarters. At the same time our penetration of rigs with our complementary services continues to increase. We're now running three or more services on over two-thirds of our lower 48 rigs.

We are planning an Analyst Day for mid-November. We will be sending out a save-the-date notice soon. In addition to a comprehensive financial review, we intend to elaborate on our vision of the future rig market requirements both domestically and internationally. That will include detailed presentations on pad-optimal rig features. We also plan site visits revealing the cutting-edge features of our M800 rig, our rig automation and downhole integration achievements, our new rig operating system software and our case histories that demonstrate the performance-enhancing accomplishments.

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. Second-quarter net income from continuing operations attributable to Nabors was a loss of $183.7 million or $0.65 per share. Excluding impairments and losses related to dispose businesses and assets, net income from continuing operations was a $72.1 million loss or $0.26 per share. The comparable loss for the first quarter was $80.1 million or $0.29 per share.

Excluded from the above second-quarter losses were charges of $95.8 million after-tax, or $0.34 per share, for a portion of C&J's earnings as well as impairments and costs related to our remaining investment in that company. Also excluded were $15.8 million after-tax, or $0.05 share, related to the impairment in a value of certain assets we have agreed to sell, as well as a write-down of a receivable from a previously sold business.

Revenue from operations for the second quarter of $571.6 million decreased by $26 million or 4% sequentially. While our international business was relatively stable, our drilling activity eroded further in North America and our rig services business declined even more.

US drilling fell by 5.6% to $140.3 million, driven by a 10-rig drop in the lower 48 and the seasonal reduction in Alaska. These decreases were offset by the resolution of negotiations on the contract for a MODS 400 rig in the Gulf of Mexico which resulted in recognition of additional revenue totaling $20.9 million. In addition, earnings from initial revenue accounted for $4.2 million, roughly in line with the prior quarter.

International revenue was flat at $401 million despite a nine-rig reduction during the second quarter. The second quarter benefited from early termination revenue of $10 million in Kazakhstan and $9 million in nonrecurring revenue from the conclusion of standby revenue negotiations in Angola. Rig services suffered more than our other segments, as demand for rig components was severely muted and a 25% rig reduction for the market affected both volume and pricing for our other drilling services. Rig services revenue fell by 27% to $39.2 million, with both Canrig and Nabors Drilling Solutions dropping at a similar rate.

Finally, Canada revenue fell by 62%, reflecting a 66% drop in rig count during the seasonal break-up period. Despite lower revenue, adjusted operating income was essentially flat, at a loss of $53.4 million. However, the second quarter operating income included $29.7 million of one-time operational gains while the first quarter only had $3.6 million. These items had an estimated favorable impact on our net income of $24.1 million or $0.09 per share.

Adjusted EBITDA for the quarter of $165.5 million increased sequentially by $3.5 million. The previously mentioned one-time operational items in the second quarter accounted for $35.2 million as compared to $3.6 million in the first quarter.

International EBITDA of $150.6 million improved by $2.3 million, primarily due to the extra Angola revenue and the Kazakhstan early termination payments, partly offset by a nine-rig reduction during the quarter. US drilling EBITDA of $52.9 million improved by $1.6 million, despite sharp drops in manned rigs as the $12 million impact of the MODS 400 more than offset the decreased volume.

Canada EBITDA was still slightly positive but fell by $1.8 million on an eight-rig decrease. Rig services had a material decline with both Canrig and Nabors Drilling Solutions contributing. EBITDA for these businesses with their heavy US concentration decreased by $9 million to negative $10.4 million.

Let me turn to the key performance metrics from the second quarter. First, the US drilling business. The quarterly average Baker Hughes US land rig count declined by 128 rigs or 25% from the prior quarter. Our own lower 48 average rigs declined to 44 for the same period, an 18% decrease.

Daily gross margin in the lower 48 increased to approximately $7,900 from $7,400 in Q1. However, both quarters include early termination revenue of approximately $1,000 per day in the second quarter and over $700 per day in the first quarter. Adjusting for these categories, the comparable daily margin was approximately $6,900 in the second quarter versus [$5,700] in the first quarter.

Utilization of the lower 48 continues to vary significantly by rig type, with the highest utilization on the most capable pad-optimized rigs. At the end of the first quarter 62% of our PACE-X rigs were in revenue, the highest utilization rate for any of our rig categories.

In our international segment second-quarter rig count averaged 101.2, down from 110.5 in the first quarter. The drop was comprised entirely of drilling rigs and was slightly less than the decline we anticipated on our first-quarter earnings conference call.

Average daily cash margin in international business increased by almost $1,700 to $18,172. All of the increase resulted from the one-time favorable items in Angola and Kazakhstan.

Our low-contribution work-over rigs are still vulnerable but remained working during the quarter. The mix of rigs remained relatively constant which, combined with the 8% rig reduction, trimmed a bit from normalized daily margin.

In terms of cash generation, as anticipated, we remained free cash flow positive during the second quarter. Our net debt, defined as total debt less cash and short-term investment, fell by $121 million. As a result, we ended the quarter with the entire $2.25 billion capacity undrawn on our revolving credit facility.

The strong cash generation resulted partly from our continued efforts to align our operational cost structure to the falling rig count as highlighted by stable daily drilling margins. We also continue to focus on segment and corporate SG&A. In fact, our total SG&A spending fell by $6 million versus the first quarter. This run rate reduction already exceeds our target to cut 2016 SG&A by $20 million versus the fourth quarter's annualized run rate.

Finally, CapEx for the second quarter totaled $63 million, somewhat below our expected run rate for the year. For all of 2016 we expect CapEx in the range of $450 million.

Looking to the future, although we have experienced some recent improvement in rig count in the lower 48 and expect additional moderate increases during the remainder of the year, given oil price uncertainty, we believe the environment will remain challenging. Because of expected low drilling rig utilization, material day rate increases in North America remain unlikely through the end of 2016.

International industry rig count should continue to fall during the second half. Nabors Drilling Solutions will at best hold steady given the still anemic rig count in the US. And finally our sales of rig components are not expected to improve, as rig building has essentially vanished.

Our current rig count in the lower 48, at 49 rigs including 7 rigs stacked on rate, is up slightly from the exit rate of the first quarter. We expect the third quarter will average just under 50 rigs. We also expect to see some increase in Canada and a seasonal decrease in the Gulf of Mexico. Nonetheless, for the MODS 400, we expect to benefit from recurring revenue of approximately $5.5 million per quarter and EBITDA of $3.3 million per quarter.

Finally, in our international market, we expect a minor reduction in drilling rig activity coupled with additional cost action on our operating expenses to match our lower activity level. Despite these cost reductions, without the second-quarter favorable items noted earlier, we anticipate our international margin to fall below $18,000 per day.

Recent events and our customer interactions would indicate an improving environment and also bolster our belief that we are much closer to a sustainable material recovery in activity across the globe. However, some uncertainty about the price of oil still remains. So we remain focused on liquidity. This means we will continue to target positive free cash flow for the year and a stable net debt balance. Achieving this objective will require continuous strong discipline on all of our costs and our capital expenditures. 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 with the following summary. The lower 48 market appears to have bottomed in the second quarter. In the international business we expect the pace of rig declines to abate after the year end.

I want to note two things. One, we expect rig economics, especially in the US, to continue to decline through year end. Current spot day rates are materially lower than those in our term contracts. Second, both the recovery to date and any prospective recovery, are highly dependent on oil prices. Recently WTI has been back in the low $40s. This recent dip in oil prices has tempered our own enthusiasm.

In the face of this market, we continue to pursue our technology initiatives, most notably the M800 rig. And there is more in the pipeline. At the same time, we continue to find ways to streamline our organization and to optimize our cost structure. The goal is to emerge from the downturn as the performance driller of choice. As always, I look forward to updating you on our progress.

That concludes my remarks this morning. Thank you for your time and attention. With that, I will take your questions.

(Operator Instructions)

Angie Sedita, UBS.

Congratulations on the term contract for the M800 in this market. It's certainly impressive.

Maybe you can give us a little color there on the length of term for that contract, and anything that you are willing to say on rate. Is it closer to leading edge or modestly better?

In terms of term, it's in the one- to two-year category on term. And rate, yes, it's above what you understand as spot, upper teens plus additional services. That's the concept.

Okay. And that's three services on that rig or more?

There's going to be a bunch of services on the rig, yes.

Okay. And then when you think about your entire fleet, clearly the rig of choice here is this 1,500 horsepower 7,500 psi circulating systems and the 750,000 pounds of mass. I know that's in your M800 fleet. Can you talk about your rest of your fleet? How many other rigs have those capabilities, and how many could be upgraded to that capability?

Okay, so the X rig that we announced, Angie, as you know, two years ago was all designed with the prospect that we saw the market moving to optimized pad drilling. So the entire technology of the X platform rig was key to this structure.

So for example, the X rig was designed with three mud pumps in its base case constructive with all the high-pressure piping already done. When we start rolling it out, at the beginning the operators didn't want to have the third mud pump, so we didn't put the third mud pump into all of them. But it's already configured for the third mud pump.

The other interesting point is the racking capacity on the X rig is also 25,000 foot racking capacity, which also goes to pad optimize.

Next point is, when you think about pad optimize, as people start getting experience with these pumps, they're also going to realize you may need a fourth engine. We've actually had some operators come to us about a fourth engine. The difficulty from existing rigs out there in the marketplace, conventional [AC] rigs is their engine houses are all designed for three-engine houses.

We specifically designed the X rig with more than that because we had international experience. We tried to make -- as I said earlier, when we did the original design, make it as ubiquitous as possible. The X rig is actually wired to handle four engines.

Our expectation is, as the market matures and the customers understand that they need this stuff, we're going to drop those additional components in. And by March of next year, we will have probably over 90 rigs that I think are unparalleled. They will have 7,500 horsepower liners, I'm saying the three pumps and the fourth engines.

Okay. (Multiple speakers) Very, very helpful.

Then one quick final one -- on the international market, are you seeing any -- you mentioned, number one, that you think that you will see some increasing spending in Latin America next year. Maybe you could talk a little bit about that. And second is thoughts on price concession recovery in the Middle East and the potential timing of that.

Sure. As you know, from the last conference call, we expressed some concern about what was going on in the Middle East with pricing. To be conservative, we also signaled maybe there's some additional rigs at risk, in Saudi in particular. As you can see from the announcement, those rigs did come down, and we're working hard at keeping those rigs busy in the marketplace.

Generally, I think the biggest activity in terms of location would be Middle East and Asia. It ranges from the countries such as Kuwait -- obviously everyone knows about Kuwait. The Kuwait tenders -- it's like the longest berth out there. It's been going on for 18 months, and we're still waiting for the tender, but it's a very sizable tender that everybody in the industry knows about.

Algeria there's incremental rigs -- India, Kurdistan, Oman, UAE, and maybe Russia. All of those markets we see some activity, at least in terms of tendering and discussions right now for next year.

In Latin America, I think Mexico -- I think one of the reasons why our numbers -- we're signalling some decline in the third and fourth quarter is Mexico's actually basically going to zero rigs right now. But we think there's some discussion going on that signal maybe that's about to turn by the first quarter of next year as well. That's the way I see it right now.

Okay, great. Thanks. I'll turn it over.

Blake Hancock at Howard Weil.

Tony, back on the three new M800s, the one that's contracted and the two more that sounds like you are looking to sign, can you talk about -- are those rigs replacing some of your own, or are they taking market share? Trying to understand what the dynamics are there. Are those also with new customers? Or what dynamics driving the newbuilds versus legacy AC rigs since we have plenty of those stacked in the market today.

Right. First of all, those rigs are not replacing our own; they're actually expanding our market and our footprint. The X rig, as we said before, were designed as a pad-optimal rig, and the consequence that when we designed the X rig we thought that the market was going to go to multi-well pads, pads consisting of more than four wells per pad because we thought that's the way the operator would find the economics most attractive. That's what was built. It was not built as a fast-moving 1,500 horsepower rig.

The M800 builds on that. The M800 has most of the features the X rig has, but also can be a fast-moving rig. So for wells with -- for pads less than four or six wells on pad, the M800 is the rig of choice, we think. It has a lot of advantages compared to all the other existing AC rigs in the sense that it has more racking capacity, it has the three pumps, it has the four engines. It has walking -- and actually it can move, and we're targeting two days for that rig.

We think the M800 is actually going to expand the marketplace for us, not cannibalize it. And the idea is to get it to customers, particularly in areas where it's been the bastion of some of our other players in the market in the industry. That's the whole thinking.

That's great. I appreciate it.

And then internationally, like you said, the rigs didn't come off in 2Q like we'd expected. You mentioned maybe a modest decline here in 3Q, with 4Q looking, it sounds like, a bit worse. Can you talk about what's taking place here? Where are the rigs coming out of? And help us understand the margin progression, at least over the back half of this year?

I think as you look into the next quarter, the amount of decline of rigs is really looking at most a couple rigs. I think we've signaled that, in terms of mix of rigs working, will it drop in rates from our average this quarter to maybe another 4% or 5%. The total -- that would indicate what the total would be.

I think, we also signalled in the comments that we are really being very aggressive about figuring out what other money is left on the table and trying to collect some. We also expect to have some offset to those declines.

When you put it all together, in the third quarter we think the EBITDA internationally is a risk of about 3% to 4%, just to give some rig fencing here. And the fourth quarter maybe another 5% risk.

The declines -- there's no single area where there is a lot of declines; it's a bunch of miscellaneous stuff. It's everything from -- as I said, the largest one I think is Mexico, where Mexico totally goes off, down to zero in effect. There's Angola will go off. Kurdistan has something. Iraq has something. There's just a bunch of miscellaneous stuff.

But our core market of Saudi, for example, we don't really see, at this point -- we think we're going to try to do our best to hold position. I'm not saying it's not at risk -- everything is at risk, when you're talking about fourth quarter with oil prices today. But I think that should give you some sense. There's pretty stability here.

The other point to make is that, having said that about the fourth quarter, then what you have is, in the end of the fourth quarter, the Kurdistan rig goes on payroll, and that's going to be a very additive rig into international. That starts propping things up as we see immediately in the first quarter.

The other point I'd make is, if you look at the contracts, it was announced today, there is basically three contracts. This is not exactly international -- I think it's the point I would like to make here. When people think of Nabors or they think of the marketplace and their drilling, they always focus on the lower 48.

The three contracts we have announced today, which is the contract for the M400, the rig in Kazakhstan, and the coil tubing rig in Alaska, which are three different markets other than the lower 48. They are all five-year contracts, and the collective EBITDA contribution each year for those three contracts is in excess of $75 million. Okay?

And that really shows you what Nabors is about. That's what's going to be going on here. Obviously, any single market goes up and down, et cetera, but in this environment, to end up in three different markets with that kind of thing now in the pipeline, that's where we're trying to allocate capital.

That's great. Thanks, guys. I'll turn it back.

Sean Meakim, JPMorgan.

I think I heard you right that you are expecting contracted rigs to be up sequentially in the third quarter. Perhaps that M800 helps a little bit, but I think that implies that you are adding contracts.

If that's the case, could you give us a little more detail of what those could look like -- maybe term length, rates -- any of them are bid versus being negotiated? Just trying to get a sense of the mix of some of that activity that you are adding in the third quarter.

Right now I'd say the bulk of it is very short term, and it just gets rigs back into the marketplace. And customers, one, they start thinking of ramping up.

And as we sit here now and as we mentioned in our comments, we think we will exit the quarter at an average of 50. And hopefully the exit rate will be modestly above the rate we are saying, which is at 49 rigs working. That's the strategy right now.

We're not going to be going long on stuff other than some of the newbuilds that we talked about. We're more on the shorter end of the curve right now.

Okay. That's helpful.

Just maybe circle back to the contracts that you announced today. You talked about this is where we want to be allocating capital. Could you give us a sense of -- we talked perhaps a little bit internationally.

What are the other opportunity sets that are out there? Is there a return hurdle rate? Or some of the different ways in which you are trying to rank order some of your deployment of capital into some of these opportunities?

Well, first thing is, with the strength of the three ones I announced today, the payback is less than four years on those projects. Some of them are actually pay back substantially better than that. That's point one. That's the hurdle rate we have consistently used at Nabors, and we try to look for opportunities where that makes sense.

I think the other point though is, in the US where we are building rigs right now in a market that obviously the pricing doesn't line into term contracts and cover those contracts, our thinking there is that there is a technology shift going on and we want to be at the table with that. We think we have some better mousetraps in process right now, and we want to get them in front of the customer and fill that position.

The other point I'd like to make is, all this technology we're talking about, this has been part of a two-year campaign in terms of building a platform. And so one of the things we're thinking when we do this is that the features, a lot of the features, especially operating systems and performance tools that are going into the new rigs is also capable of being retrofitted on our existing rigs. So we get a double benefit there.

And the last thing, of course, is, as we add these new rigs and we retrofit with these extra packages, they also expand the capability for our performance services, scope of services, which we think also has attractive returns at the margin compared to other opportunities. That is the thinking here.

It's not just in a quest to build a bunch of rigs into a market that doesn't have term contracts. It's actually to position us, as well as take advantage of improving our existing legacy assets and existing newer assets like the X rigs that are out there with really super-charging them with this technology. That is what we're trying to do. It's up to us now in the marketplace to show the customer that can deliver.

And at that point, since you gave me a chance, I'll just mention that there is a rig in -- X 46 in the Caribbean this past week that we drove for an operator where we had all our services, in addition to rig, we had the full rig. And we're told -- I'm sure people know what all the records are out there, but we're told it could be a [phase-in effort] where from kickoff point to the end of the curve, we did it in 6.75 drilling hours and a total time of 8 hours. That includes our directional drilling, as well as all the other performance tools on the rig. We have had operators calling around saying how the hell we did it. That's the concept here.

Thank you very much for that detail.

To wrap up that point, one thing that would be helpful is if you could remind us, going from, say, a rig day rate to adding in all the potential services, what does that delta look like on a day rate basis?

Without well bore placement, it's a couple thousand. With well bore placement, it could be anywhere from $8,000 to $10,000 more.

Wow, okay, great. Thank you for all of that.

Jim Wicklund, Credit Suisse.

There is no question that the packaging or bundling of services, as you note, is a coming trend and is very beneficial. If I could, though, what is the current leading edge, now that we actually have a spot market? What is the spot market for a PACE-X or equivalent rig in the market today?

I'd say mid- to upper-teens.

Upper teens?

Mid- to upper-teens.

Mid- to upper-teens. Okay. We had heard -- I guess Pioneer had talked about getting rigs at $14,000 a day in the Permian, and so we were just trying to triangulate that. I appreciate it.

And Tony -- (multiple speakers)

Not from us. It wasn't from us.

Okay. I was a bit surprised to see Nabors and Riverstone vie for the C&J business in the courts, after the sale of your C&P business was the crowning achievement of your strategic plan. Can you talk about the rationale for what you are doing there?

I can't talk much about it, other than to say, like I said, I think at this point the company has filed for a bankruptcy, and the lenders have a pretty large number of lenders behind the restructuring plan. I think our thinking has always been that if there's an opportunity that we could deploy capital and maximize the investment we had in C&J with a superior return for ourselves, if there's that path to do that, we would pursue it.

Obviously, if we're doing it with a partner like Riverstone, who's, I would say, is the premier energy company in the space right now on private equity, that we would only do it to make money. And so that's the only thing I can comment on right now.

And clearly it seems that most people in the market think that completions, at least early, will do better than land drilling early. You make the point of how much more efficient we have made the rigs, and unfortunately you guys don't capture all the value you have created in day rate. Do you agree with that attitude? And is pressure pumping something that -- other than what you are doing with Riverstone -- is pressure pumping something that, given the right circumstance, Nabors would find attractive going forward into the next cycle?

I would say, number one, we made the decision to get out of that business, and we're not looking to roll up the pressure pumping business. Number two, we've heard all that commentary and we understand how the attractiveness in terms of what people are saying, and we have heard with great interest what Schlumberger and Halliburton have said.

But we also are keenly aware that this equipment is running at over time, and the capitalization rate on the equipment is super high. And I'm not sure that actually the capital is really good return in terms of what's happening when you adjust for capital expense. It's the past season everyone is talking about. I'm not in that business, but that's my own two cents.

There's other parts of the C&J thing, like the workover side, that I think have better risk-reward attributes, actually. And as I've said many times, I really believe in the workover. If you believe in the shale space, the workover has a pretty good future in terms of built-in demand.

On the pressure pumping, I think there should be an opportunity for smart people to make money that are innovative and can come up with a better mousetrap. As you mentioned, the completion guys have not done to completions what the rig guys have done to rigs, in terms of efficiency, when you actually look at it. There could be room for somebody to do that, but right now that's not where we are at.

Very helpful, Tony. Thank you very much.

Waqar Syed, Goldman Sachs.

Thank you for taking my question. Tony, you mentioned that you are providing additional services on the drilling rigs. Could you describe what those are, number one? And number two, when do we start to see the impact of those services on the profitability of the rig services business?

They range from everything what you've heard about before. Obviously, one of the core ones is ROCKIT, which is the performance part that we use when we drill all these horizontal sections. There's only one competing product out there, and I think it's really a second-rate product [in terms of] in the marketplace.

We have another product called REVit, which is stick slip mitigation, which has been extremely helpful and could account for the case study I just referred to a little bit. We are doing BOP testing; we're doing chokes. We've also started with some customers running casing running with a new casing running tool that we're testing.

And so those are the kinds of things that we're talking about, in addition to [one more placement] which would be our directional tools, which, by the way, are not the conventional directional tools. These tools we are offering have add-on capabilities that are competitive with what the big boys use offshore. They do downhole torque, downhole weight on bit. They do azimuthal gamma, which is something that the market, it's not really using yet. We also have the resistivity module as well. So there's a lot of stuff in the pipeline.

You're not seeing the numbers yet because obviously we are building out the Organization and that, coupled with the manufacturing part of the Business being pretty weak right now, so it's not showing, but we are starting to get these things out there. Obviously we're competing against everybody and the weather, and the margins are razor thin right now. But our goal is to get these on the rigs and prove up the value of it and show how, on an integrated package -- we're not just looking to bundle.

We want to redefine how these services are done. I am not really interested in just bundling. Bundling just means the guy is going to buy three things and then he wants a discount.

What I want to do is change the way we actually do things for the customer, and give them a better product and a better service. That's our goal here. We are in the early stages of it, and I hope over the next couple quarters you can start to see some momentum behind it in the numbers.

And to that point, in terms of providing a better service to the customer, you were looking into integrating basically the data from the downhole assembly, bottom hole assembly with the systems on the rig. Where are you in that? Have you made progress with that? Do you have prototypes now in the field?

Yes, we do. In fact, hopefully when you are here by November, we're going to show you a bunch of stuff that's real and actually out there. But, yes, we do have prototypes in the field, and we actually have a whole remote operation center here now that's running this stuff. We're just -- as you say -- we're trying to commercialize right now. But, yes, we have working versions of things right now.

So, Waqar, Tony is referring to our analyst day, which is going to be held in November.

Sure, I already have you guys on the calendar. Looking forward to that. Thank you, sir.

Marc Bianchi, Cowen.

Maybe just a point of clarification for the international comments that you provided, and thanks for such detailed guidance. The 4% to 5% margin decline -- or 3% to 4% EBITDA decline and then another 5% in the fourth quarter. Is that off the [$150 million] that you reported in the second quarter?

Yes.

It is? Okay.

If I carry that through, I end up with something in the mid- to high-[$130s million] by the fourth quarter. Just wondering, if we excluded all the recoveries that you're chasing right now in terms of any kind of repayment that might be out there, where would that number be? Really what I'm trying to do here is get a baseline for starting 2017 for your continuing business.

Some of those recoveries -- most of those recovers that would be one time would be in the third quarter, I think. But some of those recoveries are recurring. Those are recoveries on pricing that we have given in the past and things of that nature.

Okay. So then something in the high [$130s million] is really what we would be expecting as you enter 2017?

Yes.

Okay. And then to the comment about $75 million of recurring business that you signed up here, how much of that is going into the international business as we enter 2017?

I don't want to break it down right now. There are three notable contracts. It will become clear, but right now I'd rather not do that kind of breakdown.

There's three high-profile contracts, and you guys are smart enough you're going to start trying to pick apart the actual contracts and try to figure out who did what to whom. We don't want that to happen (laughter) to be honest with you.

But they're all at least five years. One is actually a little bit longer. They're all at least five years, and as I said, the EBITDA is -- between all three of them is a minimum of $75 million.

Excellent. Okay, thank you. I will turn it back.

Amy, we have got about five minutes left. Let's take one more call, please.

Just to be clear, when I'm talking about these three contracts, I'm talking about the M400 rig, the rig in Kazakhstan, and the coil tubing rig in Alaska. All of which -- obviously, the Kazakhstan rig starts by the end of the fourth quarter; it should be on the payroll in the first quarter. The Alaska rig starts late September next year, and in the press release we indicated when the M400 what the drop-dead date is. You know for sure when that thing gets on payroll, the M400 -- it depends on what Chevron is doing in terms of planning whether it can get out on the platform earlier.

Alaska is this year, Tony. (multiple speakers)

I'm sorry, I misspoke. We've got two of the three go on, basically be up and running by the first quarter of 2017.

Amy, go ahead with the last question, please.

Dan Boyd, BMO Capital Markets.

Thanks for squeezing me in. One of my questions is more of an accounting question on where you are going to recognize the services revenue, above and beyond the daily rig rate.

And then the other one is from a risk management perspective. Are you protected if there's downside related to a lower fee service such as BOP testing?

So the accounting, it will go in the rig services category.

We're not adding it to the margin on the rigs currently. We're not doing that; we're keeping it as a -- it has a separate infrastructure. So it's a separate line, part of the rig services. That's the first thing.

Then on the second thing, depends on the type of service, for ROCKIT, REVit, the amount of downtime associated with that in terms of -- nothing in terms of the rig. The BOP testing is not a substantial risk. When people have done directional drilling, sometimes there's a linkage between your downtime on the rig versus your downtime with the tools that you are using. And that's all part of where things are in the marketplace at a certain time. We don't really see a huge risk increase, risk exposure, from these particular services that we are talking about at all.

Okay, great. Thank you.

Ladies and gentlemen, that will wrap up our call for today. If we didn't get to your questions or you want to follow up with anything, just feel free to contact us either by phone to Bill or myself, or by email.

Amy, if you want to go ahead and close out the call, please?

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