Nabors Industries Ltd (NBR) 2016 Q3 法說會逐字稿

Good morning and welcome to the Nabors Industry third-quarter 2016 conference call.

(Operator Instructions)

Please note that this event is being recorded.

I would now like to turn the conference over to Denny Smith, VP of Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining Nabors' earnings teleconference to review our third 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 are participating by webcast, they are available as a download within the webcast. Alternatively, you can download the slides from Investor Relations section of Nabors.com, under the Events calendar sub menu, where you will find them listed in supporting materials under the conference call listing. Instructions for the replay are posted on the website, as well.

With us today, in addition to Tony, William and myself, are Siggi Meissner, President of Global Drilling; Chris Papouras, our President of Nabors Drilling Solutions; John Sanchez, our Chief Operating Officer for Canrig, and 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 and 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 recent comparable GAAP measures.

Before I turn the call over to Tony, I would like to apprise everyone of our upcoming analyst day on Thursday, November 10, here in Houston. Attendance is pretty strong, but we still have room to accommodate a few more attendees; and if you did not previously receive an invitation, just email or call us and we'll be happy to send one to you. 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 planned a site visits to our remote operations center and a nearby yard, where we will feature our PACE-X and M800 rigs, our suite of downhole tools, our rig automation and downhole integration systems, and our new rig operating software system. Now I'll 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 2016. Following our usual format, I will begin with a brief summary and then comment on our performance. William will follow with a review of the financials. I will then wrap up and we will take your questions.

In the third quarter, Nabors generated adjusted EBITDA of $149 million on revenue of $520 million, versus $166 million and $572 million, respectively, in the second quarter. Our third quarter results reflect the trends we saw beginning in the second quarter, namely, for the full quarter, our rig count in the Lower 48 increased by 13%. After reaching reduced targeted spending levels in the second quarter, our Lower 48 customers increased their activity in the third quarter. We believe this increase reflects relatively stable commodity prices and generally lower costs for oil field services.

In our International segment, the rig count declined by approximately four rigs in the third quarter. This consisted of two to three rigs down in Mexico, where our rigs were idle beginning in July. We have streamlined our international footprint from 25 countries just a few years ago to 16 today. Each market has its own unique demand drivers. They don't always move in sync. This is especially true with our NOC customers.

Excluding the impact of early termination revenue in the second quarter, financial results in the Lower 48 tooling business improved slightly versus the second quarter. Increased rig count more than offset the erosion in day rates. Our quarterly rig count improved to 50 rig years from 44 in the second quarter.

Reported daily gross margin declined from $7,941 in the second quarter to $6,238 in the third quarter, primarily due to lower lump sum early termination payments in the third quarter and repricing of the fleet as term contracts rolled off and rigs deployed at spot market pricing. Additionally, third-quarter margins benefited from certain lower expenses during the quarter. We finished the quarter at 55 rigs on revenue, and we have 61 today.

Financial results in our International segment decreased slightly, though they were somewhat better than we expected. The third-quarter results included certain items. These were revenue in Mexico and an insurance settlement in Yemen. Second quarter, by comparison, included revenue from early termination of a rig in Asia and a negotiated resolution related to stand-by revenue.

Nabors' total revenues for the quarter were down 9% sequentially, in part reflecting $7 million less from these items I just mentioned. Reported daily margin in our International segment increased by approximately $200, which was better than what we expected a quarter ago. Margins in our other segments declined.

Worldwide rig activity increased to 164 rig years in the third quarter from 159 rigs in the second quarter. The rig year increase was principally in the Lower 48 and Canada, more than offsetting modest declines in International and in other US operations.

Consolidated adjusted EBITDA declined 10% sequentially. We booked a modest amount of early termination revenue in the International segment in the third quarter. Adjusted EBITDA in our Other Rig Services segment, which includes Canrig and Nabors Drilling Services, increased for the first time in several quarters. Given the tough environment in the Lower 48, we still have work ahead of us to reach positive EBITDA in that segment.

Next I will update you on several noteworthy developments since our last call. First, we signed contracts for three additional PACE-M800 rigs, bringing the total to four contracts. The first went to West Texas. The second has been drilling in East Texas. The third and fourth are going to two different customers in South Texas. It is noteworthy that these South Texas operators are returning customers. Our previously rigs with them were early casualties of the downturn. These units are some of the early editions. We think it says a lot about our offering that they have decided to deploy our M800 rigs. We remain committed to build an additional two, for six in total. Customer interest for the two remaining units under construction remains high. We already have customer commitments in process for both.

Second, we completed our first nonstop driller job for a major customer in the Middle East on a Nabors rig. The non-stop driller allows us to maintain circulation while making connections on the rig. This capability is extremely important in certain challenging wells. It is an essential component of our Nabors Drilling Services portfolio. We have a second managed pressure drilling job scheduled, also for a major Middle East company on a Nabors rig.

Third, we completed our second qualification directional drilling job for the same customer in the Middle East. We are preparing for the third. Results to date have been encouraging. We look forward to completing the stringent qualification process for this critical customer and to begin commercial operations.

Fourth, our new proprietary coil tubing drilling rig for the North Slope successfully mobilized during the third quarter. The rig went on full rate late in the quarter. It should contribute a full quarter of revenue in the fourth quarter.

Fifth, the first of two new rigs deploying to Kazakhstan went on rig earlier this month. We expect to realize nearly a full quarter contribution from this unit. Finally, our comprehensive rig enhancement program in the Lower 48 is well underway. When the program is completed, we will have a fleet of 100 of the highest tier 1500 horsepower AC rigs. These rigs will all be outfitted for the most demanding customer requirements today and in the future. This fleet will have high-pressure mud systems, three mud pumps, four engines, extended range on pad walking capability, and racking capacity of 25,000 feet of larger diameter drill pipe. Expected timing for completion is mid next year.

I will now discuss our outlook. While operators remain cautious in the Lower 48, they are continuing to move forward with plans to increase activity. The global oil market appears to be moving back into balance. Inventory levels have started to decline. According to the EIA, US crude production has fallen to levels last seen in the spring of 2014.

In the US, customer interest has steadily increased for approximately six months. We again surveyed the larger Lower 48 customers following the end of the third quarter. These customers represent over 25% of the total rig count. Of those, almost 60% have plans to add rigs into the 2017 time frame. None indicate a reduction in rig count.

Our own marketing activity shows about 10 customers could add about the same number of rigs over the next couple months. More tellingly, the confidence indicated by our customers is evident in contracts they have signed with us. We have eight pending deployments this quarter, more ready under contracts. In addition, we have commitments today for a handful more.

In the Lower 48, our rig count currently stands at 61 rigs, including 3 rigs stacked on rate. We exited the second quarter at 55 rigs in total, including 2 stacked on rate. Of the 55 at the end of the quarter, 30 rigs were working on term contracts. Our term contracts have an average remaining duration of just under a year. For the fourth quarter, we expect an increase in average rig count from the third-quarter exit rate. From the $6,200 per day margin reported in the third quarter, we expect a decline to approximately $5,000.

In international markets, customers remain challenged by the current environment, although we are now seeing early signs of activity increases. In Latin America, two customers have requested idle rigs to return to work. In Columbia, one rig has already recommenced work. In the Eastern Hemisphere, we see some variation by customer. Our rig count in Algeria is vulnerable, as contracts expire near term and tenders are processed. We expect our second new rig deployed to Kazakhstan to commence operations during the fourth quarter.

Looking farther out, we are processing multiple tenders across several markets and we are anticipating more. In Saudi Arabia, our customer recently issued multiple requisitions for nearly two dozen rigs. The expected mobilization date is the third quarter of 2017. We believe some of these rigs will replace units currently operating in the Kingdom. Our goal is to increase our market share there.

For our International segment, rig years totaled 97 in the third quarter. Given current trends and our outlook, adjusted EBITDA could decline by 5% to 10% in the fourth quarter. We expect our reported daily rig margin to decline in the fourth quarter, principally due to the absence of both catch-up revenue and the insurance settlement.

To summarize, several factors could further impact our results in the coming quarters. First, US customers are adding rigs at a steady, though modest, pace. At this time, very few rigs are being released. Those that are released had the advantage of being hot rigs, which are desired by our clients. At this point, our outlook for the US market remains cautiously optimistic.

Second, in our International segment, we expect our rig count to fluctuate in the fourth quarter. That count could be flat at best, with the potential for a slight reduction. In turn, we expect a sequential decline in adjusted EBITDA. We expect to come in modestly below what we indicated a the quarter ago.

Third, the Canadian market remains significantly below the prior year. We expect fourth quarter activity to increase seasonally, but from a low base number in the third quarter. Finally, our third-party backlog at Canrig increased during the third quarter. This growth marked the first increase in over two years. In our view, it is the signal point that this market upturn has legs, as Canrig's customers ready themselves for the upturn. In many cases, they can no longer cannibalize older equipment. We even have a few new build rig packages in the backlog.

As we emerge from the downturn in the Lower 48, we have seen rig demand increase in virtually every basin. This trend is most pronounced in our Southern region. We have seen an increase in demand across our rig types, including our smaller HC rigs. But more recently, our strongest demand is for our most advanced rigs, namely our PACE-X and PACE-M800 models. Our utilization of the X [rate] is now greater than 80%. With the additional contracts we already have in hand, that figure likely moves higher through the end of the year.

For our International business, we still expect customers to reach their reduced targeted spending levels by approximately year end. As I mentioned earlier, some are already planning activity increases next year. As is the case for the US, plans are predicated upon commodity prices and the lower cost which this market has afforded them. Based on tendering activity and indications from customers, we expect those increases in their activity after the first of the year.

I want to reiterate the relative stability of our International business. That rig count is down approximately 25% from the peak. That compares to our Lower 48 count which, after the recent upswing, is still about 2/3% below its peak. You can see in our results the International business is a significant contributor to adjusted EBITDA, even in a down market including trough levels. We expect this segment to reach $500 million in EBITDA both this year and next year. Certainly versus our US-centric peers, the value of our International franchise sets Nabors apart.

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. The voluntary reorganization process is progressing. At this point, we remain an interested observer in the process.

Second, Nabors balance sheet and liquidity. We are still anticipating net debt neutral or better performance for the full year. This forward look even incorporates accelerating expenses relating to rig reactivations.

Third, the market reception of our new M800 rig is certainly encouraging. The M800 is one portion of our technology development. We expect to introduce other innovations in the very near term. This concludes my comments. William will now review the quarter's financial results in more detail and provide additional thoughts on the outlook.

Good morning and thanks for joining us today. Before discussing our financial results in detail, I would like to make some general comments.

Our third-quarter performance clearly exhibited some of the trends we have communicated earlier in the year. First, I would say in International business was strong cash generation. We continue to see sustained strength in the Middle East and have benefited from improvements in certain Latin American markets.

Second, a fairly strong rig count rebound in the Lower 48 market, in fact, stronger than we anticipated. Nabors has gained market share during this recent recovery, mainly with it highest specification drilling rigs. We have experienced very high demand for our X rigs and the recently introduced M800 rigs, as well. Essentially all of our rigs in those two classes are either on revenue or committed to start working by early December.

Until now, our Lower 48 improvement has been mostly based on volume, as spot pricing for high spec rigs has only improved by about $2,000 per day from our low point. More rigs continue to return to work at current day rates which are below our average revenue per day. As these new lower price contracts are signed and peak term contracts continue to expire, we have experienced and will continue to experience lower average daily margins for our fleet. Absent significant pricing increases, this trend of falling margins will continue to run its course during the next few quarters.

Finally, focus on cost and liquidity throughout all levels of our Company continue to pay off. Despite adding 4.4 average rigs in the quarter, our direct costs fell by $35 million versus Q2. Our daily drilling margin in the Lower 48 fell by less than we had anticipated. SG&A was stable. CapEx remained under control, and net debt remained at essentially the same level.

Now to our results. Third quarter net income from continuing operations attributable to Nabors was a loss of $99 million, or $0.35 per share, as compared to a loss of $184 million, or $0.65 per share during the second quarter. The second quarter losses included charges of $80 million after tax, or $0.29 per share related to C&J. Also included in the second quarter earnings were $16 million after tax, or $0.05 per share, from impairments and previously sold businesses.

Revenue from operations for the third quarter was $520 million, as compared to $572 million in the prior quarter. Excluding exceptional items in both quarters, revenue decreased by $21 million, or 4% sequentially, primarily reflecting lower rig count in Mexico and a seasonal reduction in Alaska, despite higher volumes in the Lower 48 and Canada drilling, as well as increased third-party shipments in our rig component and parts business.

US drilling revenue fell by 17%, to $116 million, reflecting essentially prior quarter additional revenue of $21 million for the Mach-400 rig in the Gulf of Mexico and a $4.2 million in early termination payments for the Lower 48. There was no early termination revenue in the third quarter. Excluding early termination payment, the Lower 48 revenue increased by [7]%. This improvement more than offset the seasonal activity reduction in Alaska.

International revenue was $364 million, a 9% decline. In the third quarter, the International segment benefited from $8.4 million of revenue related to the recovery of price increases in Mexico and $3.8 million from a business interruption insurance claim in Yemen. The second quarter included early termination revenue of $10 million in Kazakhstan and $9 million in nonrecurring revenue from the conclusion of negotiations in Angola. Excluding those one-time items, International revenue was impacted on a sequential basis from the idling of our three rigs in Mexico, higher downtime in various locations, and lower demobilization revenues.

Rig services revenue turned up in the third quarter, reaching $59 million, for a 50% sequential increase. The segment benefited primarily from an increase in sales of rig components and spare parts, although more than half of the sales were internal. Finally, Canada revenue jumped by 58%, to $10.4 million, reflecting a seasonal improvement in rig count.

Our reported operating income declined to a loss of $72 million from a loss of $53 million in the second quarter. However, the third quarter loss included $12 million of one-time operational gains, while the second quarter included $30 million of one-time gains. Adjusted EBITDA for the quarter was $149 million, as compared to $156 million in the second quarter. The previously mentioned one-time operational items in the third quarter accounted for $12 million, as compared to $35 million in the second quarter.

Notwithstanding the lower rig count, International adjusted EBITDA declined by less than $2 million, primarily due to slightly higher than anticipated margins. US drilling adjusted EBITDA of $37 million declined by $16 million, reflecting the absence of prior quarter items, namely $12 million related to the start of the [MAS] 400 contract and $4 million for early termination payments. Canada was essentially flat.

Rig services performance improved, mainly due to the better contribution from Canrig. Adjusted EBITDA for these businesses, with their heavy US concentration, improved by $6.1 million, for a loss of $4.3 million. Other income and expense included $7.6 million in charges, reflecting losses from fixed asset retirement and losses in certain of our financial investments that we have chosen to recognize as other than temporary.

SG&A for the quarter was $64 million, including research and engineering, approximately flat versus the prior quarter. On an annualized basis, we have reduced these cost categories by approximately $170 million, or 40% over the last two years. We'll keep SG&A as an area of focus during 2017.

Let me turn to the key performance metrics from the third quarter. First, the US drilling business. Our Lower 48 average rigs in revenue, including working rigs and rigs tagged on revenue, increased to 50 for the quarter, a 13% increase over the prior quarter. Our rigs actually working stood at 53 at the end of the third quarter, as compared to 41 at the end of the second quarter. [Firm] working rig count is 58, as compared to 35 at our low point in April of this year, which translates to a 66% increase since our trough. Three more rigs are currently stacked on revenue.

Increases in rig count have been widely based geographically and have reflected our customers' preference for our highest specification rig. X rig utilization is 84% currently, with the remaining seven rigs committed to start work by early December. All of our M800 rigs are either working or committed. Once our upgrade program is finalized, we expect to have 100 highest spec rig available by mid year 2017.

Daily gross margin in the Lower 48 declined to approximately $6,200 from $7,900 in Q2. The second quarter included early termination revenue of approximately $1,000 per day. Excluding the prior quarter termination revenue, average revenue per day held up better than we expected.

In our International segment, third-quarter rig count averaged 97, down from 101 in the second quarter. The drop was comprised entirely of drilling rigs and was primarily in Mexico. Average daily cash margin in the International business increased by over $200 to $18,400.

Net debt, defined as total debt less cash and short-term investments, remain at $3.3 billion. During the quarter, we repaid $339 million of maturing senior notes with a combination of a draw on the revolving credit facility and cash on hand. We still ended the quarter with over $1.9 million of capacity undrawn on the revolving credit facility. The third quarter also included $19 million in interest expense. Almost all of our interest payments are concentrated in the first and third quarters.

Finally, CapEx for the third quarter was $90 million. Year-to-date, our CapEx stands at $267 million. For all of 2016, we still expect CapEx in the range of $450 million.

Looking to the future, although we have experienced improvement in rig count in the Lower 48 and expect additional increases through the end of the year, material day rate improvement in North America remains unlikely through the end of 2016 and a substantial portion of 2017. Absent any oil prices surprises, we expect to average over 60 rigs in the fourth quarter and expect to exit the year at 70 rigs in revenue. Average margins are expected to deteriorate by $1,000 per day, as our average revenue per day continues to erode.

Our international rig count should hold steady or fall slightly through the end of the year, depending on the price of oil. With a potential reduction in drilling rig activity coupled with the absence of the third quarter favorable items, we would anticipate our International margin to fall below $17,000 per day.

Alaska should benefit from the start of the new CDR3 rig, while Canada is expected to continue to benefit from the seasonal upturn. And finally, our rig services business appears to have bottomed, with Canrig's external sales recovering and drilling solutions firming up.

We have been successful in converting the high levels of customer interest in our rigs earlier this year into contracts and deployments. This is clear evidence of an improving environment and bolsters our belief that we are much closer to a sustainable material recovery in activity across the globe. However, any recovery would be highly dependent upon oil prices.

We remain cautious and we retain our focus on liquidity. This means we will continue to target positive free cash flow for the remainder of the year and a stable net debt balance through cost and CapEx control. With that, I'll 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 has increased noticeably since the bottom in the second quarter. In the International business, we still expect our rig count declines to stabilize after the year-end and to begin moving upward by mid year.

I want to note two things. First, we expect leading edge rig margins, especially in the US, to remain weak through year-end. Current spot day rates are materially lower than those in our term contracts. As we add rigs at today's rates, that puts more pressure on margins. In this environment, it is important to place rigs into the market as contributors to cash flow and stay on short-term contract duration. This preserves our opportunity to increase prices in the near future, if utilization warrants.

Second, since the recovery began, we have seen the direct impact which oil prices and lower costs have on rig activity. We are encouraged by the increase in activity to date and ultimately, those factors will determine how far the rig market will advance. We think 2017 is set up as a transition year to a more positive environment. We are already seeing clear signs which support our view.

All through the downturn and up to the present, we have pursued our technology initiatives, most notably the M800 rig. There is more to come and even at this point in the cycle, we continue to find new ways to streamline our organization and to optimize our cost structure. Our 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.

Great. Good morning, guys. So Tony, if we could start with International, given that the markets are still challenged, challenging, thoughts on the ability to recover price concessions going into 2017? And is it fair to think that EBITDA in International won't bottom until maybe Q1 of 2017 and then start to ramp up in the back half of 2017?

Well, as indicated in the remarks, in the fourth quarter we see a 5% to 10% reduction in EBITDA. Looking at the first quarter next year, we think looking forward to relative stability. And I think there is a prospect, as we said before, that most of our, almost all our rate relief cases expire at the end of the year and we'll be trying to recapture a bunch of those at the beginning of the year. So I think the way we see it right now.

Angie, by the way, we have recovered in a couple of places, Mexico and partially in Argentina, as well. So there is some foundation for optimism there, because some clients have been willing to give back those price discounts.

Okay. Okay. Helpful. And then maybe you could talk a little bit about what you're seeing in spot pricing in the US. You mentioned some upward pressure for the top end rigs. Talk about what you're seeing here in Q4 going into 2017 on the spot price.

Sure. I'm not going to discuss specific rates on this call. What I can tell you is that we're seeing pricing move up, especially for our higher performance rigs. There's still a lot of variability in contract terms, so rates you hear are not necessarily comparable, even for rigs that are same class. But I want to be clear, rates are moving up. And in fact, in our case, I would say what's really going on is as contracts expire, we're starting to see, we're on a path to convergence of our average day rate in our portfolio to the spot market. We're not there yet, but we're on that path.

Okay. Great. Thanks, guys. I'll turn it over.

Marshall Adkins, Raymond James.

Good morning, guys. Tony, it seems like in this upturn we've seen over the past few months, you guys have gained share faster than everyone else. Can you give me some color as to why you think that's happening? Is it pricing? Is it technology offering? Or is it a certain type of rig you have, others? Help me understand why you all seem to be gaining share over the past few months.

I think the feedback we're getting from customers is the [fear] of the new neighbors. I think they see our commitment to technology and our commitment to execution and performance. And I think these are some themes that we'll bring up at the analyst day. And I think there's been a lot of talk in the past couple years about rigs and what good rigs are, what they aren't. But the fact is just look at our utilization on the X rigs today, and we'll go into what really pad optimal really means.

But I think what you're seeing is the sign post that says people are really resonating now our message on what really the rig has to have, in terms of components. And I think people are also resonating with our commitment to performance. We have a huge internal commitment about the KPIs and beat our own performance, et cetera. And I think that last call, I announced we have some record scores. Of course, every contractor always has records on a well-off basis, but this is now part of our culture. And I think the contractors are starting to favorably, the operators are starting to favorably react to it.

We'll look forward to seeing that during the analyst day. Address labor concerns. I know early in the upturn, labor's probably easy. Do you see that as a potential bottleneck or -- and it seems like we always work through that pretty easily. But I just want to get your feeling on how big of a deal labor issues are as we ramp back up activity next year?

Sure. I think I talked about this on the last call, as well. I think during this downturn, we made some special steps to address labor to make sure we retained the best people in our labor force. The interesting thing about this downturn is, because it was so deep, it actually cut into people that are really committed to the sector, as opposed to people at the margin. And so there's still a bunch of those people on the sidelines, and we've been able to handle the upturn very well from just our own former hires out of the bench, and that's not exhausted. So we don't see really a problem in the medium term here adding people. And we also are embarked on a bunch of training issues with the concept of new rigs and new technology, you have to really adapt to that. So we're making a commitment to really train these people up, so when they hit the ground running earlier than prior in downturns, which I think the operators are more responsive to, as well. So all in all, of course, as the duration lasts longer, the likelihood of people returning dissipates. But right now, I think we're handling it pretty well.

Thank you all.

Scott Gruber, Citi.

Yes, good morning. Tony, a question on the new build program. You continue to secure contracts, which is great to see. Is there a plan after you get to the 100 high stake rig count mark? Do you dial back this spec new build program at that time and wait for contracts to back new builds, or do you assess the spot market at that time and general market dynamics and make a call? How are you thinking about what happens once you get to 100 high spec rigs?

Well, I think the 100 builds that we're talking about is actually enhancing what we have today. Obviously, we can dial that back if we see things reversing very quickly. The cost of that is not going to be really very enormous at all. A lot of the rigs are zero, because some of them well equipped already with all the stuff that they need. Others are at $1 million up to maybe $3 million, with an average of $2 million. So the overall number is not really that substantial to us. In terms of new builds, I think new builds will depend on where the market does play out. We're not drilling down on a brand-new, new build program on top of the 100 yet, and we'll adjust those as events develop.

And a quick one for William. Can you provide any color, an early read on CapEx for next year?

Sure. I think we're smack in the middle of our CapEx process, our budget process right now. So take this number as a very preliminary, but we are thinking of keeping the CapEx around the $0.5 billion mark next year.

Okay. Thank you.

Sean Meacham, JPMorgan.

Good morning.

Good morning

Just to follow up on the upgrades that you're planning, it sounds like you're getting, in terms of the plan will be to tie these upgrades to contracts or the customers specifically, would that be the case? Or is your feeling that it makes sense to basically upgrade these through mid 2017, irrespective of the exact cadence of demand?

I think it's really a prospect of increased utilization in the marketplace. So that specific contract for these upgrades, because we think that they will make the rigs the best-in-class in the marketplace. Going back to my question with Marshall, I think the PACE-X, a PACE-X rig is a walking rig day one. It has high pressure pumping. It has four engines. It's wired for four engines to just drop the third engine in. It's capable of free mud pumps. All that stuff is in there. So it's not a big stretch to round it out. And so similarly, we have other rigs, as well, non-X rigs that we can get that upgrade at pretty reasonable cost. So assuming the market cooperates and we see the trend continuing, we'll do that in the a new ordinary course over the next six months without necessarily marking it to a specific contract. Obviously, if we don't start maintaining utilization of the fleet, we'll slow it down. But right now, our plan is to do that and then deliver a page over the next six months.

Got it. That makes sense. And then if you think about, you talk about the market cooperating in an environment in which your peers are also likely to be continuing to upgrade rigs, in this case, we're talking about adding perhaps 50 rigs to your market in which the horizontal rig count is still, say, with a four handle. How do you run the risk of balancing, keeping that utilization high, pricing is getting better, but as we keep -- it seems like it's, for everyone, at least among the large drillers, the barrier to add incremental rigs in the near term seems pretty low. And so how do we walk that fine line in terms of balancing price and utilization?

That's always the trick in the sector. As you know, when you get to around 70% to 80% of utilization, that's when the hockey stick starts working on a pricing basis. And that's a ways off yet. But I think for us, the key is to get these in at competitive rates, prove up the value proposition to the customer, and then we have hot rigs in the market and we'll maximize our position. And I don't think for us it's a big bet and we have and installed base of rigs that will be the premium 100 pad optimal rigs in the marketplace. There's absolute conviction on that. And as I said before, the customer's reaction is such that I think that's endorsing it right now. So getting those rigs to be used, assuming there's no backtracking of the market overall dynamics right now, I'm very confident we're going to get those in the marketplace.

Fair enough. Thanks, Tony.

Robin Shoemaker, KeyBanc Capital Markets.

Thank you. Tony, I was wondering if you or Siggi could give us your view on Middle East rig demand, as it's shaping up for 2017. In terms of the pace of tendering activity, you did mention a Saudi tender that's either out there now or coming, and what about the other Middle Eastern countries and what does it all add up to, in your view, in terms of incremental rig demand for the coming year?

Okay. What I would say is that the tendering activity is robust. And so we indicated a couple of dozen in the Saudi arena, but it is more widespread than that. It applies to Middle East generally, Kuwait, Oman, UAE, for example, and [north of] North Africa and Eurasia. And overall, I would say number of Africa tenders is actually a multiple of what I just said in (inaudible) Saudi. In other words, it could be more than 50 active tenders in the marketplace. So it's a pretty robust marketplace right now. I'll ask Siggi if you have anything to add.

No. You hit it perfect, Tony.

Okay. So those rigs are of the PACE-X or M800 type of rigs or are there some more legacy rigs that are a big part of that package?

So it's a variety. First of all, I think the Saudi rigs, for example, largely are going to be high demand, high spec rate.

Tony, they're all bigger rigs than what you see in the US.

There could be an opportunity to take some existing rigs from the US in certain, there's a minor portion of that could be rigs that could be relocated out of the US, 1500 horsepowers. But that would be a minor portion of those rigs. Most of them are deep gas, high spec rigs.

Right. If I could ask one other quick question. A lot of service companies are talking about payment delays from customers beyond what is normal and an increasing problem with that, is that in any way affecting you, either in your international or US business?

[No.]

That was William. (Laughter) Was that succinct enough?

That's succinct. I like that answer. Thank you.

Mike Urban, Deutsche Bank.

Thanks. Good morning. So in the US, you pretty clearly highlighted the divergent trends in your margins, the leading edge coming down and relative to your average, where you're getting close to convergence. But presumably you're also getting some operating leverage, some fixed cost leverage. Where do you see those trend lines crossing? You've highlighted further average margin curation through year end. As we get into next year, is that where that line begins to cross over?

So with the contracts we have in hand, the current market and customer preferences, we think our Lower 48 margin bottom at around $5,000. And as I said, I think we are on the move to convergence. Our rig count, last quarter our average was about 50. I think we have visibility right now to almost about a 20% to 25% increase in average rig count. And so with those two numbers, I think basically we think results will, in the fourth quarter will be about the same as the third quarter in terms of EBITDA. In other words, the increased utilization that we have visibility on right now, combined with where we're at, we think might put us around the same for the third quarter. And then as we go into the first quarter, obviously, then that utilization really kicks in. And I think at the end of the fourth quarter, I think we'll be up even more than that average number I just talked about for the fourth quarter. I think ours will actually be even higher. So as we go into the first quarter of next year, I think then we'll start to see that improvement.

Got you. And again, trying to disaggregate the various trends in contracts versus leading edge and what have you, you've had a pretty significant focus on adding content on and around the rigs, whether that's software services, equipment, whatever the case may be, do you have any metrics on where those numbers have gone relative to last year, relative to earlier this year, or even anecdotally? Again, recognizing there's changes in pricing and day rate, so just trying to see with that trend is and how much success you're having on that initiative

I'm not going to go into that in detail on this call. I will say that some service on nearly every working rig of the five or six services we have. And on some rigs, we're running two or more, about on 70% of the rigs. And obviously, we're in the start-up phase and that's why you're not seeing visibility on the numbers yet. But we think we have a plan that we'll be talking about at some point to explain what that penetration levels are and what the economics would be.

So you'll see more of that on the analyst day.

I guess we'll just have to wait another couple weeks. That's all for me. Thank you.

Marc Bianchi, Cowen.

Thank you. First, would just like to clarify something that you guys talked about for International in the third quarter. William, you mentioned a few of the one-timers that affected EBITDA. Is the total of those one-time EBITDA adjustments $12 million or do I have that wrong?

In the third quarter.

Yes. Okay. So $12 million in the third and unassumed for the fourth, correct?

Smaller number than that in the fourth, yes.

Okay. But there are some assumed in that 5% to 10% decline guidance that you offered.

Usually, yes, but not to that level, not close to that $12 million level.

Got it. Okay. And then one other comment that I just wanted to clarify, I think, Tony, you mentioned about $500 million of EBITDA for International next year. Did I hear that right? And if so, that would imply a deterioration from the fourth quarter level, just want to make sure that I heard that right.

I didn't say about, I said at least.

At least $500 million, okay. So it's kind of a floor, as the way you guys are thinking about it.

That's the way we're thinking about it, anyway. So everyone's just giving me a look. But yes, that's the way we're thinking about it.

Okay. Fair enough. Okay. Great. Just one unrelated, on the upgrade program, how much are you thinking about in terms of the CapEx associated just with the upgrades? I think it's 50 rigs, right?

Yes. Hang on one second here. Right. So yes, as I said before, I think the amounts vary by rig. Some rigs, it's marginal, some rigs, it's $1 million. And it depends on certain rigs could be as much as $3 million. So on average, I think we're talking about on the order of magnitude of $100 million, $125 million. Some of that will be incurred this year and the balance next year. So it's relatively modest.

Great. Thanks so much. I'll turn it back.

Ole Slorer, Morgan Stanley.

Thank you very much. So Tony, could you remind us a little bit again about your utilization levels and that of your peers, for that matter, when it comes to the universal, the Lower 48 rigs that are capable of moving freely on pads and drilling some of these more complicated wells where the industry seems to be going. You said you were 80% utilized. One of your smaller peers reported this morning, said they're 92% utilized. We've heard other competitors talked about their comparable [rigging] classes being more or less fully booked at this point. So can you talk a little bit about -- so clearly you know how to add capital in order to add more high-end rigs. And how do you measure that capital allocation decision up against these Middle East opportunities, for example, 50 rigs which are in markets that historically have given very good returns on new rigs?

So first all, for utilization percentage right now is 86% on those premium crest rigs that you mentioned. That's where we are. Number two, I think yes, we always have an issue of allocating capital between, what we try to do is allocate to the best opportunities, but also try to measure where those opportunities can be over the next couple of years. So we don't just totally swing it to one market versus the other. So we do have, we try to choose the best opportunities in international, as well as Lower 48, as we address them.

So the bottom line is, I think we will be keen to pursue some of these international opportunities, and the CapEx number that William gave you is a number that could be revisited if we were wildly successful there, but we would be prepared to that with international. On the US side, as I said, until we see the day rates in the lower 20s with at least operational entity of some long enough term to make it make sense, we don't see gearing up for new rigs on a big new build program in the US right now.

Just to expand on what Tony said, and the M rigs and the X rigs are basically all gone. We can't market anymore. We're done. They're done through year-end, basically

Yes, and therefore I'm a little surprised that you say that pricing is kind of leveling off, because I presume they're not yet at a level that justifies full new building economics. I do realize that you can put some spare parts together and make some more rigs, but I'm trying to understand what it would take in terms of rates, response, for the industry to meaningfully add the kind of capacity that we all think they will add.

Right. I think as I just said, if the rates get into the low 20s, then that dynamic that you just referred to becomes actionable, and that's what we will do.

And how far away from that do you think we are? Are you having conversations now on new rigs that could potentially be assigned at those type of levels?

I'm not going to go there. No way.

I realize the sensitivity, I want to try it. Let me change the subject completely. You gave us a comment about C&J. You remain, I think, an interested observer. It was in your prepared remarks. Can you elaborate a little bit on what you mean by that? Isn't that a done deal and you lost all your equity?

I think the equity is wherever we are on the bankruptcy court and we're just following, we're a participant in the process right now. So the fate of the equity is still an issue that's open with the bankruptcy court. Obviously, the lenders have put forth a confirmation plan which does provide something to the equity, which is not really substantial. The market has changed and we'll see what happens in the bankruptcy court. That's all I'm saying.

There was an OPEC meeting in the meanwhile and things seem to be moved up quite a bit. So am I to understand that you have not completely given up on negotiating a better deal?

I think we can assume is I'm always looking out for the interests of Nabors shareholders, whatever that's going to be.

Okay. Good to hear. Thank you very much.

Operator, we're about five minutes from one hour, so we'll take one more question, please.

Yes, sir. Jim Wicklund, Credit Suisse.

Better late than never, guys. Thank you.

Thank you, Jim.

I hung on to the very end. You talk about the utilization of your top tier, super tier 1 rigs. What is your utilization of your total Lower 48 rig fleet?

Around 30%.

30%, okay. I think it's amazing that rig margins can bottom at $5,000 above cash costs in the current market. And I just wonder, is you guys have done a good job of returning older rigs, but doesn't that mean the smaller companies just about have to go away completely for us to really see the day rate improvement that we hope and expect to see? Or is the market so dramatically bifurcated that those rigs are now just moot?

I think when you look at a technology curve in general, you always see there's the right end of the curve, which is called the laggards, which is like that 15%. So I think there's always going to be that part of the market that doesn't come along, which will be relegated to the smaller E&P companies or private companies with smaller legacy rig guys. That's the guys that are going to be hanging out in that arena. I think that honestly, their economics be under pressure, but they just don't die, they kind of just drift along. So I do see that kind of bifurcation existing, yes.

And do you buy the argument that because so many of the premium rigs are owned by just four or five or six companies, that pricing discipline is better this cycle than it's been in the past?

No. I mean, pricing is always supply and demand. And the notion that there's an oligopoly or something that's going to really affect pricing, I don't think is helpful. I don't believe it. And they're happy. Because I always have confidence in the operator's ability or the customer's ability to create new opportunities or the market to create new supply, just like on the oil price. So I'm not going to sit here and make that argument.

What I can say is I think relative to everybody else, I think what we've been working on is to make sure our relative position is as strong as possible, which is why we're really investing in the rig technology and the rig platform. And the performance issues I spoke about earlier, that's our strategy to deal with that. And we think what we've got to do is improve the value proposition to the customer to get a greater share of that pocketbook. And that's what we're working on. The other thing, if it happens, that's just a bonus. For those that believe that, that's just a bonus. But that's not part of my strategy here.

The oligopoly part's never really held water in past cycles, but every cycle we revive it. If I could, one last follow-up, guys. Mexico, you put a couple of rigs back to work. Are these projects new concessions that have come out of the realignment of Mexico or are these just rigs going back on older legacy projects?

I'll let Siggi answer.

Those rigs are going back on older projects. The combined knowledge, some of the new bids that are going on have not been awarded yet. So there's nothing new going on yet.

Okay, guys. Thank you very much. Appreciate for letting me on.

And that will wrap up our call. Thank everybody for participating, and if you would close it out for us, Dan.

Yes, sir. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.