Nabors Industries Ltd (NBR) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Nabors Second Quarter Earnings Conference Call. (Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Denny Smith, Vice President of Corporate Development. Please go ahead.

Good morning, everyone, and thank you for joining Nabors' second quarter earnings teleconference. 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're available as a download within the webcast; alternatively, you can download the slides from the Investor Relations section of nabors.com under the sub-menu Events Calendar, or you will find them listed as supporting materials under the conference call listing. Instructions for the replay are posted there as well, under Teleconference Information.

With us today in addition to Tony, William and myself are Siggi Meissner, President of Worldwide Drilling Organization; 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 include our forward expectations, they may constitute forward-looking statements within the meaning of the Securities and Exchange Acts of 1933 and 1934. Such forward-looking statements are subject to certain risk and uncertainties as disclosed by Nabors from time to time in our 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. All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word "adjusted" or otherwise, mean adjusted EBITDA as that term is defined on our website and in our earnings release. 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 to begin.

Good morning, everyone. Welcome to the call. We appreciate your participation as we review our operations for the second quarter of 2017 and our view of the market, going forward. William will follow with a review of our financial results. I will then wrap up, and we will take your questions.

Before getting into the quarter's results, I would like to make some comments regarding our technology initiatives. As we outlined last November at our Investor Day, Nabors' vision is to be the performance driller of choice. To this end we are building the most capable, fit-for-purpose rigs and integrating them with the latest automated drilling technologies. Paired with our Nabors Drilling Solutions, or NDS, products and services, we believe we will have the ultimate solution for today's unconventional [well-] manufacturing industry.

There are three initiatives I would like to report on today. First, rig designs. Our SmartRigs continued to deliver strong performance, with 100% utilization. Our Pace-X800 rig was designed more than 4 years ago from the outset as super-spec. It is able to accommodate 3 7,500-psi mud pumps, 4 engines, multidirectional walking, and 25,000-foot racking capacity. It also features the side saddle, which optimizes batch drilling.

We had 2 new-build Pace-X800 rigs start on contract in the second quarter and 1 more this month. 2 of these 3 include a new revolutionary quads rig design. The benefits are listed in our accompanying earnings slide deck. Quad stands require fewer connections per well than triples, resulting in less time spent making and breaking connections. More importantly, building double casing stands offline reduces casing running time. The design also increases casing racking capacity for longer laterals.

These are probably the first mainstream land quad rigs in the industry. We are excited to be partnering with 2 premier clients in this effort and are pleased by the early results of these rigs. We look forward to seeing how the market responds to this capability.

We will also be placing into the market our new M1000 rig. Its features, also noted in the accompanying slide deck, include a 1-million-pound hook load and racking capacity for up to 30,000 feet of 5 7/8 drill pipe. The rig incorporates both a side saddle and hydraulically raised substructure, the first in the industry. It will be capable of meeting the demands of the most challenging laterals today. We have 1 going to work in the third quarter and 2 in the fourth quarter with a super major.

This quarter we also expect to go commercial with a new combination of performance software tools, which takes us one step closer to the vision of fully automated drilling. The first is Navigator. Similar to your Waze app, it computes the instructions needed to achieve your intended well path. This software provides a more accurate, productive well bore with additional transparency to the operator. In a heads-up competition, a large independent chose Navigator over multiple competing offerings in the marketplace.

The other product, which we believe is unique in the marketplace, is PILOT, which is part of our operating system and will automatically execute the Navigator instructions. This system doesn't just compute the well bore path; it also executes the drilling instructions.

Our goal with these products is to provide best-in-class, consistent, and repeatable execution of directional drilling paths.

We also had some excellent test results on our rotary steerable tool. We are on track and targeting customer deployment around the beginning of the year with that new tool.

Finally, we expect our iRacker automated tubular handling system to commence field trials in the next few months. The system will offer a fully automated rig floor for pipe handling and casing. The goal is to achieve top-decile performance predictably and consistently. Another benefit is increased safety on the rig floor.

Now let me turn to this quarter's results. This quarter's results reflect a substantial improvement over the previous quarter. We restored adjusted EBITDA growth in each of our segments, other than the anticipated exception of Canada related to seasonal effects.

As signaled on our last call, we addressed the exceptional items that impacted the first quarter. In the US, we reversed the trend in daily margins with improved pricing and cost reductions.

Internationally, we recovered from the impact of mass certification in our largest market, and we added rigs internationally for the first time since the first quarter of 2015, increasing our quarterly average rig count by 3. We also restored International margin levels with an over-$2,000 a day increase.

Finally, our Rig Services segment swung from negative adjusted EBITDA to a significant positive contribution. This was driven primarily by NDS but was also supported by improvement in our Canrig manufacturing subsidiary to near break-even levels.

Finally, our Canadian operation, though beset by the seasonal effects, logged 3x the rig days as the same quarter last year.

Our people have worked hard to build customer trust, execute at the highest level and implement new technologies. The activity growth we have seen in the last 12 months, particularly in the US, likely will not continue at the same pace. However, I am confident in the trajectory of each of our business units and of Nabors as a whole.

Now let's turn to our financial results. In the second quarter Nabors generated adjusted EBITDA of $139 million on revenue of $631 million. This performance compares to $100 million and $563 million, respectively, in the first quarter. Revenues increased across all segments, with the exception of Canada.

Our revenue growth reflects several positive trends: first, a sustained increase in the North American rig count, along with higher realized spot market rates; next, the addition of 3 international rigs with solid margins, along with rigs returning to drilling operations from recertification work in Saudi Arabia; and finally, further growth in our NDS business, with a boost from margin improvement in our directional drilling services.

We have now increased revenues for 3 consecutive quarters for the first time in over 5 years. We expect this trend to continue through at least the remainder of the year.

Nabors' worldwide rig activity increased to 206 average rigs on revenue in the second quarter, from 201 rigs in the first quarter. The activity increase took place principally in the Lower 48 and International, more than offsetting seasonal declines in Canada.

For the full quarter, our average rig count in the Lower 48 increased sequentially by 15%, or just over 12 rigs. This rate of growth has moderated as compared to that achieved in the last few quarters. Nonetheless, as planned, all of our existing SmartRigs are currently on contracts. And in addition our newbuilds as well as our upgraded rigs have all immediately commenced work upon deployment or completion of their enhancement projects.

We expect that we will continue to add rigs on a quarterly average basis in the Lower 48 through the year. We currently have 102 rigs working, versus the 95 average for the second quarter. We also have additional rigs contracted or committed that are currently under construction or in the yard for upgrades. However, we expect the pace of growth will continue to moderate, driven by the slower growth for the Lower 48 market as a whole. We continue executing on our upgrade program, although we expect to defer upgrades on a handful of rigs in the north.

In our International segment, the net average working rig count increased by 3 rigs in the second quarter, to 93 rigs. We added a rig each in Algeria, Argentina, Kuwait and Mexico, offset by the loss of a rig in Ecuador. We exited the quarter with 93 rigs working internationally.

Our Canadian segment held up much better than expected, given seasonal factors. We had over 12 average rigs working there in the second quarter, versus the 4 average rigs working in the second quarter of last year. We are pleased by the customer demand and pricing traction that is emerging.

Now let me drill down a bit further into each of our business segments. Turning to the US, financial results in the US drilling segment improved both in terms of activity and margin growth. In the Lower 48, our quarterly rig count improved to 95 average rigs working, from 83 in the first quarter. Average daily rig margin increased by a little more than $600. Fewer rig reactivations, along with rigs rolling to higher spot rates, were the primary drivers of this increase.

Our rig count today of 102 rigs includes 3 SCR and 12 smaller AC rigs. The $600-plus per day margin improvement in the Lower 48 this quarter is a movement in the right direction. Our focus remains on driving this number higher through the year.

On the revenue side, we are rolling rigs on spot or short-term contracts to higher rates. The current spot rate for our SmartRigs can vary by region. Generally, in Texas this number is close to $20,000 a day, while in the north it may be up to $1,500 lower.

However, many of our SmartRigs are still working at day rates below these. Contracts for around 80% of our Lower 48 rigs will roll over the remainder of 2017. We anticipate our revenue per day will continue to improve as more SmartRigs roll to higher spot rates and more balanced contractual provisions take hold.

We again surveyed our larger Lower 48 customers earlier this month. These operators represent nearly a third of the total rig count. Of those, nearly a third have plans to add rigs between now and the end of the year, and about 15% indicated a likely reduction in their rig counts. Netting out the moving parts, the feedback from these customers indicates a Lower 48 rig count that moves higher by about another 30 to 40 rigs from today in the second half of the year.

The one caveat I would add to our survey is that the smaller private operators who may be more tied to cash flow may not be adding rigs at the same pro rata pace as these larger clients. But we remain confident that the market demand will be sufficiently strong to absorb the fleet of SmartRigs to be fully deployed by year-end, along with 10 to 20 legacy rigs.

As far as the pace of our rig activity growth in the Lower 48, we currently expect to add approximately 8 to 10 rigs in the third quarter and a similar number in the fourth.

While $50 a barrel seemed to be the key go-no go point earlier in this year, it is clear that the high-$40 range works for activity in a number of basins. Until we get more clarity on our clients' next budget cycle, it is difficult to offer a 2018 forecast with any conviction. I would say, though, that the increasing sophistication of today's wells in the Lower 48 continues to generate increased demand for both our highly automated [pad-optimal] SmartRigs and our NDS technology.

Lowering expenses was a primary focus and made up most of the margin improvement this quarter. A slower pace of readditions from that of the fourth and first quarters helped this effort. We are seeing some labor cost increases in tight markets such as the Permian. However, we are generally able to share these increases with the operator. We have also made additional progress in continuing to lower R&M costs. Finally, our working fleet continues to grow, and we will more easily absorb the reactivation costs for future quarters as well as field-level fixed costs.

Financial results in our International segment were restored to a level above the fourth quarter after recertification issues affected the first quarter results. This is due primarily to recovering from the material down time and extra expense in our largest international market and to adding a net 3 incremental working rigs.

Reported daily margin in our International segment increased by approximately $2,300, again due primarily to the conclusion of those rigs, coupled with an overall positive mix effect from added rigs.

As I mentioned, we do not currently foresee net rig additions in the third quarter, which will make it difficult to improve on our second quarter results in this segment. We are striving to repeat the high level of operational performance that we executed in the second quarter, but it would be premature to guide to that assumption. However, the second quarter provided a clear demonstration of why this segment is such a critical differentiator for us.

We now anticipate a steady International rig count for the third quarter. For example, Mexico is an area where we had high hopes earlier in the year after resuming work with 2 offshore platforms in the first quarter. At sub-$50 oil prices, however, budget constraints limit further growth opportunities there. Later in the year, we do expect additional growth, most notably in Algeria and Russia, along with 2 platform rig startups in India.

A handful of opportunities in various countries suggests we could end the year around the 100-rig level. The larger Middle East tenders we are excited about should be a key driver of 2018 growth.

Finally, our drilling JV with Saudi Aramco -- officially named [SauNad], or Saudi Aramco Nabors Drilling -- is expected to start operations within the upcoming 3 months. Both Nabors and Aramco want to ensure the start of operations is seamless in terms of rig performance but also, more importantly, for all employees joining the workforce. We continue to be excited about the potential to optimize how wells are drilled in the Kingdom together with Aramco.

Now turning to Canada, Canadian activity and margins again both came in well above our expectations. Major operators are increasing their Canadian activity while many of the efficiency gains we are seeing in the Lower 48 are benefiting Canadian drilling, too. We expect post-breakup drilling plans to continue this upward trend. In fact, we see our average rig counts for the remaining 2 quarters to be substantially above those of 2016.

The Montney shale is prolific at low cost, and many of our Canadian rigs are well suited for this basin. Our fleet composition is weighted more towards the larger rigs versus super-singles. We are capitalizing on these trends by upgrading 5 of our less capable rigs to triples, as previously announced.

Turning to our Rig Services segment, revenues here grew by 30% in the second quarter, to $93 million. Within Rig Services, NDS achieved several important milestones this quarter. First, the quarterly adjusted EBITDA number of $7.6 million represented a 159% increase over last quarter's number. This success supports our target of an annualized $50 million EBITDA run rate by the fourth quarter of this year.

Adjusted EBITDA growth was the result of several factors. First, we continued to make further gains in sales and market penetration across many of our NDS products. Our doubling of margin to $1,000 a rig day in the US was driven by both cost improvements, to a higher volume of jobs, along with adjusting our revenue model in light of the success of our products.

Directional drilling is the leading example of this success. Its gross margin contribution rose by over $2.5 million quarter-on-quarter. We expect directional drilling contribution to grow through the year.

We have recently achieved some key operational milestones that we anticipate will drive NDS earnings higher in the near future. First, we received qualification for well bore placement in the critical Saudi Arabia market. We expect this market will be the next big driver of NDS growth beyond the Lower 48.

First, additional directional drilling tools are arriving and being put to work every month. Today we have about 20% directional drilling penetration on Nabors rigs. By the end of the year we expect to have enough directional drilling tools to execute jobs on 44 rigs, up from 27 today.

NDS has tremendous operating leverage potential. The Saudi qualifications and the upcoming advances in rotary steerable technology gives us confidence in our $50 million EBITDA run rate target by the end of this year and also in our $200 million to $250 million target for 2020.

Canrig sales are also increasing. Sales of top drives, catwalks, wrenches and drawworks all moved higher in the second quarter. We expect Canrig to contribute positive EBITDA next quarter and thereafter as deferred maintenance spending continues to materialize in the drilling industry.

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

Good morning, and thank you for joining us today.

Net loss from continuing operations attributable to Nabors of $117 million represented a $31 million improvement over the first quarter. Second quarter loss per diluted share of $0.41 improved upon a $0.52 loss per share in the first quarter. Included in these second quarter numbers are approximately $7.3 million after taxes, or $0.03 per share, relating to premiums paid on debt repurchases and certain costs associated with the formation of the new joint venture in Saudi Arabia.

Revenue from operations for the second quarter was $631 million, as compared to $563 million in the prior quarter, a 12.2% improvement. US [earning] revenue increased by 15.7%, to $187 million, reflecting 15% more rigs in the Lower 48. Lower 48 revenue increased by 16.7%, as the higher volume was supplemented by an overall improvement in the average daily revenue of almost $120 per day.

An approximately $500 per day increase in average pricing reflecting better day rates and other contractual improvements was partially offset by a $380 per day reduction in reimbursable costs, which carry zero margin. Renewals and new contracts increased their average day rate as multiple rates were signed at spot rates exceeding the fleet average. We expect this trend to continue.

International revenue increased by 12.5%, to $380 million. This increase was driven by the reduction in down time following last quarter's recertification project in Saudi Arabia. We also added 3 net working rigs. Excluding the impact of the above down time, our International revenue grew by 8.6%.

Canada revenue was impacted by the typical seasonal breakup in the second quarter. Revenue declined by 38.4%, to $17.1 million, as rig count for the quarter fell from 22 rigs to 12. Revenue was over 2.5x what we achieved in the second quarter of 2016.

Rig Services revenue continued higher in the second quarter, reaching $93 million, a 30.2% sequential increase. This increase was driven by both Canrig and NDS. Canrig revenue of $61.2 million was up 38.8% from the first quarter's $44.1 million, with growth in both third-party and internal sales. NDS revenue reached $31.8 million, up from $27.4 million in the first quarter, a 16.3% increase. During the quarter we benefited from strong performance software sales on the higher overall rig count and also made some progress on our pricing.

Adjusted EBITDA for the quarter was $139 million, as compared to $100 million in the first quarter. With the seasonal exception of Canada, all other segments increased as compared to the first quarter.

The $11.2 million increase in the US primarily reflected an improvement in Lower 48 margins and activity. Lower 48 EBITDA rose by $9.8 million, with $3.6 million driven by an increase in the incremental rig count from an average of 83 working rigs to 95. Higher daily margins delivered an additional $6.2 million increase versus the prior quarter.

Drilling margins for the Lower 48 increased by just under $620 per day, to approximately $3,900. The improvement was driven by about $500 per day from more favorable pricing and another $120 from cost reductions primarily related to reactivation costs.

The International segment delivered the largest positive impact to our total adjusted EBITDA, with a $26 million increase to $135 million. $70 million of this total was related to the conclusion of the recertification program previously mentioned. The net addition of 3 working rigs across several markets also drove EBITDA higher.

In our previous call we stated our goal of increasing second quarter average daily rate margins back to at least where they were in the fourth quarter, which was $17,000 a day. We were able to exceed that target and reach almost $17,800 per day, bolstered in part by strong operational performance in various markets.

Canada EBITDA declined by $2.2 million, or 34%, to $4.2 million, driven by a 44% seasonal decline in rig count. Margins improved from just below $4,000 a day in the first quarter to $5,136. Our daily margins did benefit from a favorable rig mix and fewer rig moves during the quarter. As the spring breakup started, several clients kept our most capable rigs drilling in multi-well pads, translating into higher day rates and more efficiency.

Rig Services returned to a positive EBITDA contribution, from negative $2.1 million in the first quarter to positive $5.5 million in the second. NDS EBITDA increased 159% to $7.6 million for the quarter, compared to $2.9 million in the first quarter. Canrig also made good progress, getting very close to a positive EBITDA contribution in the second quarter, up $3 million from the first.

Now let me make a few comments on items affecting our liquidity and cash generation. CapEx for the second quarter was $136 million, down from $154 million in the first quarter. I continue to expect our CapEx for the year to land somewhere between $550 million and $600 million. As compared to 2016, our maintenance CapEx has increased in line with our rig count. We will closely monitor our activity and cash flow generation to take action on our CapEx if we need to.

Net debt for the second quarter ended at $3.5 billion, with an increase of $75 million during the quarter essentially for working capital increases. We expect working capital requirements to be less of a factor over the remainder of the year as activity becomes increasingly weighted to the North American markets where our DSO is significantly lower than in international markets.

As stated before, during 2017 we do not expect to materially reduce our debt. We target ending the year at current levels. Our longer-term forecasts continue to indicate very material cumulative cash flow generation in the period 2018 through 2020. Our free cash flow will be allocated to debt reduction until we reach our net debt target in the low-$2 billion range.

Finally, our $2 billion in available revolver capacity gives us significant flexibility to address our 2018 maturities, which currently stand at $465 million.

We continue to buy back our 2018 notes, with $200 million bought back during the quarter. We expect to use a combination of cash and our revolver to repay the 2018 remaining balance at maturity.

Looking ahead, with a continued tightness among Lower 48 high-spec rigs we are rolling many of our rigs at rates higher than the current contracts and expect to roll more to higher rates during the third quarter. Our latest spot contracts for high-spec rigs have been signed between $19,000 and $20,000 per day in the southern Lower 48 market and, generally, slightly below $19,000 per day in northern areas. We will continue to target further day rate increases over the coming months.

Given the current level of customer interest and existing commitments, we would expect to average close to 105 working rigs in the third quarter as more SmartRigs are delivered. As a reminder, we had 102 working rigs in the Lower 48 as of yesterday.

Lower 48 margins for the next quarter should end in the $4,200 to $4,400 a day range. We expect the improvement to come primarily from average day rate increases, coupled with further reductions in reactivation costs.

Our International rig count we believe has begun a gradual recovery. Although we expect to add a very limited number of net rigs during Q3, we expect to end the year around the 100-rig mark.

International daily margins will likely not match the second quarter's level, which was driven by exceptionally strong operating performance, but we expect our daily margins to gravitate towards their more normal level of $17,000 per day in the third quarter and beyond.

We are putting rigs back to work in Canada, and we stand at 15 rigs as of yesterday. We anticipate an average third quarter rig count in the mid- to high-teens, with margins in the mid- to high-$3,000s, impacted seasonally by the challenges of putting rigs back to work.

And finally, Rig Services should continue to improve, primarily from additional growth in both activity and margins in Nabors Drilling Solutions. These services will benefit from our higher rig count and increased market penetration, particularly in well bore placement and performance software. We are targeting an annualized run rate of $50 million in Q4, as compared to $30 million in the second quarter. Canrig revenue is also expected to increase materially as third-party product deliveries ramp up. For Canrig, we expect to deliver a positive EBITDA for the remainder of the year.

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. I am pleased with our second quarter results and the rebound we saw in many of our financial metrics.

Even more importantly, however, the second quarter marked major progress across a number of our key technology initiatives. First, we are rolling out our new quads upgrade on 2 of our Pace-X800 rigs, providing faster tripping time and the racking of casing stands. Next, we are commercializing a new combination of performance tools that automate and execute the optimal well path. Finally, we are now on the cusp of commercializing 3 exciting new technologies: the M1000 rig, our rotary steerable tool and the iRacker. Taken together with our existing platform of pad-optimal SmartRigs, we believe we can offer clients best-in-class well construction capabilities. These capabilities should sustain our ability to create value through our global rig platform in the volatile and dynamic oil market.

Finally, our NDS growth profile is on track with the plan laid out on our Investor Day, ambitious as it seemed then. These products are allowing customers to drill more efficiently, safely and consistently and earn a better return on their investment.

The combination of increased penetration, improved pricing, new product offerings, geographic expansion and operating leverage gives us confidence that there is still much room to run.

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

(Operator Instructions) Our first question comes from Byron Pope, with Tudor, Pickering, Holt.

With regard to the US Lower 48, the NDS strategy seems like it's certainly playing out the way that you guys talked about it last November. And so if I think about the 102 rigs that are working today, could you frame how many of those you're providing multiple services on? Just trying to get some order of magnitude there.

Sure. I would say virtually every rig has at least 1 service on and probably 60% have 2, something like that order of magnitude. And there's a whole suite of services still to get on each of those rigs. So the goal of course is to get 3 or 4 services working on each rig.

Okay. And then one quick question on the International side. Appreciate the Q3 guidance. As we think about some of the tenders that have been pushed out in the Middle East into next year, I would think that as those finally do start to come through that those would be accretive to the overall International segment daily margin. Is that a reasonable way to think about it once we do start to gain traction on the (inaudible)?

Absolutely, yes. I think the point to be made here is that unlike the US market or any other markets in the world, I think these Middle East tenders are typically, especially on the gas rates, asking for rates that don't exist today. So those rigs of course are going to require replacement-cost pricing to satisfy. So I think they will be highly accretive to existing margins today.

Our next question comes from Sean Meakim, with JP Morgan.

So, Tony, you made big strides on the adoption so far with NDS. Great to see that you're on track for the fourth quarter. As we look ahead into '18, I'm trying to get a sense for what are the potential gating items or things to be mindful of. So is it -- like, is it capacity as you try to roll out on the more rigs? Is it customer mix? Perhaps it's easier with kind of some of certain customers, and as you expand across your fleet that gets more challenging? What's the timing mix, sort of the timing on the Saudi market opportunities? Those are just some to mention things to talk about.

Sure. I think it's all of the above, Sean. You're trying to build a whole new sector here. I think the first thing is the mindset of the operator, to make him understand there's a different value proposition and a different path.

And there's a lot of resistance in the supply chain to these ideas that we're pitching, because we're actually asking them to break the model of how they actually look at these services. A lot of the services are disruptive in terms of the work flow of what we're doing on a rig floor, and to them that's a (inaudible).

So it's not only that we have to show that we have technically a good product, then we have to show then how it will help them, and then make sure that people don't get threatened by the product. For example, the directional drilling product that we're talking about today, how do you take advantage of the fact that most of the instructions, say, that people relied on they get from a directional driller sitting there also was a comfort factor to a company man on a rig site for other reasons. It may not be needed, because the software itself is going to generate instructions at least as good as what he's typically doing absent the singular events which, by the way, which are taken care of with our remote 24/7 operations center which is staffed by best-in-class directional drillers all the time.

So that kind of value proposition really disrupts a lot of things in the process. So there's a bunch of hurdles here to make this thing successful. And I think we probably have gone out a little too far making our plans pretty clear here what we're trying to do, but that's what we're trying to do.

In terms of Saudi, as we noted, we have been gated for well bore placement for MWD, and that's going to be the first thing. And we've also done some testing of the MPD and [NSD] trial products there, as well. So those will be the 2 areas that we'll be pushing in Saudi next year, as well.

Technology-wise I think we're pretty comfortable with the field trials that we have, that we have the right answers here. So it's obviously building scale, upping our manufacturing capacity to supply it, the service organization to back it up. But the marketing and getting customers to understand what we're trying to do and make them understand that there's something there for them, that it's really a unique proposition, that's probably our greatest challenge.

Got it. Okay. Thank you for all that detail. And I guess just one other follow-up inside of NDS, just thinking about any update on the Weatherford JV? And thinking beyond that, the Weatherford partnership, other types of partnerships that could be advantageous for Nabors longer term?

Well I think it's interesting about our industry. in general. I don't want to say we're a dinosaur industry, but unlike other industries, joint ventures or partnerships to move things along have not been nearly widespread nor successful to a large degree. Typically, the joint ventures typically end up in a couple of years one person buying out the other person. And so I think there needs to be a mindset change in the industry that you can be cooperating on some things and not necessarily -- and be competing on others to move us forward.

With respect to Weatherford, we've made some progress relating to the [launch] with Weatherford. We'll continue to work toward an overall commercial and technical framework. We have joint working teams identifying specific commercial opportunities in the US market today, and the teams have started working on the software integration to take what they have integrated to our control system. So that's what we're working on right now.

And it's right now mainly focused on managed pressure drilling, by the way.

Our next question is from Blake Hancock, with Howard Weil.

William, first on the International guidance, I just wanted to make sure we understood correctly. The 3Q margin you said probably goes below the kind of norm of $17,000, but 4Q should migrate back. Is that correct?

No. What I meant is if you look back over the years, our margins stay remarkably close to about $17,000 per day, absent some unusual [demoves] or items of that sort. So we believe that $17K is roughly a normalized margin. So that's what we were talking about of achieving in the third quarter.

In the second, we did have very, very good operational performance in multiple markets all at the same time. We had really no negative news anywhere. So that's what I was saying. $17,800 is a little bit higher than our average normalized. So we are saying we'd probably gravitate more towards $17,000, going forward.

Okay. Thank you. And then, Tony, as we think about kind of the US land business and the 80% that are rolling off, what's your appetite? Are we looking to secure more longer-term contracts or (inaudible)? And what kind of rates are we seeing? Or would you expect longer term versus kind of the spot market today?

Sure. Well with respect to pricing, the first comment I'd make is that it's (inaudible), and I don't want to get into any details on this call.

The second point I'd make is it's a pretty volatile issue, a topical issue, today. It's volatility not only in the commodity price, but it's volatility in the perception of the commodity price and where it's going. So there's a lot of noise in the system.

I would say, generally, we've seen pricing up to $20,000 in spot rates, particularly in East and West Texas and maybe up to $1,500 lower in the north. For term contracts, we're able to get into the low- to mid-$20,000 range. And so as -- those will be the guideposts as we move off -- 80% of our rates, I think as we mentioned, are up for renewal this year. And so, therefore, that's the environment that we'll be rolling into.

The other point I'd make is I think the average rate today is $18,500, which is a little lower than the spot rate is. So there's obviously potential for improvement in our margin, going forward, on that basis.

And the $18,400 includes about $1,500 worth of reimbursable revenues. In reality, the implied average day rate is about $17,000 per day in our fleet. So at the current spot rates that we're getting, you could see some quick appreciation, going forward, in terms of revenue per day.

Our next question is from Scott Gruber, with Citigroup.

William, you mentioned using cash and the revolver to pay off the (inaudible) '18 notes as they come due. But with crude back now around $50, is there a window opening up to refinance the notes? We just saw another SMid oil service company last night announce a private placement for notes. So I was curious to hear your thoughts on the potential to pivot back towards a refinancing.

And that's a pretty good question. I've tried to be pretty consistent with our shareholders on our plans, going forward. We do expect to generate a significant amount of cash over the next 3 years, and that cash is intended for debt reduction.

We have a pretty public target out there of where we want to take our debt. So that means we'll need lower debt in the future. So refinancing the $400 million, plus the $300 million that we have in 2019, and adding additional debt not only is a very negative NPV-type transaction, but then we would have to buy back those long-term bonds some time in the future.

So the idea is because we said the revolver could give us some flexibility in terms of refinancing these facilities and using our cash flow to pay down our debt, at this point we have no intentions of refinancing those $400 million, but rather just paying them down using cash and a portion of the revolver and then pay down the revolver as we go forward.

Got it. And I may have missed this during your prepared remarks, but what are your early thoughts on CapEx for next year? And if you could split out growth from maintenance, that would be great.

I think maintenance is somewhere in the range of $350 million, or so, I would think, at our level of activity. So right now because our clients are not well advanced on their plans for next year, it's difficult to know if we will have requirements internationally. In the US, we're pretty much done with a lot of the investment we've done. I wouldn't expect very material numbers in the US, besides maintenance CapEx and maybe finalizing some upgrades next year, but those are not big numbers. I think the uncertainty would be on the International side, given those tenders that were mentioned before. I would not expect to see CapEx higher than what we have this year.

Got it. And then how capital intensive is the NDS business? I realize you're likely investing for growth today, but do you have a lot of sight to the business starting to spin off some free cash? And once the business hits your goal of over $200 million of EBITDA, what's the maintenance CapEx associated with that business line? I assume that it's accretive to the free cash [potential] of the business, but just wanted some detail around it.

It is. And it's a very good question, actually, because it fits nicely with the strategy that Tony has been putting in place for the last few years, which is to take a very nice business, which is a rig business, automating and enhancing those rigs, but then integrating it with the NDS and bringing those businesses, which tend to be much lighter in terms of CapEx than the rig business and they tend to be high margin.

So a lot of the CapEx that's required for some of those businesses -- because we build the rig and put the piping and some of the incremental hardware that appears after use are already part of our rigs, that we don't have to spend as much as some others would because of the integration potential. But secondly, the actual investment versus the margin per day is much lower.

To give you an example, with all the growth that we're accomplishing this year in NDS, we're talking about $50 million CapEx investment. So again it's not CapEx heavy, and it should change the economics of our company as a whole, going forward, very materially.

Our next question is from James West, with Evercore ISI.

Tony, thanks for laying out your views on the US land market and dispelling the kind of nonsensical comments that have been made by some in the market about an imminent collapse in the rig count. I think that's very, very helpful.

But what I really wanted to talk about is a piece of the business I think that's really not well understood by the market or recognized or getting any value right now in your share price, and that's the Saudi JV. When do you guys expect that business to start building cash? And on top of that, as we think about your addition of rigs and then building rigs, is the Saudi JV -- am I right, I guess, and correct in saying the Saudi JV is not going to require really any CapEx from you guys because it will be mostly self-funded?

James, let me address that. I think -- well in the first year we're only starting the JV in a couple of 3 months. So you won't see a lot of impact this year, obviously, because there's only going to be some 4 rigs from Aramco coming in as incremental rigs into our JV and then another rig in the beginning of 2018 coming in. So initially you won't see a significant amount of impact. It's only 5 rigs from Aramco coming in.

But 2 years down the road, we'll start layering in 5 rigs per year over a period of 10 years. Keep in mind we have about 38 land rigs today in Saudi Arabia. So that is a pretty material increase.

And the good news is that the cash generation in the JV itself, of course taking into account that Aramco is also putting some funding into the JV, means we won't have to tap Nabors capital to finance that growth.

And then if you do the math, yes, that's a very big increase in the rig count, a much more efficient use of our resources. And by working together with Aramco, we think we can create more efficiency for our drilling JV. I think our Saudi operations is already one of the best in the world, and I think we're going to see very exciting things in terms of cash flow generation and growth in [SauNad] over the next even 5 years.

And to the extent that we could change the model there to have the NDS-type services become part and parcel of the base operation and illustrate to Aramco the benefits to them of doing that and to being side by side, I think we'll hopefully be in a better position to do that. I think that offers even increased enhanced return opportunities in that marketplace.

So thanks for bringing that up, because we haven't been very vocal about it until we started the JV itself. But of everything we've done in the past 3 years, I think that's probably one of the most critical, if not the most critical, success Nabors has had over the last 3 years.

Yes, I totally agree. And then, Tony, on the NDS business, what do you think is the gating item on the penetration of your new products and services? Is it just the commercialization and just the normal sales process? Or is there some unwillingness by the customers to add some of your software, the new software, or the directional drilling to your own rigs?

Well the first thing I'd say is we have confidence in the strategy because of our track record with the ROCKit product. The ROCKit product, as you all know, is a software tool designed to optimize performance in the -- as you drill the lateral, and that product is now on about 90% of Nabors rigs in the US. And so that was a clear indication that providing a performance tool to our operators, there's a market for it.

I think the issue is as we branch out here the typical person that a drilling contractor deals with does not necessarily deal with these other issues, like the MWD, where we think we have the best MWD tool for the unconventionals today. It's maybe hard to understand that, but I actually believe that that is the case, because it has more of the sensors and it's a more robust tool for the same dollars.

We're not trying to, by the way, in the strategy of NDS -- I'm not trying to hit every high-end segment of the market. For example, on (inaudible) tools, I'm not trying to hit the super-high temperature stuff. The reason for that is the number of tools, the number of jobs, for that is limited and the R&D to make it all happen is really expensive.

So what we've done, what we're focusing on, is the fat part of the market, the stuff where we know the market needs 80% of that service, and that's where we're going. But the issue on the marketing for a lot of this stuff, it's not necessarily the same people we typically talk to. So we have to change our own marketing organization to staff up for that. So apart from showing the value proposition, that is another hurdle.

Austin, we're getting close to the one-hour mark. Why don't we just take one more question and then wrap up the call, please?

Our last question will be from Ken Sill, with SunTrust.

Everybody is excited about NDS, as am I. Great outlook there. So what is the prospect of getting some of these tools and services on third-party rigs? And is there a percentage of revenue that's coming from third-party rigs already, or is all of it coming from Nabors rigs?

Actually, there already is. And just by way of background, it's never been really kind of the marketplace -- Nabors already has a product called RIGWATCH, which is the equivalent of Pason's product for instrumentation. We've never made a big push at pushing it hard on third-party rigs, but that will be something we're looking at now.

So we have a track record of providing some of the third-party rigs. With respect to directional tools today, on the tools we have today, Chris, how many [are based] on third-party rigs?

Probably 30%.

About 30% of our directional tools is on third-party rigs, which is interesting, including on some of the rigs of our leading competitors, which I would say demonstrates the fact that we do have a really good tool for unconventional shale in the US today.

And the comment I made before about being a dinosaur industry, I think there's room for more of that with our NDS business. And part of the strategy we're doing is to obviously build the business in a way that we can service a bigger market, not just the US market, of the Nabors rigs. For example, even Canrig top drives and Canrig equipment we sell to third parties, obviously. And so we mentally have made that adjustment that we can put it onto other people's rigs.

And is that being more successful with some of the tools like 3D rotary steerables and MWD than the software? Or is the uptake pretty similar on both sides?

I'm sorry. I didn't understand the question. Say it again.

In Nabors Drilling Systems, part of your offering is the automated drilling systems, which I kind of call the software side of things. Whereas 3D rotary steerables and measurement while drilling are kind of product tool oriented. Is there a difference?

Yes, there is a difference. With respect to some of those services, some of it we can easily put on third-party rigs if they use a Canrig AC top drive, because the software is really keyed into the actual hardware and that's because the way we've designed it to be a best-in-class performance.

Think of an Apple iPhone compared to a Windows PC. With the operating system meshing with the hardware, you get a better user experience when it's all integrated, as opposed to patched together like with a Windows thing where it's plug and play but you have to have flexibility. But sometimes the experience is not as good.

So in our approach we've gone with the former more, although some of the other things, like we said with the tools, they can go on anybody's rig. But the software, Canrig AC top driver is kind of key right now. We have some other ideas in the background that we're looking at to see whether some of the other performance tools whether we would make them available, but that's not fully commercial yet.

Okay. And then one final question, as you roll out the 5 new rigs a year in the Saudi joint venture, what happens -- or does anything happen -- to the 38 rigs you already have working in Kingdom? Or does those go into it?

They're all managed by the joint venture, and when they come up for renewal there's a process for them to be continued in the joint venture.

And so they all roll into the joint venture.

They'll either roll into the joint venture or stay on a leased basis or a managed basis.

Austin, that will conclude the call. Thank you for participating, ladies and gentlemen. If you have a question you didn't get to, feel free to call us or email us at any time.

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