Nabors Industries Ltd (NBR) 2017 Q3 法說會逐字稿

Good day, and welcome to the Nabors Third Quarter Earnings Conference Call. (Operator Instructions) Please note today's event is being recorded.

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

Good morning, everyone, and thank you for joining Nabors' Third 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 insight 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 2 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 submenu Events Calendar, where you will find them listed as supporting materials under the conference call listing. Instructions for the replay are posted there as well as under the 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 risks 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'll 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 third 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.

The third quarter served as a great example of how Nabors continues to execute on our new business model for the contract drilling industry. First, we signed 2 strategic acquisition agreements this quarter. These transactions represent major steps forward in realizing the vision of providing fully automated drilling operations.

On August 14, we announced the signing of an agreement to acquire Tesco Corporation. Tesco has an excellent reputation worldwide as a top-notch tubular service provider and rig equipment manufacturer. As I noted at our Investor Day last year, our vision is to leverage the drilling rig to serve as the delivery platform for Rig Services. We are doing this successfully across multiple product lines. Now we are ready to accelerate these efforts with Tesco's premium casing running tools and automation technologies. The combination of our complementary rig equipment product lines will also enhance scale, product offering and aftermarket service to our customers. Integration teams are working hard, identifying how we can hit the ground running as a combined team on day 1. Close of the transaction is expected by the end of the year with synergy targets as initially expected.

Following the Tesco announcement, we announced on September 5 that we have closed the acquisition of Robotic Drilling Systems or RDS. This exciting technology represents the dawn of the fully automated robotic drill floor. It is applicable both in onshore and offshore markets, on newbuilds as well as retrofits. By combining the RDS technology portfolio with the Nabors global drilling platform, we are uniquely positioned to integrate and scale this technology. The technology has received significant funding and support to date. This support has come from major international E&P companies as well as industry and governmental sponsors. We are already engaged in commercial discussions with multiple leading offshore drilling contractors regarding upgrades using this technology.

We plan to first commercialize this technology offshore. In addition, we are field-testing an onshore version of the system. This expanded capability will enable Nabors to further improve operational efficiency and drilling performance. We plan to combine RDS' technology with our operating systems, Canrig equipment, the Tesco casing running tools and our new iRacker handling system. Through this combination, we have the potential to transform both the offshore and onshore drilling landscape.

We also are in the final stages of preparation for the commencement of operations on Sanad, our JV with Saudi Aramco. We expect to issue a press release announcing commencement shortly. Our fourth quarter outlook will include projected contributions from Sanad. This JV is a cornerstone of not just our international strategy but also our global franchise. No other contract land driller can count on the bedrock foundation of having the world's largest oil and gas company as its partner.

Turning to the Lower 48. Our first new Quad rig commenced working under contract in the third quarter. As noted last call, this rig represents a modification to our PACE-X package. The rig drills would stand to 4 drill pipe joints rather than the usual 3 joints per stand. It decreases the number of connections and also allows for running double joints of casing. We expect the second Quad rig to commence operations shortly for a second customer in West Texas. We are excited to be partnering with 2 premier customers in this effort. We are receiving additional inquiries and look forward to securing new opportunities to deploy this capability.

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 our cutting-edge drilling automation technologies. Our Nabors Drilling Solutions or NDS penetration rates continue to increase. We now have 83% of our Lower 48 rigs running at least 3 NDS services, up from 76% second quarter. 36% of these Lower 48 rigs are running 5 or more NDS services, up from 34% last quarter. Our recently deployed ROCKit Pilot (sic) [ROCKit AutoPilot] fully automated directional drilling system has successfully drilled 5 horizontal wells in the Permian with exciting results. The fifth well performs the fastest conventional spud to total depth on an extended lateral in the Lower Spraberry for a major Permian operator. This system doesn't just compute the wellbore path, as some competitor offerings do. It also automatically executes the drilling instructions. Along with the continued buildout of our directional drilling fleet, we expect casing running to drive a substantial increase in activity after the close of the Tesco acquisition.

Unfortunately, due to delays caused by the massive flooding brought on by Hurricane Harvey, we were not able to finish and put our first new M1000 rig to work during the third quarter as expected. We now expect to deploy our first M1000 rig in November and the second before the end of the quarter.

Its features, also noted in the company slide deck, include a 1 million-pound hook load and racking capacity for up to 30,000 feet of 5-7/8 drill pipe. It will be capable of meeting the demand of the most challenging laterals today. It is ideal for emerging international shale plays as well as in the Lower 48.

In regards to Hurricane Harvey, let me thank the many of you on this call who have reached out to us to offer your support. We were fortunate not to have lost any of our Nabors family. However, many of our employees around Houston and the Coastal Bend suffered tremendous property damage and family displacement. These men and women are pulling double shifts as they come home from work, take off their hard hat or tie and get to work repairing their homes. I am very appreciative and thankful for their ongoing sacrifice.

As a company, we experienced minimal equipment damage and non-revenue downtime. Our assessment of total damages and lost revenue totals about $300,000, not including the aforementioned construction delays or personnel lost time.

Now let me turn to this quarter's results. In the third quarter, Nabors generated adjusted EBITDA of $143 million on operating revenue of $662 million. This performance compares to $139 million and $631 million, respectively, in the second quarter. The quarter reflected strong performance for our drilling rig business based on additional Lower 48 rigs as well as higher margins in the U.S. and international markets. However, within Rig Services, continued adjusted EBITDA growth in Nabors Drilling Solutions was more than offset by disappointing shipments of rig equipment from Canrig. Numerous customers delayed deliveries scheduled for the third quarter, and several orders were canceled. Nonetheless, we expect Canrig revenue to pick up before year-end. We also plan to deploy several rigs in the U.S., Canada and international markets during the fourth quarter.

In addition, our Saudi JV should bring incremental activity. And finally, we anticipate NDS to finish the year strong. Nabors' worldwide rig activity increased to 212 average rigs on revenue in the third quarter from 206 rigs in the second quarter. The Lower 48 was the largest contributor to this activity increase. The rig additions came mostly early in the quarter. The dip in oil prices that occurred in July dampened the operators' activity plans for the remainder of the 2017 budget cycle. With WTI back up above $50 for several weeks now and Brent above $55, we are seeing increased contracting interests from our customers. We will, of course, be following 2018 budget announcements closely. As of now, the feedback we are receiving, especially in North America, leads us to cautious optimism.

Now let me drill down a bit further into each of our business segments. Turning to the U.S., financial results in the U.S. Drilling segment improved both in terms of activity and margin growth. For the full quarter, our average rig count in the Lower 48 increased sequentially by 7% or just under 7 rigs. This rate of growth has moderated as compared to that achieved in the last few quarters. We expect that we will maintain or slightly increase average Lower 48 rig activity levels during the fourth quarter. We currently have 100 rigs working versus 102 average for the third quarter. This total includes 3 SCR and 10 smaller AC rigs. This 2-rig decline took place within the lower-spec, 1,000-horsepower AC fleet. We anticipate that 2 of our contracted newbuilds currently under construction will begin work in the fourth quarter. We also have additional rigs contracted or committed that are currently in the yard for upgrades. We continue executing on our upgrade program in Alaska and U.S. offshore to sustain their steady contribution.

Current leading-edge day rates are generally unchanged in the Lower 48 even while our high-spec rigs remain essentially sold out. Client conversations indicate the potential for term contracts with the initiation of 2018 budgets. This development could generate pricing momentum given the tightness in the high-spec market. Average daily rig margins for the U.S. increased by $225, at the bottom of the guidance range we provided. Our focus remains on driving margins higher through the year into 2018. William will lay out our expected margin progression in more detail. We anticipate our revenue per day will continue to improve as our 5 remaining newbuilds enter the fleet over the next 2 quarters. Additionally, we still have some rigs to roll to current spot pricing.

We again surveyed our larger Lower 48 customers earlier this month. These operators represent about 1/3 of the total rig count. While most plan to maintain a flat rig count between now and the end of the year, more plan to add rigs than drop them. Based on this information, we would expect the Lower 48 rig count exit the year at or above today's total.

Our previous client survey was taken prior to the impact of the low oil price affecting rig count plans. This survey indicated an increase of around 30 to 40 rigs, extrapolating large clients across the operating universe. The rig count decline since last quarter has come primarily from smaller private operators as the clients we surveyed overall stayed about flat. Until we get more clarity on our clients' next budget cycle, it is difficult to offer a 2018 forecast with much precision. However, our conversations of late have been positive with the supportive macro backdrop. There are a considerable number of inquiries for December and January start-ups.

Let's turn to International. In our International segment, the net average working rig count declined by slightly more than a rig in the third quarter to 91 rigs. We decreased by 2 platforms in Mexico and 1 rig in Ecuador, partially offset by gains in Algeria and Kuwait. We exited the quarter with 91 rigs working internationally. Despite the lower activity, adjusted EBITDA still improved internationally by $2 million on strong margins. Reported daily margin in our International segment increased by approximately $450 per day to over $18,000 per day. However, some of this gain was driven by exceptional performance in certain countries. We continue to anticipate an ongoing International margin in the low to mid-$17,000 range.

Now let's turn to the outlook. After the third quarter pause, we should resume rig activity increases in the fourth quarter for International. We are putting an onshore platform back to work in Mexico and 2 in India. Since the start of October, we now have a rig deployed and running in the UAE, and we are in advanced discussions for additional rig activity in Algeria and Russia. The larger Middle East tenders we are excited about should be a key driver of future growth. We have strong working relationships with these customers. Our global asset base and manufacturing capabilities provides us with unique opportunity to make highly competitive proposals.

Finally, our JV with Saudi Aramco is expected to start operations in the very near future. Activity and earnings will be consolidated within our International segment. We expect that 3 rigs will be added to the fleet from Saudi Aramco upon initiation. Early in the first quarter, 2 more rigs are planned to join from the Saudi Aramco side. We continue to be excited about the opportunity in tandem with our partner, Saudi Aramco, to optimize how wells are drilled in the kingdom.

Let's turn to Canada. Canada had a strong start to the post-breakup season with the low oil prices in July, fast momentum as it did in the U.S. We have 13.5 average rigs working there in the third quarter versus the 9 average rigs working in the third quarter of last year. We have 15 rigs currently working there as the pace of contracting increases for the winter months.

The Canadian market has transitioned to more regional E&P companies with whom we have strong legacy relationships. We see both our rig and NDS margins increasing there the next 2 quarters. Our targeted upgrade program for 5 less capable rigs to triples has positioned our fleet for additional activity and margin. We expect the fourth and first quarters to exceed that of the prior year in EBITDA contribution.

Now the Rig Services segment. Our Rig Services segment saw offsetting trends this quarter. NDS revenues and adjusted EBITDA continue to climb. On the Canrig side, however, several deferrals and cancellations hampered performance. Recently acquired RDS has been integrated into this division, and as a reminder, our rotary steerable development effort also falls under this segment. While total adjusted EBITDA for the segment dropped from $5.5 million to $1.8 million, adjusted EBITDA for NDS increased again from $7.6 million to just under $10 million. We continue to fire on all cylinders towards our target of an annualized $50 million EBITDA run rate for the fourth quarter for NDS.

Speaking to NDS, adjusted EBITDA growth was the result of several factors. As I mentioned earlier, we continue to increase market penetration across many of our NDS products. Averaged across our working Lower 48 fleet, daily margins increased by nearly $200 to almost $1,200 a day. RIGWATCH and directional drilling led this improvement. We expect directional drilling to drive additional impact in the fourth quarter with the delivery of incremental tools.

Looking forward to 2018. We expect several new factors to take the baton for the next leg of growth. The Tesco acquisition is an important incremental driver. Tesco is currently running a substantial number of jobs in the Lower 48, with plenty of room for expansion on Nabors rigs. Integrating Tesco with its best-in-class people and tools will overnight transform their product line. As I mentioned on the last call, we received qualification for wellbore placement in the critical Saudi Arabia market. We expect to generate a significant revenue from this service in 2018. This market will likely be the next big driver of NDS growth beyond the Lower 48. These developments, combined with the 2018 commercialization of our rotary steerable technology, gives us confidence for continued rapid growth in 2018, and we reiterate our $200 million to $250 million target for 2020.

Canrig took a step back this quarter, primarily due to product deferrals with some cancellations. We expect Canrig to contribute positive EBITDA next quarter and thereafter as deferred maintenance spending continues to materialize in the drilling industry. More critically, the addition of Tesco's equipment sales and aftermarket service business will create a more profitable operation on a global scale. Combined with the new robotics technology added to Canrig's existing product line, we believe Nabors has the potential to become the leading provider of drilling automation systems both on and offshore.

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

Good morning, and thanks for joining us today. Net loss from continuing operations attributable to Nabors of $121 million represented a loss per diluted share of $0.42. These numbers are slightly lower than the second quarter's totals of $117 million and $0.41 per share, respectively. The reduction in income resulted from lower tax benefits than in the prior quarter.

Revenue from operations for the third quarter was $662 million as compared to $631 million in the prior quarter, a 5% improvement. U.S. Drilling revenue increased by 19% to $223 million, reflecting 7 more rigs in the Lower 48 along with margin improvement for this segment.

Lower 48 revenue increased by 18% as the higher volume was supplemented by an overall improvement in the average daily revenue of about $1,600 per day. Renewals and new contracts increased our average day rate as multiple rigs were signed at spot rates, exceeding the fleet average. In addition, reimbursable expenses at limited to no margin also increased. We expect the favorable day rate trend to continue, especially with the 5 remaining newbuilds joining the fleet over the next 2 quarters and additional rigs rolling onto higher day rates.

International revenue decreased by 2% to $374 million. This decrease reflected a reduction in average rig activity of just over one rig, partially compensated by higher margins of nearly $500. As Tony mentioned, some of this margin increase was driven by exceptional performance in certain regions. We also anticipate a return to more normal performance levels following the strong second quarter.

Canada began its recovery from the typical seasonal breakup. Revenue improved by 6% to $18 million as average rig count for the quarter increased from 12 to nearly 14. The improvement was somewhat dampened as compared to initial expectations as clients showed some restraint following softening oil prices early in the quarter.

Rig Services revenue dropped 6% in the third quarter to $87 million. While NDS revenues grew by 18% from $32 million to $38 million, Canrig revenue of $50 million was down 18% from the second quarter's $61 million. The projected increase in third-party sales at Canrig did not materialize due to deferrals and some cancellations. In NDS, we benefited from strong performance software sales on additional penetration as well as repricing certain wellbore replacement contracts.

Adjusted EBITDA for the quarter was $142 million as compared to $139 million in the second quarter. Gains were driven primarily by the U.S. segment, while Rig Services represented a $3.7 million offset to the negative side. The $5.5 million increase in the U.S. primarily reflected an improvement in Lower 48 activity and margins.

Lower 48 EBITDA rose by $4.9 million, with $2.6 million driven by an increase in the incremental rig count, from an average of 95 working rigs to 102. Higher daily margins delivered an additional $2.3 million increase versus the prior quarter.

Drilling margins for the Lower 48 increased by approximately $250 per day to $4,160. The improvement was driven by about $1,000 per day from more favorable pricing, offset mainly by higher labor costs as several deployments and upgrades were delayed, with the additional crews remaining idle. I would like to point out that some of these delayed deployments were related to Hurricane Harvey's impacts. We believe that with the anticipated additional rig deployments, the increased daily labor costs will fall back to expected levels.

The International segment delivered additional adjusted EBITDA even with the lower rig count. The third quarter total of $137 million increased by $2 million over the prior quarter. The decline of a little over 1 average working rig was more than offset by the roughly $450 increase in margin to over $18,000.

Canada adjusted EBITDA declined by $1.6 million or 38% to $2.6 million, driven by a roughly $1,600 drop in margin. As with the Lower 48, we ramped our costs somewhat early as activity levels were not as strong as we expected. In addition, during the spring breakup in the second quarter, several clients kept their most capable rigs drilling on multi-well pads, translating into higher day rates and more efficiency in the second quarter.

Rig Services provided a lower adjusted EBITDA contribution, from $5.5 million in the second quarter to $1.8 million in the third. NDS adjusted EBITDA increased 28% to $9.8 million for the quarter compared to $7.6 million in the second quarter. The lower revenue at Canrig had a negative impact on adjusted EBITDA, which was some $8 million lower than we expected.

Now let me make a few comments on items affecting our liquidity and cash generation. CapEx for the third quarter was $130 million, down from $136 million in the second quarter. I expect our CapEx for the year to finish in the $500 million to $550 million range.

Net debt for the third quarter ended at $3.7 billion. The quarterly increase was affected by several factors. As usual, the third quarter, along with the first, is when our biannual interest payments of roughly $90 million are made. The acquisition of RDS, along with an unrelated final legal settlement in discontinued operations, accounted for another cash outflow for a combined $75 million.

Finally, the higher revenue translated into increased working capital requirements. We expect the fourth quarter to provide positive cash flow operationally with limited interest payments, furthered by the closing of the Tesco acquisition and cash contributions from our JV partner. Our longer-term forecasts continue to indicate material cash flow generation starting in 2018 and ramping up through 2020. Our free cash flow will be allocated primarily to debt reduction.

Finally, our available revolver capacity and our cash balances give us significant flexibility to address our 2018 maturity, which currently stands at about $460 million.

Looking ahead, with the continued tightness among Lower 48 high-spec rigs, we still have rigs expiring in the fourth quarter, with room to reprice to spot. To provide additional detail, we have 15 Lower 48 term contracts that were signed in either the first quarter of 2017 or the fourth quarter in 2016 that have terminated or will terminate in the fourth quarter. We expect to keep these rigs working and to do so at higher rates than the prevailing prices at the time of their signing. Given the current level of customer interest and existing commitments, we would expect to average in the range of 102 to 104 average working rigs in the fourth quarter. As a reminder, we had 100 working rigs in the Lower 48 as of yesterday.

Lower 48 margins for the next quarter should end in the $4,500 to $4,700 a day range. We expect the improvement to come in roughly equal measure between continued day rate increases and lower daily OpEx. We expect to end the year with a solid increase in Q4 for our international rig count. As Tony mentioned, we have added and currently are adding rigs across multiple locations and expect to begin the Saudi Aramco joint venture shortly.

We are putting rigs back to work in Canada, and we stand at 15 rigs as of yesterday. We anticipate an average fourth quarter rig count in the mid- to high teens, with improved margins in the mid-$4,000s.

And finally, the Rig Services segment should regain its momentum from additional growth in both activity and margins in Nabors Drilling Solutions as well as the recovery for Canrig. NDS services are benefiting from increased market penetration as well as new product development, such as ROCKit AutoPilot. We also expect a sharp increase in wellbore placement revenue.

In 2018, we expect additional growth from geographic expansion, for instance, wellbore placement in Saudi Arabia, as well as from our rotary steerable tool and from a strong increase in casing running activity. We continue to target an annualized run rate of $50 million in Q4 for NDS as compared to $40 million in the third quarter.

Finally, we expect substantial improvement at Canrig in the fourth quarter with the capture of deferred third-party orders.

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. This quarter, we took significant steps to increase our technology leadership in the drilling industry. We are adding a leading global casing and tubular running services provider to our drilling technology portfolio, we've bolstered our manufacturing operations with additional products and scale, and finally, we took a big step forward in developing the goal of a manless, fully automated drill floor aimed both on and offshore. With these strategic acquisitions, we believe that both our technology and rigs are second to none in the marketplace. Our mission now is to market and to execute to drive maximum cash flow from these investments.

As William mentioned, our leverage in cash generation will continue to be an area of focus. We will continue to enforce capital discipline. We will also keep sweeping costs out of our operations to compensate for increased working capital requirements. These requirements have arisen as a result of our strong and sustained growth.

I'll finish my comments by saying that the market we are facing still presents some challenges. However, we are experiencing increased interaction with our customers on future activity and on the introduction of new technologies. These interactions indicate our customers are busy and focused on future projects. With the operators' continued focus on lowering dollars spent per BOE, we are finding that their interest in technology is increasing. We are positioned to meet that need in terms of both drilling efficiency and resource recovery.

From that point of view, the environment certainly feels better than 3 months ago, and it seems to be playing to our strengths. We have invested both in our assets and in new technology, and we are now positioned to reap the benefits of these efforts.

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

(Operator Instructions) Today's first question comes from Ole Slorer of Morgan Stanley.

Yes. I mean, the drilling operations came in pretty much in line with what we were looking for, kind of maybe a little weaker. But kind of the surprise this quarter was out of Canrig. And I wonder whether you could sort of discuss a little bit this -- exactly what went wrong there, why the weak numbers. And clearly, you're in the process of putting together something much bigger on that front. So the strategy between RDS and RSS, how far away you are from, you think, integrating this and delivering something that effectively can allow you to take a bigger wallet share in a rig market that looks to be maybe leveling off in the -- 130, 140 level. Will you?

Sure. Ole, thank you. Well, first, let me start by saying I am equally annoyed and disappointed with the numbers at the short term, let's make no mistake about it. And it's not really acceptable, what happened. But I also -- to put things in context, let's talk -- first talk about Canada, what happened in Canada. I think the first thing to point out, the 2Q number, as we pointed out on the conference call last -- at the latest conference call, these 2Q numbers reflected -- particularly more than reflected the fact that our guys did an exceptionally good job that quarter, relocating rigs on pads. So therefore, they stayed working longer during that 2Q than normal. And actually, if you look at the share of the rig count in the 2Q versus the first quarter, actually, our market share in the 2Q were not disproportional than our historical practice because of that. So the delta between the 2Q and 3Q is -- you compared it to something that was exceptional during the 2Q. That's point one. Point two was that -- what really happened was we had a core customer that once oil prices started turning, they dropped 2 rigs on us. And a second customer deferred putting a rig to work as well up there. So that, combined with this -- with the cost issues of having people on the payroll ready to do that work, that's what contributed to the delta. As we have said, you got to put this in context, that the fourth quarter was going up to -- we've only got a couple of rigs, and also, the margin we expect to increase back about 30%. Now let me turn to Canrig next. So in Canrig, the issue there was, frankly, that we had 5 different drilling contractors, all of whom canceled orders at the last minute in the quarter. That was the orders made from up to 6 top drives, 4 wrenches and 5 catwalks collectively. And that reflected, as you recall at the second quarter -- at the end of the second quarter, we were a little -- getting a little bullish about the order book up and the interest. And what happened was, as the quarter progressed and people got worried, everyone started taking a step back. And that what's changed the dynamics of the orders. And so as they were preparing to fulfill these orders and staffing up and rolling the manufacturing forward to do that, that's what happened. Now should they have gotten so far over their heels over it? Looking back, maybe not. And maybe they should have been a little more diligent about following up on the strength and the -- what the resolve was of those customers. But as things occurred, even though these orders have been canceled and deferred, at least half the people are back talking to us about wanting the equipment. So that's the situation that we're in, and obviously, it's a response to the macro environment. The third comment I want to make is, you got to put this all in some context. The Canrig and Rig Services numbers, even on a run rate basis, you're talking about 3% to 4% of our EBITDA. Let's look at the 3 core parts of the business, as you alluded to. The first one is Lower 48. Lower 48, as we said, in terms of our rig count, unlike some other people's guessing, we're still saying that the third quarter number, we exited at 100, we think we're going to exit the fourth quarter about 105. Our average for the rig will be slightly up, but we're starting down for the reasons -- it was alluded to in our remarks that we had 2 lower-spec rigs get off contract. And we also think our margins in the U.S. are going to go up as well. As we have said, it was about 10%. International, the rig count in International -- this quarter was a decent quarter in International. I think the margins came out better than expected, again, because of some of the exceptional performance. Even planning that we don't repeat exceptional performance, this mid- to 17 -- lower to mid-$1,700s to $17,000s in day rate, we're still expecting several rigs here additional in International. And NDS, as we said, had a good record of continued growth at roughly $7.5 million to $9.8 million run rate in respective quarters, third -- second versus the third. So that's -- those 3 areas are the core of the company, and that's where the numbers are. And that part is very strong. And as I said, the other 2, I think, are a disappointment, but I don't think there are any cause for anybody to reassess the whole company because it's not -- it's limited to those 2 areas. I hope that answers your question.

Yes, no, it does. Canrig, as you said -- so you highlighted that for the cancellations. I presume that those cancellations come with equipment that's had pretty hefty down payments on it. Would that be correct?

Well, down payments are typically no longer -- there are no longer down payments that are not refundable. I mean, they are refundable, so that's the problem. In this market today, that's the situation. So that's the issue.

So Ole, the cancellations were only some of the equipment. One piece of equipment was canceled, another rig was moved to early Q1 2018, and most of the other equipment was deferred into the fourth quarter. So we expect a fairly decent quarter in the fourth for Canrig.

Yes, it sounds like you should, yes, if you're talking about deferred delivery of equipment that effectively you've collected a down payment on. But Tony, the second question was around the losses in Canrig. That, I think, makes people nervous about your rig equipment expansion. And you've added your -- the RDS, and you added -- or Tesco, sorry, in the process of adding. So could you kind of remind us a little bit about your vision for putting this together, if it's possible to show some synergy numbers around that or some other kind of reason you have for being confident that this combination will work out for you?

Sure. First of all, let's talk about the Tesco acquisition. Tesco acquisition, the closing is expected to occur sometime before the end of the year, number one. Number two, I think the casing running business is a natural fit with our NDS strategy, and they have a huge inventory of existing unused assets, which we'll kickstart. There's a lot of room to grow in the U.S. alone on Nabors rigs to where Tesco is in terms of penetration today. And if we apply our NDS model to that casing running business as opposed to how the business is run by the major casing running companies today, where we're going to use (inaudible) to the rig, reduce the number of labor that you need on a casing crew, et cetera, I think we have a prospect for significant growth in 2018 with that casing business. The rest is the fold-in, and -- but we -- cost synergies on the manufacturing side of all the units with Canrig. So the way we see it is the fold-in, combined with sort of hyper-growing, accelerating the casing running business. But in terms of synergies, we're thinking about at least $20 million for 2018 and $30 million to $35 million for 2019 based on the cost side. That's not revenue synergies. That's just cost synergies. That's the way we're looking at it today. And in terms of RDS, I think RDS -- as some of you are aware, we already have one of the RDS pipe handlers working on our new rack and pinion rig that's in the yard, which will certainly vie for a customer shortly. So that will be proof of commercialization of the technology. We're in discussions with several large -- very large offshore drilling companies that have interest in the RDS technology for new drilling packages or retrofits on existing rigs. And we're also looking at combining some of the RDS stuff with our iRacker stuff to make it even more robotic. So those things, I think, will -- you'll start to see those rolling out in the first 2 quarters of 2018.

Okay. So looking into the middle of '18, and we should have an optimally sized, cost-efficient rig building division. Would that be fair?

Correct. Well, I would not read into anything about this loss as being nonoptimal rig building or not cost-efficient. I mean, if you actually look at this, Canrig's numbers historically, their returns on capital, they're lean necessarily so they're actually very cost-effective. This is a miss because of these orders, and the order rack, too, yes, it is $5 million, but you got to put it all in context. So...

And ladies and gentlemen, our next question will come from Marshall Adkins of Raymond James.

Recognizing, obviously, Canrig is not a huge component of the story going forward, but that's the question. That's what we're going to be getting questions on today. I just want to drill down a little bit more on that particular issue. Can you give us some sense of kind of what type of equipment was canceled or delayed? Where was the equipment going geographically? I mean, was it mainly destined to the U.S.? And I guess the last -- go ahead.

No. I would just say it was all the U.S., and 6, 7 were top drives, and the rest were catwalks and wrenches, high roughnecks.

Okay. I don't want to read anything into this, but are you getting any customer pushback? I mean, you guys are pushing the envelope on putting together some badass rigs here. Are you -- for your own use. So are you getting any customer pushback at all between selling the equipment to other contract drillers?

There's obviously 1 -- yes. There's 1 or 2 competitors in the marketplace that seem to have the view that they don't want to buy from Nabors because we compete. Nabors, of course, we buy from everybody, including people that we compete with. People like Weatherford, we buy stuff from Weatherford even though we compete against with them internationally. But the point is that I think it's the case that we have a number of contractors in the U.S. that actually like the fact that Nabors is using equipment and Nabors is behind it because first of all, they have the credibility, and they know it works, and it's a good product. So the answer is yes, and like anything in life, it's a mixed bag. There are those negatives, but right now, because it outlasts them. And as we get more interesting stuff out there, people are becoming even more interested in it. I find it very interesting that we're not known as -- I mean, Canrig is not known as being in the offshore part of the segment even though we do have a bunch of top drives, 750s on some offshore rigs, but we're not known. But since this RDS acquisition, people are taking a second look at Canrig and realizing that they may offer a different path to our runway of drilling partners that they can't get anywhere else. So there's certainly no unwillingness. In fact, there's every willingness to really look at them in that whole arena, which is a new frontier for us.

Right, right. Okay, perfect. That's just what I needed. Shifting gears on my second one, I don't know if Siggi is here, but I always love getting some color from you all on what are the ups and downs, the pros and cons that you're seeing right now in the international markets, which markets are hottest, which markets are weakest, that kind of stuff. Can you just give us a quick overview there?

So Marshall, the markets -- the only really bidding activity that's ongoing is in the Middle East, Latin America, as I think we've said, maybe Argentina. But there's not that much exciting stuff going on right now, I would say.

Outside of Middle East, you say?

There's some activity in Russia as well, but as you probably know, those things take a long time. Algeria is not that big a part. Algeria, there's some activity, but it's nothing -- I mean, it's relatively flat, I would say, besides the activity in the Middle East.

And overall, it's probably bottomed?

I hope so.

Marshall, as indication of the Middle East, for example, Canrig this quarter should be shipping 2 catwalks to Kuwait. So it gives you an idea that's supporting the concept that Siggi is saying that there is activity there in the marketplace.

And our next question today comes from Kurt Hallead of RBC.

So the general tone of what you guys put forward here seems to be fairly constructive. I know you mentioned there was some cautious optimism around it. Can you give us just some general update on where you see pricing in the U.S. market as you head out into the fourth quarter? I think last quarter, a lot of conversations kind of centered around kind of the high-teens kind of spot rate. So I was just wondering if you could give us just an update on how you see things pressing in fourth quarter and, given your survey, what you think may transpire as you head into the first part of next year for U.S. Lower 48?

So the -- this is William, Kurt. The pricing has remained fairly stable for rigs that are rolling off and rolling into new contracts. And you're right, it's in the high teens. Our new deployments though are getting somewhere in the range of $22,000, $23,000 per day. So the new rigs obviously generate a little bit more juice, but the ones that are upgraded to smart rigs are also in pretty high levels. We were expecting to see more momentum on pricing in the fourth quarter some -- a few months back, but prices have, I think, right now stabilized around the high-teens, $19,000 kind of range.

Okay. And what -- along those lines, I know you mentioned, going into the fourth quarter, about half the increase is expected to come from rate, the other half comes from lower cost. What can you guys do at this juncture with respect to the cost structure? Is labor tight, supply chain? Can you just comment on that?

Yes. Labor is a little bit tighter, that's correct. Supply chain, not so much. I mean, we're not really even close to some activity levels that we were sometime in the past, so -- a couple of years ago. So supply chain, I don't feel is tight, but labor is starting to get a little bit tight and some competition for people out there in the market. What we are seeing, though, is a lot of these start-up costs that we incurred over the past quarters is gradually being amortized out of our balance sheet. And I think in the fourth quarter, we'll see an impact on that, a reduction in the amortization of those start-up costs. And obviously, we ramped up our headcount in expectation of maybe a few more rigs. Some of those were delayed by Harvey and others by a little bit more cautious or restraint from our clients. But as we head into the fourth quarter, those extra hands will just flow into the new rigs that are being deployed. So we should expect to see, on a daily margin basis, some improvement on the cost side. And definitely, on the revenue side, we're seeing it. And we have got high hopes for the day rate progression for the fleet during the fourth quarter.

Yes. Marshall, on the people issue with -- or Kurt, on the people issue, we -- unlike before where -- I think I said this last call, where we dig into a reservoir of existing people, that reservoir is obviously much more limited. Therefore, the timing, effort, training issues, there's more costs there than -- and we've had to give some increases to some people. But as you know, generally, we've shared those with the -- that burden with the customer. So I think it's fair to say, though, compared to the prior up cycle, we don't have the labor pain that was afflicting us back then right now, at least not yet.

Right, right. I appreciate that. And maybe just kind of one additional one. Just coming back around to the totality of Rig Services going forward, once you roll in Tesco and RDS, how should we as an investment community kind of think about the revenue generation from that Rig Services business in 2018? What kind of level are we looking at?

So we were hoping nobody would ask that question because we're in the middle of putting together all the numbers and the synergies with Tesco. But we feel that Tesco does accelerate our initial plan. I'm not saying that we're going to go beyond our $200 million, $250 million target for 2020, but we do think we'll get there faster. I think we expect very material growth in 2018 versus our run rate for the fourth quarter, which, as I mentioned, was $50 million. So we are -- we're not ready yet to give you a specific number, but definitely, very material growth year-on-year and/or run rate of the fourth quarter.

All right. And just to clarify, so that $50 million run rate for -- was for the totality of Rig Services, not just for the NDS?

No -- that's NDS, that's NDS.

That's NDS.

Yes, Rig Services. And then I mean, Canrig, if you look at last year, the numbers for Canrig were much worse than this year. So we've really made some strides in getting closer to breakeven, and we fully expect to be break-even in the fourth quarter and then positive for Canrig even without Tesco next year. So Tesco will just be incremental to those numbers as well.

And our next question comes from Waqar Syed of Goldman Sachs.

William, as you acquire Tesco with equity, how would the net debt-to-cap ratio change for Nabors?

Well, the Tesco acquisition obviously is very helpful to the covenant calculations on our debt. And it takes it down by roughly close to 3 percentage points, depending on what the closing share price for Nabors is. But that's the expectation, including the cash that comes in with Tesco. Plus, the equitization coming from the deal is about a 3 percentage point turnaround. So it is very helpful to our metrics.

Okay. And then any early thoughts on CapEx for '18?

I think we -- you should not expect a number higher than this year. And to put it in perspective, remember that we've really been working very hard on capital discipline. First year I was here, a few years back, on the drilling, we spent about $1.5 billion. The next year, we cut that down to about $900 million, and last year, we had about $430 million. So -- and this year, we're traveling at about a $500 million range despite the fact that our maintenance CapEx with the development of the rigs went up fairly -- went up somewhat. So that's going to continue being a focus next year, making sure that we really spend the money where it's going to give us the most payback and try to limit how much we spend overall.

Okay. And could you also talk about -- maybe Tony, on the arrangement with Weatherford, how is that proceeding?

We're still -- we have our technical teams making progress. They've identified a path to work together, and we're just carrying that out. And so we hope to conclude something this quarter.

Our managed pressure drilling.

Yes, our managed pressure drilling.

Today's final question will come from Jim Wicklund of Crédit Suisse.

Tony, you talked about robotics on offshore rigs first. You got platform rigs. Your rigs that you're building are state-of-the-art. Longer term, how much of that business is going to be captive business for you guys? And how much of it is going to be third-party commercial?

I would like a significant part of it to be third-party commercial. Offshore basically, as our platform rigs, I think is some of the third party obviously. And onshore, I think we have a ways to go to get penetration on our own rigs first. There could be components of -- remember, to make this automation, there's several components of toolkit that you need. You need automatic torque wrenches. You need a rotating mousehole. There's different things. And these components -- I think we're going to start running third parties, buy some of the components because there is very good stuff in some of the existing marketplace. So there'll be a partial third-party buildup of stuff on the onshore version, but offshore, we're ready to let offshore have it.

So typically, in Canrig, about half of sales come from third party. So we probably have a 10% market share of the rigs and of the rig business. And therefore, probably our Canrig business addresses somewhere in the range of 20% of the total market, including Nabors.

Okay, that's helpful. And my follow-up, if I could, we've seen companies obviously do the running casing and tubing. You already got directional drilling. Is there any temptation to put your toe back into the water on coiled tubing or high-end workover rigs or, heaven forbid, pressure pumping or any of those type completions related? Are you just going to stick with everything that's kind of more ancillary to a drilling rig?

Don't get our blood pressure up on that one.

Yes. Don't -- yes, because we can't help it. Our plate is pretty full right now, Jim. Our plate is pretty full. What we have right now, we make it work. So we want to do the best on what we're working on right now, okay?

Excellent and understood.

This concludes our question-and-answer session. I'd like to turn the call back over to the management team for any closing remarks.

I just want to reiterate, thanks to everybody participating today. And if we didn't get to your questions or you have any other questions, just feel free to give us a call or e-mail us at any time. Thank you very much.

And thank you, sir. Today's conference is now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.