Nabors Industries Ltd. (NYSE:NBR) Q2 2020 Earnings Conference Call July 29, 2020 2:00 PM ET

Company Participants

William Conroy – Vice President of Investor Relations

Tony Petrello – Chief Executive Officer

William Restrepo – Chief Financial Officer

Conference Call Participants

Connor Lynagh – Morgan Stanley

Taylor Zurcher – Tudor, Pickering & Holt

Waqar Syed – ATB Capital Markets

Sean Meakim – JP Morgan

Karl Blunden – Goldman Sachs

Operator

Good day, and welcome to the Nabors Second Quarter 2020 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to William Conroy, Vice President of Investor Relations and Corporate Development. Please go ahead.

William Conroy

Good afternoon, everyone. Thank you for joining Nabors second quarter earnings conference call. 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 their perspectives on the quarter’s results, along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks, a slide deck is available, both as a download within the webcast and in the Investor Relations section of nabors.com. Instructions for the replay of this call are posted on the website as well.

With us today, in addition to Tony, William, and myself, are Siggi Meissner, President of our Global Drilling Organization, and other members of the 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 Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to 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 vary 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 net debt, adjusted operating income, adjusted EBITDA and free cash flow. 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.

Likewise, unless the context clearly indicates otherwise, references to cash flow means free cash flow, as that non-GAAP measure is defined 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. Furthermore, the results discussed during the call are preliminary and unaudited and are subject to change and finalization based on the completion of the company’s normal quarter-end procedures, particularly as it relates to impairments and valuations or reserves around the carrying value of various assets on our balance sheet.

As a result, these preliminary results may be materially different than the actual results reflected on the company’s Form 10-Q when it is filed. We do not expect there to be any differences in revenues, adjusted EBITDA, adjusted operating income, free cash flow or net debt or any of the rig activity or daily rate financial information. But there could be material differences to net loss from continuing operations, attributable to Nabors common shareholders and earnings per share.

Before I turn the call over to Tony, I would like to mention that we have attempted to incorporate your suggestions to improve this call to usefulness to you. As such, we are streamlining our prepared remarks, which should permit more time for your questions.

With that, now I will turn the call over to Tony.

Tony Petrello

Good afternoon. Thank you for joining this review of our results for the second quarter of 2020. I will begin with comments on our actions in light of the current environment. Then I will follow with the discussion of the markets and highlights from the quarter. William will follow with the financial results. My wrap up comments today will focus on three timely and key subjects. First, Nabors position in capitalize and several emerging things in the industry. Second, our advantage position of the market as the industry navigate the downturn. And third, Nabors’s standing as a technology leader in our industry.

Let me firstly leave off by commend to each member of the Nabors’s total team and the management of the impact of the pandemic. The health and safety of our worldwide staff are paramount. Nabors remained committed to ensuring the wellbeing of our workforce at each location around the globe. As well, we are dedicated to maintaining our focus on safety and our industry leading drilling performance. This environment has been a challenging one. I am proud of the team for its innovation and perseverance. These qualities have minimized the virus’ effects on the Nabors extended family, and on our operations.

Nabors has the long-standing commitment to the health and safety of our employees and the border community in which we operate. The value of this commitment is especially noteworthy in this era. Next, I would like to update you on our actions as we manage the current business environment. This downturn requires swift and decisive actions, the spending reductions, which we announced earlier have been fully implemented, as those were put in place, I also challenged our team to reevaluate our structure and processes.

The team responded, and we are targeting additional savings to those previously announced. These measures to reduce our overhead costs and further support our free cash flow. We are now targeting approximately $11 million in additional savings of fixed costs. This brings our target to $96 million, up from the $85 million, which we announced previously. I think it was important to note, we expect to realize the additional $11 million during 2020. Combined with the common business expansion, these actions plus our previous capital spending reductions totaled more than $220 million of cash savings. That magnitude demonstrates our commitment to mitigate the impact of lower industry activity. At the same time, we remained focused on free cash flow generation and net debt reduction.

Let me now spend a few moments discussing the macro environment. On the day of our last quarterly earnings call in May near month WTI was $24. Since then it has rallied above $40. And this support movement occurred, operators executed the spending reduction plans they put in place earlier. Consolidation has continued. Chevron is acquiring Noble for $13 billion more than a dozen oil producers have filed for bankruptcy. So the getting to the end of the second quarter, the Baker Hughes Lower 48 land rig count declined by 451 rigs or 64%. The pace of decline has slowed dramatically since the beginning of June.

Based on our conversations with the largest Lower 48 operators, we believe that, their planned activity reductions are nearly complete. That and the lack of incremental announcements suggestion may be hearing a bottom in activity. In our international markets, the activity response is varied. In certain Latin American markets, the response was sharp with drilling activity seating four times during the second quarter. Most of these reductions resulted from efforts to contain the spread of the coronavirus.

The longer lasting cut investment were also announced in Colombia and in Venezuela. In this latch market, the exit of our main customer has led to a shutdown of our activity. In other markets, customer actions were initially more measured. However, some of our customers outside of Latin America have started to reduce their drilling activity based on supply demand considerations. The most impactful is the significant cut in the total rig count in Saudi Arabia.

For Nabors, that has resulted in the suspense of a number rigs until year end. In addition, our customer in Kazakhstan has terminated contracts on two of our rigs. More recently, some of our clients are beginning to reverse the actions taken earlier this year. Global oil demand has increased from the low point in the second quarter is economic activity rebounds. That trend helped to work down the excess inventory, which builds up. These are positive signals but still too early.

Next, I would like to highlight a few aspects of our second quarter results. William will cover our results in more detail, as well as our forward guidance. Total adjusted EBITDA was $154 million in the quarter. These results benefited in part from one-time items in our international markets, which totaled approximately $8 million. Thanks to in pact to this EBITDA performance, we’ve reduced net debt in the quarter by $117 million.

Our global rig count totaled 148 rigs, a 26% decline from the first quarter. Outside of the U.S. Lower 48 and Canadian markets, our rig count declined by just 5%. We never like downturns, but Nabors decline as a much smaller than the industry. This is a strong testament to the performance and value, which Nabors delivers to its worldwide customer base. In our Lower 48 business our reported daily rig margin of 10,449 exceeded the expectation laid out on the previous earnings call.

Nabors margin performance reflects four key facts. First, the capabilities of our rig fleet are second to none. We offer the highest specification rigs in the Lower 48. Second, we are the leaders in field and safety performance. We believe we deliver greater value, while emphasizing safety than our competitors. Third, our focus on operational excellence and reducing the expenses yielded the expected benefit of free cash flow. And fourth, recognition by our customers of the value we bring to the table has allowed us to manage pricing and mitigate the erosion of our average savings for the fleet.

In our rig technology segment, we delivered the highest quarterly EBITDA in five years. This performance reflected improved margins in the Canrig operation. It also underscores Nabors ability to deliver technology initiatives that lower costs.

We achieved some notable highlights in addition to our financial results. First, data and visual workflows are coming to the forefront as a means to create significant value in our drilling services. The latest addition to our digital portfolio is Rig Cloud. Rig Cloud is a platform for digital operations, which streams real time drilling data from the edge devices to the cloud. It provides real time visibility and analytics to drive performance. Rig Cloud enables collaboration between the remote teams of customers and support centers to maximize planning, execution and reperformance across fleet. Rig Cloud is open ecosystem of apps compatible with both Nabors and third party rigs. It promotes informed, simple and better drilling decisions. We have launched it this month with more than 20 drilling apps and widgets that can be customized to create dashboards and tiles based on user’s preferences.

Second, we have unified the branding of several products and services to live with Nabors smart brands. This evolution should enhance awareness for several products and services in the Nabors portfolio. The new naming under this smart umbrella with the company value proposition for each offering will reinforce our products reputation for innovation, value-add and quality and help to drive demand.

Now, I will discuss our view of the market in more detail. Last week, the Lower 48 land rig count stood at 236, that is down by 465 rigs, since the end of the first quarter a 66% decline. In comparison, Nabors working rig count excluding rates stacked on rate has declined by 53% with 13 points better over the same period. This environment is challenging and clients are highly selective when determining their contractors. Our share gain clearly demonstrates our position as the leading performance driller. Nabors provides the best drilling performance with a superior safety record in the Lower 48.

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Looking to the future, we have spent a significant amount of time trying to understand how this market will unfold. The recent stability oil price is around the $40 level should improve operator confidence. A handful of operators could see a modest increase in working rates during the second half of 2020. For 2021, assuming global economic activity and demand for oil continue to grow we believe EMP industry spending will increase. That spend less than pull for additional rig activity.

In this scenario, we believe Lower 48 operators will be highly discriminating in their selection of drilling contractors and rigs. For drilling specifically, we anticipate a focus on premium, high spec rates, the lower 48 operators, which are most likely to increase their filling in the very near term includes several that paused activity completely, beyond those we expect operators with balance sheet strength, free cash flow generation, and a low cost space as the most likely to deploy rigs.

In our international markets, we have already seen activity restart in Argentina and Colombia. The Middle East markets continued to evolve to spending out of there is less certain, regardless contractors with established market share and demonstrated track record of operational assets will be advantaged.

That concludes my remarks on our second quarter results highlights in the current market. Before William more precision marks I want to thank to the entire Nabors team for their hardwork and sacrifice in a very difficult environment. I also stand well wishes to all those in our extended community who are affected by the virus.

Now, I will turn the call over to William for a discussion of financial results and guidance.

William Restrepo

Thank you, Tony, and good afternoon everyone. Revenue from operations for the second quarter was $534 million, a sequential reduction of 26%. All of our segments experience revenue decline, mainly related to the macroeconomic response to the global pandemic. U.S. earning revenue of $174 million decreased by $101.1 million or 37% as our average rig count declined by 34%. Lower 48 rig counts of 57.2 felt like 36%. Daily rig revenue in the Lower 48 at $24,744 decreased by 2,455 per day reflecting lower average day rates and we reduce revenue from reimbursable expenses.

Average day rate eroded by $2,000, driven by a reduction in average pricing, as well as by a higher number of contracted rates back on revenue. But our rate lowers than the operational day rate. International drilling revenue at $301 million decreased by $36 million or 11%, primarily due to a 5% reduction in rig count, pricing concessions on COVID related standby periods in Latin America and negotiated day rate discounts across certain markets.

These deteriorations were probably upside by early termination revenue. Canada’s drilling revenue was $3.6 million down 86% as rig count sale by a similar percentage. The normal impact of seasonality was exacerbated by the week drilling market. Drilling solutions revenue of $33.1 million declined by 40% from the previous quarter. All of our product lines decreased sharply with our pacing line business holding up the best, driven by a strong international franchise. This deterioration was driven by pricing pressure and by a reduction in the Lower 48 industry rig count, which was significantly higher than the decline in Nabors rig count. U.S. revenue for this segment fell by 46%. Revenue in Rig Technology segment was $8.6 million or 20% lower at $33.6 million. The decrease in revenue came primarily from lower after market sales in the U.S. somewhat upset by more stable international activity.

Adjusted EBITDA for the quarter was $154 million compared to $188 million in the first quarter. The decrease was driven by activity reduction in the Lower 48, which affected several segments and by lower rig count in international coupled with pricing concessions. Although some of these concessions are related to COVID lockdowns, and thus was temporary other discounts have been extended through the remainder of the year.

I would also like to highlight that the quarter’s EBITDA benefited from $8 million in net gain, which came primarily from early terminations in our international markets. U.S. drilling EBITDA are $77.7 million was down by 23.7% sequentially. Although Lower 48 average rig count fell by 36%, daily margins increased by just over $500 per day to 10,449. Some of this margin improvement came from the increased number of stack by contracted rigs. Overall, lower expenses for these rigs outweigh the reduce day rates. Although, we experienced some pricing erosion, this in fact was offset by targeted cost initiatives, which we can largely replicate in future quarters. We exited the second quarter with a Lower 48 rig count of 49 rigs. Our current Lower 48 count remains at 49. We expect average rig count in the third quarter to decrease by two to three rigs from the second quarter exit rate of 49 and then to level-off for the balance of the year.

The third quarter rig count represents a 20% reduction as compared to the second quarter. In the third quarter, we anticipate daily rig margin to tail-off to around the 9,000 to 9,500 range, driven primarily by lower day rates and by a moderate increase in rig operating expenses. In addition, we expect to incur one-time cost to move and store a significant number of rigs that have been idled over the past two quarters. International adjusted EBITDA increased by $2 million from $93.5 million in the second quarter, including the $8 million in gains primarily related to our determinations. International rig count was 82.4, down 4.3 rigs.

Venezuela accounted for 1.5 rig reduction as our main customer exited the country. We are in the process of shutting down our equity in this country. The remaining net reduction in rig count was driven by actions taken by customers to mitigate the current supply demand and balance, which in certain markets also resulted in reduced pricing. Daily gross margin excluding the unusual items was approximately $13,000. In the second half of the year, we anticipate third quarter EBITDA to decline from the second quarter level, driven by a decrease in rig count of approximately 11 rigs and pricing reductions in select markets. We expect most of the rig count decrease to come from Saudi Arabia, Kazakhstan and Colombia.

Canada adjusted EBITDA decreased by $8.5 million to a loss of $560,000 in the second quarter. Rig count at 2.2 rigs was 14.6 lower sequentially. After the severe decline of vacating the second quarter, we expect an improvement in the third quarter, as we’ve experienced the unusual seasonal recovery in both rig count and margins. We currently have eight rigs operating in Canada. Drilling solutions posted adjusted EBITDA of $9.4 million down from $19.4 million in the first quarter. The decline in U.S. drilling activity for Nabors and third party rigs affected volumes for this segment.

In addition, pricing pressure has impacted our results. For the third quarter, we’re expecting adjusted EBITDA to remain approximately flat. Rig Technology’s reported adjusted EBITDA of $3.2 million in the second quarter, an increase of $6.4 million despite the decline in the market. International sales and significant cost reductions drove this improvement. The third quarter EBITDA should be in line with the second quarter.

Now let me read your liquidity and cash generation. In the second quarter, net debt decrease by $117 million to $2.78 billion. Free cash flow defined as net cash from operating activities, less net cash used for investing activities, totaled $101 million. This compares to free cash flow of approximately $8 million in the prior quarter. The improvement was driven by lower semi-annual interest payments on our senior notes and reduce capital expenditures, which more than offset the lower EBITDA and a normally weak collections in many markets.

Disruptions traded by COVID delayed customer approvals, our invoicing and payments by our customers. In addition, lengthy negotiations related to day rates during COVID lockdowns in Latin America prevented us from invoicing several customers during the quarter. Capital expenses in the second quarter of $49 million were $11 million lower than the prior quarter. Our CapEx target for 2020 remains at $240 million. Our solid cash flow generation is the result of swift and meaningful actions taken to mitigate the impact of the current downturn.

We now expect our actions on overhead, capital discipline and dividends to exceed $220 million for the final three quarters of 2020, somewhat higher than our initial target. We anticipate having ample liquidity to meet our upcoming obligations. Our cash balances closed the quarter at $484 million and availability on our credit facility stood at $440 million. Remaining balances in our senior notes due in 2020 and 2021 now stand at $139 million and $154 million respectively. Our credit facility, a key component of our available liquidity includes various covenants. This facility expires in October of 2023. Given the current industry uncertainty under certain scenarios, reaching up the facilities covenants in 2021 could be possible. So we moved this exposure. We’re currently working on an amendment with the lenders to avoid potential covenant leases through the facility to remaining life.

With that, I will turn the call back to Tony for his concluding remarks.

Tony Petrello

Thank you, William. I will now conclude my remarks this afternoon with the following. We are witnessing several transformations across our industry. Even in the current environment, we see accelerating interest from our stakeholders and internal teams. First, integration, specifically a services around the website. Nabors has led this revolution. Our services and wellbore placement and tubular running are designed to run seamlessly with our rigs. An important benefit in the current market is do staffing and services at the website.

Second, digital invasion. Our systems quite comprehensive data in real time while drilling this portfolio includes drilling data and high velocity diagnostic data generated by equipment. Using our rig cloud platform, we offer cloud edge digital workflows, which facilitate real time optimized decision making.

Third automation, which improves speed performance and safety. Nabors offers a broad range of task automating services. Our suite is industry leading. It includes the ROCKit and Revit performance tools. Our portfolio also includes more recent additions, SmartNAV formerly named Navigator and SmartSLIDE, which is formally made ROCKit pilot.

Finally, ESG. Our current focus is to set baseline for our ESG criteria. This effort incorporates the initiatives already underway and completed. These include our dual fuel capable rates, engine emissions, our low noise, caring sigma top drive and our leading safety performance. The breadth of our initiatives in these areas is comprehensive. The obvious benefit is to improve operator’s economics. Beyond that, they improve well site safety, produce higher quality wellbores, increase total well production and drive positive change course the value chain and in society broadly. The current market is forcing the extraordinary selection process in the services industry and among EMP operators. In the Lower 48, operators who survive this process are likely those with financial strength and advantage cost structures. This is the group we think most likely to deploy additional rigs as the industry rebounds.

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By design Nabors has focused on precisely this group of operators over the past several years. Our market share with this collection of 20 companies was increasing prior to the downturn. Since then it has jumped significantly. In terms of working rigs we calculate our overall share within these 20 has increased from approximately 80% at the end of February to 25% most recently. Taking another view among the companies with which we had working recent in February, our shares increase from 27% to 34%. These share gains show the growing preference for Nabors rigs amongst those operators, most capable of adding reagent an upturn.

In international markets, we maintain a significant global footprint in countries with significant reserves at relatively low breakeven prices. These markets include Saudi Arabia, Kuwait Kazakhstan, as well as offshore Mexico. These markets are poised to increase activity as global oil consumption rebound. Our positions in our served markets and the value proposition we bring to those markets are firstly. We are confident we hold the advantage as the industry emerges from the downturn. The leadership position in drilling requires best and fast rig design, industry leading safety and operating performance and advanced technology. Nabors began its commitments to technology leadership years ago. We heavily invested in R&D even through the downturns. We have a robust drilling technology portfolio supported by proprietary and patented systems. We expect to continue to expand the breadth of this portfolio.

In addition to our advanced rigs, we monetize much of our technology to our NDS business. I will remind you mind you that this business is significantly less capital-intensive than the rig business. Revenue in NDS is larger than similar business lines as other Lower 48 drilling contractors. In recent quarters, NDS’s EBITDA has significantly seized the next two combined and demonstrating the reach of this business. Third party rigs have accounted for 15%. So as much as the third of NDS is Lower 48 revenue.

Our technology portfolio is developed collaboratively with customers feel the benefits of experience, expertise and perspective from a universe of contributors. I think these relative statistics, the technology portfolio, talking about the lives of NDS and third party volume, demonstrate our field leadership position at drilling technology.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question today comes from Connor Lynagh of Morgan Stanley. Please go ahead.

Connor Lynagh

Yes. Thanks. Afternoon. I think you brought up in the prepared remarks some degree of pricing pressure in international markets. I was wondering, if you could quantify or at least, directionally speak to the magnitude where it was worse where it was better. Any color you can provide that would be great.

William Restrepo

Sure. So good question Connor. And it has multiple answer to it. Unfortunately, we have a piece of the pricing pressure really was related to the COVID lockdown. So basically, the discussion was raised on the contract on standby revenue. But because of the situation our customers were facing, what kind of day rate were we going to get for those periods. And actually, that has been the biggest factor. I would say, I were to estimate how our revenue or pricing was affected overall in the second quarter, I think it would be like a 12% hit based on those are significant reductions in those markets, which were mainly in Latin America, by the way.

Then if we look at more of the demand supply situation that our clients are facing and some of the pressure reporting, both on volume and pricing. I would say that that particular impact is, between zero and mid-single digits. That would be the more sustaining reductions that we will face going forward. That’s what we’re seeing today.

Connor Lynagh

You raised the issue of the covenant on credit facility, which certainly seems like thus far banks have generally been willing to work with lenders on that front, but could you just sort of think more holistically, how should we think about maturity management over the next few years? Is your intention to continue to repurchase near term maturities? What’s your sort of the high level view of what your plan is there?

William Restrepo

So yes, obviously, we have to — part of our job is to look forward and identify potential problems in the future. Yes, so we don’t have any near term covenant issues. But the facilities still have three more years remaining. So obviously, we discuss early on rather than wait for problems to occur. So that’s, we’re currently in discussions with events we expect to have an amendment pretty shortly that will allow us to not have any covenant issues through the remainder of the facility in October 2022. Yes, we have been purchasing some near term maturities. I must say that the volumes we have managed to purchase more recently have falling off and people are holding on for a bounce to a bit more than maybe a few months ago. So, for now, we think we’re paying down or 2020 with our cash generation and existing cash, and 2021 is still a bit far off to be guessing about what we will do. But if you have opportunities to buy the 2021 off the market we’ll continue to do so.

Connor Lynagh

Got it. I appreciate color. I’ll turn it back.

Operator

The next question is from Taylor Zurcher from Tudor, Pickering & Holt. Please go ahead.

Taylor Zurcher

Hey, good afternoon and thank you. I wanted to start by asking about some of your comments in Saudi. It sounds like, at least a handful of your rigs are going to be suspended through year-end. And I’m curious if you could frame, how many rigs are going to be affected by this at least in 2020? And then if it really is a suspension period, do you expect those rigs to go back to work and at somepoint in 2021? Or is that too early to call that right now?

Tony Petrello

So in the Saudi market in general, I think the rig count in terms of spent, which is up to about 28% since last quarter. So, it’s pretty significant. I think if our market position as well as a great support for our customer partner, I don’t think we’re being impacted to the same extent, but we will be impacted. And that’s a situation right now.

William Restrepo

So we estimate an impact from 6 rigs from the 43 that we have today.

Taylor Zurcher

Okay. Got it. Okay. And second question also internationally, it sounds like working capital was a headwind in Q2 and you went through the reasons for that and part of that is that the pandemic that’s ongoing. But curious if at least in July for the first month of Q3 have collections internationally improved at all? And is there any way to frame for us how we should think about working capital, hopefully tailwinds in the back half of 2020?

William Restrepo

So yes, I did mentioned that and I want to clarify this a relative headwinds. I mean, obviously our revenue went down quite a bit and working capital did helped a little bit. But not nearly as much as we expected because DSOs went up by 4 days. And yes, it was mainly Latin America. I mean, it is more issues of, if you were discussing what the day rate is going to be during the lockdown period, obviously you can’t invoice. And those negotiations are finalized, you have to wait to invoice. So we do expect to recover a lot of that slowdown during the third quarter. Some negotiations may take longer and would extend maybe to the fourth quarter. But in general we do expect most of that slowdown that we saw in collections to correct itself into third quarter.

Taylor Zurcher

Alright. Thanks for the responses.

Operator

Our next question comes from Waqar Syed of ATB Capital Markets. Please go ahead.

Waqar Syed

Sure. Thank you. So the 74 rigs that you have working internationally, could you provide a breakdown of where geographically they are working right now?

William Restrepo

Obviously the biggest piece is Saudi Arabia, where we have 43 rigs, and less will be Latin America, Waqar, we have some 20 rigs and so that are operating. And then the rest is just drips and drabs, I mean Kazakhstan, Russia. We have one remaining rig in Algeria, and then Kuwait, Oman. So that’s more or less the distribution. I don’t think we have any other country that I didn’t cover many, Latin Americas, Mexico, Colombia, and Argentina now has been closed down.

Waqar Syed

So the 74 rigs that you have working does not still include the eight rigs that make them off in Saudi Arabia.

William Restrepo

I think I said six before, but yes.

Waqar Syed

Sorry six rigs.

William Restrepo

Couple of them are already down.

Waqar Syed

Okay, so couple of them are already.

William Restrepo

By the way is doing this very smartly rather than suspending rigs permanently, what they’re doing is alternating rig, so keep their rigs active and keep the rigs from being stacked fully and moves on a certification periods and so on and so forth. What they are doing is automating the rig and rigs are taking turns to go down. So I think that’s very beneficial, both, I think for ankle, but also for the drilling contractors, because it avoids having to show rigs on fully and then try to bring it back down the road. So I think that I haven’t seen this done by other clients, but I think that’s a very smart way of doing it.

Waqar Syed

And then you have a contract to build five rigs a year. Do you expect to stop that program next year in Saudi Arabia?

Tony Petrello

Well the triggering point is the Aramco issue a work order with a term contract to initiate a process that’s not happened yet. And, but we are prepared to accept that and move forward. But so far that hasn’t happened and given what we just told about rig. So time been certain when in fact they will issue that the first work order. So we don’t think any rig will be deliver in 2021 by the way.

Waqar Syed

Okay, fair enough. And then I know people try to commit different ways, but do you think margins in international could be in that 11,000 level in third quarter? Or do you think that better or worse?

William Restrepo

As you’re going to margin. I said many times as the margin internationally is really an average of a very widely dispersed number of rigs, relevance for modeling, I guess. But what I can say is that we expect in the second half of the year to recover some of the erosion we saw in the second quarter through the COVID rig counts. Now the extension of the COVID discounts and the activity shutdown so we’re seeing in these various countries is still uncertain when it will stop or how much or which hotspots that client decides to shutdown. But we do expect to recover that. On the other hand, we expect a lesser impact from more permanent discounts in various rig markets. So I think the erosion that we’ll see the margins could be more related to how rigs operating and us being unable to fully reduce the direct overhead as much as the rig counts fall, but we’re certainly going to try our best. So we think we’re going to be able to sustain our margin pretty well, of course in the second we did have early summation, which impacted our margins and so we are more like margins were only $13,000 per day.

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But what I can’t say given all the moving pieces, it’s very difficult for me to give you a number for third quarter. So we’ll say something similar to what we said in the second is that at this point, we’re not really ready to provide guidance on international because there’s several moving pieces that are being negotiated, and sometimes the issues that can give us a wide range.

So here’s an example in the second quarter of international market we had a range of outcomes somewhere in a $30 million range. So it could have been higher or more. Fortunately, we’re very close to the upper end of our outcomes. In the third quarter, we do have a couple I would say $10 million to $20 million difference in potential outcomes, depending on how negotiations and some discussions we’re having with clients call.

So we’re not ready to give guidance. But all we can say is that our rigs will most probably go down by another rig, and we will have a little bit of improvement in pricing, I think in the third quarter versus the second. And we also believe that, pricing will continue to be a little bit under pressure in the fourth quarter, and potentially a couple more weeks could go down.

Tony Petrello

Okay. I answer the [indiscernible] Waqar is that international is a portfolio, just looking out little bit past those two quarters. I mean, our average duration of our contracts more than two years, and of course, the countries that we have started to are all developed countries with long term markets where there’s no question they’re long term developed markets, so I think position wise in terms of a rebound, we’re very well positioned and we have some underlying strength given our contract position and market position today.

Waqar Syed

Absolutely, thanks I appreciate the answer.

William Restrepo

So sorry I couldn’t give you a number on the margin requirements I’ll try harder next time.

Operator

The next question today comes from Sean Meakim of JP Morgan. Please go ahead.

Sean Meakim

Tony, Williams so constructive progress on the cost reduction program. Well just it’s not clear how much of this is variable versus entire the lower activity versus what your fixed cost structure more competitive when activity improves. The total cost out seems to align with the revenue declines give or take for the year. Can you maybe just elaborate a bit on how much of that cost you taken are you characterize as fixed or variable and any implications?

Tony Petrello

Sure. About, I would say about half is SG&A and engineering and the other half a little bit more than half is field support. And I would say that probably 70% of the cost structures hopefully are structural, and the rest are related to lower your compensation given the environment. So it has some downside potential. That’s roughly the numbers we’re seeing right now, so probably we need to convenience that.

William Restrepo

No I think that’s exactly right.

Sean Meakim

Yes, very helpful. I appreciate it. And so then the thing about the U.S. specifically, day margins in the quarter the guide for third quarter. You’re able to offset some of the lower activity and some initial decline of rate with cost out. I didn’t hear any comments about the impact of rig mix the meaning the handful rigs you have outside of the Lower 48 being a bigger piece of the overall. Did that have any impact on the guidance that you gave? And then just thinking about the outlook for Alaska and Northern Mexico, how that’s influencing the numbers 2Q to 3Q? Thanks.

William Restrepo

So we did give specific guidance for the Lower 48, Sean. You’re rights. I mean, there’s some mix impact there. Some of the rigs we lost or some of the weaker margin ones, but also something that is impacting several of the contractors margins in a favorable way is that, the rigs that are stacked overall. I mean, it doesn’t all for all customers. But overall, we lose less in revenue than the potential for reducing costs. So, the margins for those rigs on the average are better than our average for the whole fleet. So that, we want to speak of a mix that probably was the biggest and largest impact.

And yes, I mean, we have more our M1000, M800, some of our highest quality rigs working as a proportion of the fleet today than maybe two months ago. So, that does have an impact on the average margins.

Sean Meakim

And then in Alaska and Gulf of Maxico, any change there?

William Restrepo

In the Gulf of Maxico, I think the hurricane season comes at one rig goes out and then hurricane season ends and comes back then we get a couple of comeback. So not a lot of changes. We had a very, very strong second quarter. I think, we expect the one rig maybe go down with third.

Tony Petrello

One or two maybe.

William Restrepo

One or two maybe. And then come back in the fourth quarter. Alaska, pretty stable. I mean, yes. I mean, we have the seasonal down takes that we usually see in this quarter same as in Canada. But general activity space more or less the same from what we saw in the first quarter underlying activity.

Operator

The next question comes from Karl Blunden of Goldman Sachs. Please go ahead.

Karl Blunden

Thanks for the time and good to see the progress on cost cutting. Just a question on the balance sheet and the bond buyback activity. It’s seems the slope quite markedly since May. And I was curious if you could provide a little bit of context on the trade-offs that you’re looking at when doing those bond buybacks. It feels like it’s a 22 still trading well below par would make some way to create a little bit of value by going off to those a bit more aggressively.

William Restrepo

I think it’s 23, so we don’t have any 22. So we have 21s and 23s. And anything within the next couple of years is pretty fungible in terms of cash flow and obligations that we have we find in near-term. So being able to buy some of those loans on the market at a discount is certainly attractive. Obviously, we tried to do it within the constraints of our cash flow generation to make sure we don’t go too big on revolving credit facility. So that’s what we’ve been doing and we are taking a measured approach, trying to take advantage of the market, but not going crazy in terms of trying to buy too much.

So maybe within our cash generation means actually sort of trying to do.

Karl Blunden

And then just on the bank lender discussion. Maybe there’s not much you can share at this point in time, but what are some of the things that are giving you and the banks comfort with providing a way for us that you require certainly a better cash flow than you’d expected, but what else is part of that discussion at this point?

William Restrepo

I think a discussion that ongoing it by its nature confidential, and that’s something we’d like to talk about, but it’s just, I mean if you know what banks do and if you’ve seen what Nabors has done in the past, I think, it’s just the normal kind of discussions to get some kind of relief.

Operator

Next question comes from Jason Murty of Millennium. Please go ahead.

Unidentified Analyst

Thanks for the call. I just had a question on Saudi Arabia, if you could provide an update on the amount of cash that was there that’d be great. Thank you.

William Restrepo

So somewhere in the 300 plus range.

Unidentified Analyst

Are there any plans or avenues for you to access that cash?

William Restrepo

Yes. I mean, we have more cash than we need for future expansion of the fleet. So right now, given the current environment, obviously there’s too much cash and we will continue probably to build up some cash for the next two years if we don’t use it for the new build. So we do have some mechanisms to get the cash out, but we haven’t engaged in those discussions with their partner, because up to now, we haven’t really needed that cash outside.

Unidentified Analyst

Understood. And then any way to kind of bracket the amount of excess cash out of that 300?

William Restrepo

If you think about it, maybe investments in potentially new rigs will be somewhere in the range of a couple hundred million dollars, maybe hitting most of that hitting in 2022. So obviously we won’t be needing those 300 — and 300 change in the next year and a half or two years.

Operator

Last question today comes from [indiscernible] Capital. Please go ahead.

Unidentified Analyst

Thank you. I had a question regarding the process for recovering. In other words, the one demand starts coming back. What happens to those old contracts from clients? Are those contracts, if the clients have demand, do you have to start new contracts and looking forward? What do you see the process for recovery?

William Restrepo

Right now we’re in the mode where there aren’t any new contracts maybe its extensions and renewals and on a rebound obviously those customers that are poor customers, we would hopefully engage with them and there would be additional contracts and pricing would be agreed to at that time, reflecting the end market. So that’s where we are seeing evolving. In some cases, rig effect on rate, so there is still revenue and its still contracts. So those rigs turn them off, there is no need to do any new contract. And maybe the countries where we have COVID shut downs. Again, we have contracts that are covering those rigs, so there’s no need to do any new contracts. So I think some of that would be non-contracts but as Tony mentioned, if clients, want more rigs they have to do contract.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to William Conroy for any closing remarks.

William Conroy

Thank you, [Eliza]. We’ll wind up the call there. Thank you ladies and gentlemen for joining our call this afternoon. If you have any questions, please give us a call or email us as always.

Operator

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



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