Q3 2019 Earnings Call
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<unk> earnings Conference call.
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Corporate development and Investor Relations.
Please go ahead.
Good morning, everyone.
Thank you for joining neighbors third quarter 2019 earnings conference call.
Today, we will follow our customary format with Tony Petrello, Our chairman, President and Chief Executive Officer, and wherever strip, our Chief financial officer, providing their perspectives on the quarter's results along with insights into our markets now we expect neighbors to perform in these markets.
In support of these remarks, the slide deck is available both as a download within the webcast and any investor relations section of neighbors Dot com.
Instructions for the replay of this call are posted on the website as well.
Since much of our commentary today will include our forward expectations.
It may constitute forward looking statements within the meaning of the securities that 1933, and the Securities Exchange Act of 1934.
Such forward looking statements are subject to certain risks and uncertainties as disclosed my neighbors 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 net debt adjusted operating income adjusted EBITDA.
Free cash flow after dividends.
All references to EBITDA made by either Tony or William during their presentation.
Well there qualified for the word adjusted or otherwise mean, adjusted EBITDA is that term is defined on our website and in our earnings release.
Likewise, unless the context clearly indicate otherwise.
References to cash flow or free cash flow being free cash flow after dividends.
Is that termed as defined on our website and in our earnings release.
We have posted to the Investor Relations section of our website reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures.
Now I would turn the call over to Tony to begin.
Good morning, Thank you for joining us as we review our results for the third quarter of 2019.
Before discussing neighbors performance I will offer some comments on the macro factors affecting our markets.
These factors had a material impact on our north American customers activities during the quarter. They also appear to be influencing their forward planning.
During the third quarter, the average price of near my WT I was $56, having traded as long as $51 to mid August .
This represents a nearly 6% decline versus the second quarter average.
Natural gas prices also declined averaging just over $2.30 during the second quarter.
The most recent quarterly Dallas Fed Energy survey M. P. Respondents cited it low commodity prices as to make it straight limiting their growth.
The lower customer activity in North America has also resulted from the combination unlimited access to capital as well its investor pressure to generate free cash flow.
Finally, macroeconomic fears related to trade wars, and sluggish growth have increased customer concerns about future demand for oil and gas.
These factors clearly accentuated the expected decreases activity for the third quarter as our customers compensated the cash flow shortfalls with what we're drilling and completion expenditures.
Consequently, the third quarter average and exit rig counts for the industry fell well below prior expectation.
We expect all of these macro element to result in some additional reductions and lower 48 drilling activity through the ended the year.
During the third quarter in particular, the U.S. lower 48, Lan industry average rig count declined by 102 rigs and 11% reduction.
I will have additional thoughts on this topic when I discuss the results of our quarterly customer survey in a few minutes.
For our international markets, the macro picture, it's one of improving pricing and gradual growth in activity.
In those markets oil prices have still been supportive of incremental activity.
Moreover, our typical customer is longer term focused and either a state owned oil company or a large global operator. This provides a layer of insulation from the market pressures that exist as lower 48.
Consequently, we anticipate ongoing incremental demand for VIX across most of our international markets.
Our U.S. drilling results reflect the change in the market that occurred during the latter part of the quarter.
At the same time, our international business drove a significant increase in our consolidated results adjusted EBITDA totaled 207 million up 4% from the second quarter.
Our lower 48 average rig count declined less than seven rigs at the same time daily gross margin improved slightly due to stable pricing excellent operating performance and a favorable rig mix.
In our international segment, adjusted EBITDA increased by nearly 10%.
This growth reflected significantly better operating performance across several markets the balance of our segments. We're about on par with the second quarter.
Notably our Nabors drilling solutions segment improved despite the loss of content from idled third party rigs in the lower 48.
Although short of expectations. This increase occurred as the concept penetration per rig expands it.
Also the segment's results reflect increasing adoption of higher margin automated directional drilling and tubular running technologies.
Now, let me discuss our view of the market in more detail.
During the third quarter, the industry rig count and lower 48 averaged 886 rigs.
Last week the rig count stood at 800 that is down by 29 rigs from the ended the third quarter, which stood at a 29.
Since the beginning of the year the rig counts declined by 249 rigs or about 24%.
As of last week neighbors rig count was down by only 13 rigs were 11% for the year in the U.S. lower 48.
Our relative outperformance, both operationally and financially it's the best testimony to the value add it by the quality of our rigs operations and technology.
The foundation of this performance is our best in class safety record, which has steadily improved for the past eight years 2019 is shaping up to continue that trend.
As I have stated many times, we believed that the quality of our U.S. rig fleet is second to none these third quarter results demonstrate that.
Midway through the third quarter, we saw a sharper activity reductions that were indicated in our previous lower 48 customer survey.
This decline occurred with the mid August contracts metal prices and with the emergence of recessionary concern.
Customers continue to adjust their operational tempo, so lower cash flows capital constraints and oil price worries.
Once again in September we surveyed our top 20, <unk> lower 48 customers. The survey reflects some specific consolidation plans from recent mergers and minor budgetary constraints.
The surveyed clients account for approximately 39% of the total lower 48 industry rig count the participants indicates that a further decline of about 20 rigs were 6% is planned for the remainder of 2018.
Most of this net decline is concentrated in just two operators, notably nearly 60% of responded indicated no change.
The June version of our survey, which was taken before the emergence of third quarter macro sentiment changes, indicating a similar magnitude decline among the larger number of operators. However that change resulted in an actual decline there was more than doubled the indicated level.
The latest version of the survey indicates those customers largely completed their plan changes in activity during the third quarter.
As a reminder, my comments on the survey reflect the responses of our customers their plans and activity levels can and do change overtime.
As I highlighted earlier, our U.S. lower 48 rig count has held up quite well, particularly in the face of the current industry conditions, we credit the quality of our customer base and their strong appetite for high specification rigs.
These rigs comprise 95% of our working rig count.
In West, Texas for example, the most active rig market and lower 48.
Our rigs are among the most competitive at highly sought after we currently have 41 high spec rigs, including 16 of our pace X rigs in that market.
The utilization of our X rigs is currently 93% in West, Texas, We only have one idle X rig out there.
Although our high spec utilization is also extremely high in the North Dakota, and Marcellus markets. Some gas markets have underperformed. These include the Rockies East, Texas and the mid Con, where we have seen drops that activity and some pricing pressure.
Within the industry, leading edge pricing for high spec rigs has softened somewhat in recent weeks, although as mentioned pricing trends vary by geography and type of plays.
For the vast majority of our fleet, we have held the wide on pricing, particularly in the most active basin in West, Texas in South, Texas as well as the Bakken.
Our financial results reflect our pricing discipline.
At the same time utilization for our highest spec most capable rigs in the lower 48 remains approximately 90%.
Market pricing for rigs has come under some pressure as certain competitors have selectively just kind of rig rates.
Our focus remains the delivery of value and performance to our customers. Our results indicate we are succeeding.
In our international markets industry rig activity has been stable and 20 I'd team.
Pricing in these markets appears to be strengthening we have already deployed several rigs not present in our third quarter rig count and what's the point at least two more by the end of the year.
Multiple opportunities remain for additional high spec rigs in several markets.
In our other segments interest in performance in automation solutions is growing.
Customer adoption of our innovation continues to increase operators realized tangible benefits from these products and it shows in our results.
Now, let me comment on our various segment results in highlights.
For the third quarter consolidated adjusted EBITDA totaled $207 million. This performance was up 4% compared to 198 million into second quarter revenue declined sequentially by approximately 2% to $758 million. Several factors drove our results for the third quarter.
Adjusted EBITDA in the international segment increased sequentially by more than $8 million were 10%.
This improvement primarily reflects better performance in several key operating locations.
You asked drilling adjusted EBITDA declined slightly in the third quarter by 3%. Despite a 6% decline in our lower 48 rig count.
Our lower 48 average daily margin improved during this quarter as did U.S. offshore.
In Canada, although EBITDA increased somewhat the market remained weaker than we expected this affected both our rig count and average daily margin.
And rig technologies segment results declined modestly following high revenue for the robotic systems in the second quarter. We are encouraged that the performance and Canrig improved sequentially.
We achieved some notable highlights during the quarter.
First we deployed to are you rigs the international markets during the quarter.
The first is a very large you to in Kazakhstan. The second is a highly capable newbuilds and 1000 unit in Argentina.
All of these rates are working for U.S. space majors ran overseas and should be accretive to this segment's margins beginning in the fourth quarter.
During the third quarter, we again increased the penetration of rocket pilot and navigator, we increased the total job count by 20% in the third quarter.
The number of jobs running for third party directional drillers increased by a third.
We expanded our customer reach and are running automated directional drilling jobs with our pilot system for 10 customers spread over six basin.
Nearly 60% of our current pilot system jobs are remotely operated we're seeing a consistent uptake for pilot. The initial rollout has been successful and we're now scaling.
Canrig deployed the first unit of its next generation Canrig stigma top drive on X rig in South Texas.
This unit achieved industry, leading horsepower output in its class.
Features a direct drive mechanism, which reduces the number of moving parts improved reliability and reduces maintenance.
Most performance advantages will be even more attractive for our clients drilling hard formations with high vibration in the middle East and other markets.
Now, let me discuss our segments in more detail first U.S. drilling.
We currently have 99 rigs working into lower 48. This compares to an average of 107.8 for the third quarter and 101 at the ended the third quarter.
During the third quarter, our average rig count decreased by seven rigs versus the second quarter.
Even in light of this rig count we managed to maintain our lower 48 daily rig margins to 10000 to 31 per day.
International drilling.
Our international rig count for the third quarter averaged 88 rigs down one versus the second quarter. Despite the slower breakout adjusted EBITDA for the quarter increased by 10%.
We realized the benefits of the performance improvement plan, which we previously implemented in Latin America, and the Middle East.
These resulted in improved uptime and better move performance.
The rest of our international operating geographies were mixed and on balance stable.
In Canada, our results increased modestly as the market environment remained weaker than we expected this market experienced only a very muted seasonal upswing our results were not immune to that.
Drilling solutions.
Drilling solutions financial performance improved slightly versus the previous quarter.
Encouragingly this increase occurred in the face of lower neighbors and third party rig counts in the U.S.
Our international results and tubular running services line, we're bright spots.
Next rig technologies results in our rig technology segment were essentially flat.
This segment includes can rate to TD and robotics technologies second quarter results benefited from significant milestone payments for our initial robotic to afford project.
Now, let me discuss our outlook by segment.
In U.S. drilling for the fourth quarter, we believe our lower 48 rig count should approximate the current level of activity.
We expect our lower 48 daily margins to decline by a couple of hundred dollars per day, our U.S. offshore and Alaska business should be essentially flat with the third quarter.
In the International segment, we expect steady improvement largely driven by increased rig activity. In addition to the two high spec rigs, which deployed in late Q3, we have additional units scheduled to commence during the fourth quarter. These include two platform rigs in Mexico late in the quarter.
Our average rig count for the fourth quarter did increase by approximately two rigs.
Our customer in Venezuela receives an extension of sanctions waiver, we expect to maintain our operations there at third quarter level.
All in we expect fourth quarter International adjusted EBITDA essentially in line with third quarter.
This sequential performance from the increase in rig count will largely be offset by the expiration of amortization of upfront payments.
Drilling solutions in drilling solutions, we expect fourth quarter results approximately in line with the third quarter.
Rick technologies looking forward, we expect fourth quarter adjusted EBITDA for rig technologies in line with this past quarter's results.
That concludes my remarks on the third quarter results and our outlook now I will turn the call over to William for a discussion of financial results. After his comments I will follow up with some closing remarks.
Good morning.
The net loss from continuing operations attributable to neighbors of $123 million represented a loss of 37 cents per share.
The quarter included $14.7 million or four cents per share an exceptional charges related to an income tax settlement in a foreign jurisdiction.
An 8.5 million or two cents per share an after tax currency losses from the Argentina devaluation.
The third quarter results compared to a loss of $208 million or 61 cents per share in the prior quarter.
Results into second quarter included $99 million or 29 cents per share in net impairments to intangible assets.
These were partially offset by a nonrecurring tax gain of $31 million or nine cents per share.
Revenue from operations for the third quarter was $758 million, a sequential reduction of 13 million or 1.7%.
Just drilling fell by $15.6 million or 4.8% driven primarily by reduced rig count in the lower 48.
Seasonal declines in the Gulf of Mexico, and Alaska also contributed to the drop.
Rig technologies revenue decreased by $9.6 million, reflecting a reduction in equipment sales and the prior quarters milestone revenue for robotic systems.
Unbalance revenue from our remaining segments increased moderately.
Our average rig count in the lower 48 of 107.8 declined by just under seven rigs some 2.5 rigs more than we had anticipated.
Daily rig revenue in the lower 48 increased by slightly more than $100, reflecting relatively stable pricing for rigs.
Then improving mix.
International drilling revenue at $328 million increased by 1 million, primarily reflecting improved downtime performance in several of our larger operating locations.
This improvement offset a slight reduction in segment rig count.
Canada drilling revenue at $12.2 million increased by $800000 rig count increased fractionally as the expected seasonal improvement was muted and occurred later than anticipated.
Drilling solutions revenue of $62.3 million declined by 2.3 million from the previous quarter.
Our international activity increases were more than offset by lower activity us land.
However, the incremental activity overseas provided us with significantly higher profitability then the loss activity in the lower 48.
Revenue in a rig technology segment was $10 million lower at 63.1 million.
The decrease revenue came primarily from lower sales of capital equipment spare parts and repairs.
Most of the reductions came from more margin internal sales.
In addition in the prior quarter, we had higher milestone revenue for robotics system project in the North Sea.
EBITDA improved to $207 million compared to 198 million in the second quarter, a 4% increase.
This improvement was led by international drilling, which increased by $8.4 million, while you're drilling fell by 4 million on the onshore rig count decline.
Drilling solutions, Canada drilling and corporate overhead reductions all contributed to our improved results.
US drilling EBITDA of $120.9 million was down by 3% sequentially.
In the lower 48 daily rig revenue and margin held steady with rig margins closing a 10231.
Our rig cruel wage increase of $290, what's the offset by higher revenue per day and by reductions in other operating costs.
We expect daily rig margin to fall off somewhat to around that 10000 dollar mark in the fourth quarter driven by market price erosion in a couple of regions.
Our current rig count is 99 in the lower 48.
Rig count should average approximately 100 rigs in the fourth quarter.
International EBITDA increased by $8.4 million to 95.2 million in the third quarter. Despite a 0.8 rig reduction to 88 average rigs in the quarter.
Daily gross margin increased from approximately 12602 13700.
This improvement primarily reflects substantially better operating performance in multiple locations and further benefits from cost improvement initiatives in Latin America.
Operational and cost performance in almost all of our international locations with somewhat better than the prior quarters.
In the fourth quarter rig count should increase somewhat due to the recent deployments of two rigs in Argentina.
So in Russia, and another one in Kazakhstan.
No more platform rigs are scheduled for deployment in Mexico in early December .
We currently expect international Q4, EBITDA essentially in line with the third quarter.
Our fourth quarter forecast assumes stable rig count in Venezuela based on the recent extension of U.S. waivers until late January .
Although fourth quarter average recapture increased by a couple of rigs.
This incremental activity will be offset by an 8 million dollar reduction in a more decision of advance payments in Saudi Arabia, and Catholics done following the recent contract renewals.
Canada, EBITDA increased by $400000 to 1.5 million.
Rig count at 7.7 was marginally higher and daily margin increased slightly to $3800.
The marketing, Canada has fallen more than expected and all the recovering from the seasonal second quarter decline the rebound has been less robust than usual.
We now expect a modest seasonal increase in activity for the fourth quarter with a three rig improvement in rig count and margins around the 5000 dollar Mark.
Joining solutions posted EBITDA was $23.5 million up from 22.5 million into second quarter.
Product lines, the largest improvement was in tubular running services as our activity continued to shift towards higher margin integrated services.
The balance of our NDS product lines declined modestly in the third quarter driven by the lower us rig count.
The fourth quarter, we are targeting EBITDA and NDS similar to the third quarter.
Rick technologies delivered EBITDA of $2.2 million in the third quarter as compared to 3.2 million in the second quarter.
EBITDA improved in the core canrig equipment business due to a better mix.
Fourth quarter EBITDA should essentially mirror the third.
Our neighbors as a whole we would expect EBITDA onto being the range of 202 $205 million in the fourth quarter.
Now, let me review or liquidity and cash generation.
The third quarter free cash flow after dividends defined as net cash from operations less cash used for investing activities minus dividend payments was $74 million.
This compares to approximately 82 million in the prior quarter.
The third quarter included semiannual interest payments of approximately $70 million as compared to minimal interest payments in the second quarter.
We also continue to implement initiatives to reduce our working capital.
These are required to offset recent trends in our accounts receivable.
There was a third quarter many customers have delayed their payments.
The impact of these delays has been approximately $85 million versus our year to date target.
Capital expenditures of $87 million into third quarter fell by 43 million below the level the preceding quarter.
We're now targeting $400 million to $410 million in Capex for the full year.
Well the absence of semiannual interest payments and additional capex reductions our free cash flow should increase significantly in the fourth quarter.
We also expect reductions and are working capital as we continue our portion receivables and other cash generation initiatives.
We remain focused on improving our cash flow, while decreasing our leverage we maintain our commitment to reduce net debt in excess of $200 million. This year.
We're currently working on our budgets for 2020.
And on updating our cash flow forecast for next year.
Our 2020 plan will be prepared with an objective of generating minimum free cash flow of $300 million.
Our plan will include a reduction in capex to a level well below 400 million.
And continued focus on cost optimization, including overhead feel support cost and operating expenses.
With that I will turn the call back to Tony for his concluding remarks.
Thank you William I will now conclude my remarks this morning with the following.
During the third quarter the slowdown in the lower 48 rig count accelerated as we move through the quarter.
This reduction in activity caused a knock on effect on our drilling solution segment.
Over the same time period, there is little evidence of any similar trends in our international markets. In contrast to demand outlook in those markets remains favorable.
We just completed a couple of impactful Vic deployments and we have additional deployments scheduled this quarter indexed in fact, I am pleased with the activity in international markets across all of this relevant segments.
This performance has been a real bright spot for the company.
Against the market backdrop in the U.S., our drilling business is performing well.
The utilization of our high specification rigs is still approaching 90%.
We have shown the ability to put rigs back to work relatively quickly.
Early three quarters of our lower 40, if we currently works for Super majors and large independents.
That penetration demonstrates the value that we delivered to this demand a group of customers.
In drilling solutions, our technology suite is expanding the growing penetration of our leading edge navigator and pilot directional drilling automation systems is encouraging.
Despite the current market headwinds, we continue to validate the value we offer to customers. We remain committed to realizing the significant profitability potential of the MBS portfolio.
Our portfolio of businesses is unique in our sector, we have asset class diversification across several categories domestic land drilling international land drilling offshore well site services and technology. We also have geographic diversification with presences in both.
International and North American markets, which together account for 70% of the world's oil and gas production.
This diverse portfolio is the source of strength.
Growth in our international NDS and U.S. offshore operations led to a sequential increase in total EBITDA.
Approximately two thirds of the company's EBITDA is sourced outside and lower 48 land rig market.
In other words, the majority of our business was stable if not improving throughout the quarter.
I firmly believe the company's performance in a relatively soft U.S. environment confirms that we have the right assets people and technologies in the right places our goal is to capitalize on this situation.
We remain focused on restoring our businesses to solid profitability and returns on capital.
That concludes my remarks. This morning. Thank you for your time and attention with that we will take your questions.
And we'll now begin to question and answer session to ask a question you May Press Star then one in your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, a pause momentarily to assemble our roster.
The first question comes from corner the dog with Morgan Stanley . Please go ahead.
Thanks morning, guys.
Good morning.
So pretty impressive free cash flow target you've laid out for next year I'm wondering obviously, we're early in the budgeting phase, but if you could just walk through at a high level. The big Big factors bridging you from 200 million this year to to 300 million next year.
What are the big moving pieces there.
Await way, we'll do that.
Hey, Hey, Connor, so we're expecting to see about 200 this.
This year like let me just said.
Obviously, we're just starting our budgeting process, but where we have plenty of seminary indications first of all that we expect to see EBITDA higher next year than this year, so that should be incremental and we're not ready yet to discuss by how much higher but oh thats part of our plan.
Secondly, I think we're going to cut or capex by another $45 million next year.
Interest expense should drop by about $20 million.
And if you may recall in the first quarter. This year, we did pay and incremental $11 million or so of dividends. We then we cut the dividend after that so thats 10 million should be accretive tour. So our cash flow for four to 2020, if you add that all those things up to the 200 you end up.
I would say comfortably above $300 million.
Got it but that's helpful and just thinking about the fourth quarter cash flow how contingent is that.
Working capital release, how do you think about what.
Oh, no downside there I.
I mean, the biggest piece as though are more like the interest expense, which is going to be about $70 million more I think our capex is going to be another $45 million north side, we saw in the third quarter.
And of course, we.
Part of my job is to make sure that we have.
No the most efficient working capital for the size of our business and.
We have our team very very focused on that some some of that may come from the working capital obviously year end, it's tough to gauge how well customers will pay but we do expect to get to squeeze of it.
A few tens of millions of dollars on working capital in the fourth quarter. In addition to that we do have a.
Idle assets that are non core and those are now being numbers, but maybe a couple of the three tens of millions of dollars as well in the fourth quarter again, Thats part of our ongoing process and I think in the fourth quarter, we'll see somewhere in the range of $20 million to $30 million and asset sales as well.
Okay. Thanks very much.
You're welcome.
The next question comes from Scott Gruber with Citigroup. Please go ahead.
Yes, good morning.
Turning.
In September I think you entered a a accounts receivable purchase facility did you sell and receivables during the quarter or was there a benefit the cash from any sales.
It's all reality the way the way the way I view this.
Con or is that.
We signed an agreement to sell those receivables that we sold some so why do we do this.
I hate to say this but our customers have been delayed payments on more than usual this year.
Basically not meeting their payment commitments on paying on time and that started pretty early this year.
So I guess those delays have something to do with a push on cash flow that they're getting from their shareholders, but the fact is that year to date, we've underperforming collections in our DSO has suffered.
As a result.
We deteriorate every quarter this year. So the impact this year on working capital was about $85 million. So the way I view. This this agreement is defensive.
So we used to we use that to compensate some of the erosion in our or deterioration or DSL and.
We paid back some of our revolver and but.
I guess the.
So that's part of the game.
But in places like Latin America, we saw a lot of that I mean devaluation in Argentina.
You know allow some of our clients too.
Yeah, so excuse as to delay and renegotiate and things like that so.
So we see that all the time, but I must say that this year, we've seen it a little bit more than usual and like I say that's been we've had a tough year. This year in the first couple of three quarters now the impact has been in the 80 80 plus million dollar range.
Yeah sure that I can just that's one more quick one question we get.
Hi, Nabors is just given the moving pieces, how do you guys think about maintenance capex for the organization as a whole.
I'll turn it back though.
So so for the organization as a whole it obviously maintenance capex depends on the rig count.
But I think our bare bones maintenance capex to low as they can get it too is somewhere in the high 100 to make 180 190.
And so thats pushing I read a more.
More normal number would be somewhere in the low 200.
And again Thats very very much dependent on rig count right. So that that that the current rig count you could do the low two hundreds.
At its current we can't get we can get under 200 until at the currently rig count yes, okay.
Got it thank you.
The next question comes from.
Kurt Hallead with RBC. Please.
Please go ahead.
Yes, good morning.
Hey, Kurt.
Hey.
So my.
Hi, I'm on my follow up questions here, just stick on the financials for a second would be where you generate the net or.
Reduce net debt. If you go into next year can you help us understand if there's going to be they're going to be an absolute net debt reduction into next year, William or is it just building cash on the balance sheet.
No I mean, it's definitely going to be a reduction.
Next year I mean, the minimum yet you were going to see is about 25, which is a 2020 instead mature.
And in September of next year.
So that's going to meet a minimum production, but I would I would expect to see how much bigger reduction on that.
As you can see.
The initial outstanding on the 2020 it was about $600 now we're now at two times so.
So we've been picking at it and we've been picking at the 23 winds and the 2020 threes I think those those three maturities will fall very significantly during 2020 than during the next this coming year 2020.
Okay. Thanks for that additional color Tony Tony on your end do that survey a of the customer base every quarter.
As you kind of.
Maybe step beyond that have any piece really giving yet or do you have a high degree conviction and what the piece.
I've given you in terms of indication on how they're going to start a 2020.
Obviously.
This is the topic as Youre I would say, it's almost where they're talking about filled premature.
I can't say, there's been a great deal dialogue in interest from them in contracting additional high spec rigs, obviously, the commodity price has to cooperate and the overall macro rooms as a big issue, but I think the early indications are yes, and Directionally you can see from waves comment that we are I think we're going to be up so and we were pretty clear about our average rig count.
For the fourth quarter, and we said Directionally you know next year, it's going to go up.
HM. Okay. Then you know into context of dynamics at play through the fourth quarter, where you indicate some competitive pressures ending cash margin degradation. You know as you go again think through that process, where we try to think through the process into next year.
Do you get a sense that that pricing should stabilize or do you think that there's still going to be some bleed bleed through on pricing as you get into the first part of next year.
Again, I think the visibility is limited I think you got to be really careful we talk about pricing I mean theres lot of talk on Ralph can make sure you're talking about apples to apples here.
I mean, you've heard people talk about.
Dayrates in the low teens I'd be surprised when rigs are the same how those offerings with the same kit that we're pacing in the mid Twentys set those rates when you break it down you have to segment markets here in the U.S. in the oil markets as we indicated I think there.
There is little weakness, maybe as much as far as long as a day real weakness is in the weaker gassy markets that could be up to a couple of thousand dollars. We've been able to navigate this speak with our focus on the oil oil markets and the shift in mix towards high spec rigs.
We don't see.
A reason to reprice, our fleet down to just get USA show a few rigs to me, that's I guess as to us and but having said that we haven't lost a rig to a competitor undercutting us so.
And as you know the top $4 a cap and why is your high spec rigs and they've been about both with disciplined settle as it's a pretty supportive environment I don't think that's changing as I look going into next year again absent some big event that we haven't seen that occur yet.
No that's great that's great color. Thanks, Tony I appreciate it.
The next question comes from Chris Farley with Wells Fargo. Please go ahead.
Good morning got.
Morning morning.
Just curious about the 8 million dollar amortization benefit compared to flattish EBITDA in Fourq, you is that going to continue and be persistent through 2020 going forward.
So some of your NAV organization, it's actually no benefit as the other way around we had it through the third quarter the contracts the contracts.
Expired and were renewed so that over those for those contracts had significant upgrades and that there were paid at the beginning of the contract and we are amortized over the life of the contract right. So those 8 million where in the third quarter, but it won't be in the fourth right. So that's not what's offsetting the incremental rig count and some costs continuing cost initial.
Is that we are.
There were that we are.
Implementing in South America, and the Middle East. So so those things we have some positives, but those are being offset by in terms of accounting.
Revenue in the from the amortization of the deferred revenue what do you need to keep in mind, though is that if we have the same EBITDA in the fourth quarter versus the third that means our cash flow should be some $8 million better because that's non cash right.
Right, Yes, that's what I meant I guess at an express it correctly noted they were system going forward, yes specialty persistent okay. And then just curious on the technology front I think maybe one of the things to reduce costs going forward can be progress on de Manning rigs to some extent just curious if that is a a near term potential and to what.
Expectation that we will have some expenses in 2020, I think is somewhere in the range of $50 million.
Both on Ramco and and the manufacturer of the rigs in country indicate that that time timing may slip a little bit.
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