Q2 2020 Nabors Industries Ltd Earnings Call
Good day and welcome to the neighbors second quarter 2020 conference call.
All participants will be in listen only mode. So do you need assistance. Please secondly conference specialist by pressing the star keep all advice Bureau.
After today's presentation, there will be an opportunity to ask questions.
Please note. This event is being recorded I would now like turn the conference over to William Conroy, Vice President Investor Relations in corporate development.
Hi.
Good afternoon, everyone.
Thank you for joining neighbor 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 neighbors to perform in these markets.
In support of these remarks.
Slide deck is available both as a download within the webcast and in the Investor Relations section of neighbors Dot com.
Instructions for the replay of this call are posted on the website as well.
With US today in addition to Tony Williams, and myself are sticky 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 security talked of 1933 and the Securities Exchange Act of Nike 34.
Such forward looking statements are subject to risks and uncertainties as disclose 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 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.
Yes, the context, clearly indicates otherwise references to cash flow made 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 and most recently comparable GAAP measures.
Furthermore, the results discussed during the call our preliminary 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.
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As a result, these preliminary results may be materially different than the actual results reflected on the company's form 10-Q, when it's 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 neighbors common shareholders.
And earnings per share.
Before I turn the call ever to Tony I'd like to match that we've attempted to incorporate your suggestions to improve this call usefulness to you.
As such we're streamlining our prepared remarks, which should permit more time for your questions.
With that now I will turn the call ever to Tony.
Good afternoon. Thank you for joining this review of our results for the second quarter 2020.
I'll begin with comments on our actions in light of the current environment.
Then I will follow with a discussion of the markets and how that's from the quarter.
We will follow with the financial results.
I, rather not comment today will focus on three timely and key subjects first neighbors positioning to capitalize on several emerging themes in the industry.
Second our advantage position as a market as the industry navigate the downturn and third neighbor standing as the technology leader in our industry.
Let me first lead off I commend the each member of the neighbors whole team I've their management and the impact of the pandemic.
The health and safety of our worldwide Safra Paramount.
Neighbors remains committed to ensuring the what we have our workforce at each location around the globe.
That's well we are dedicated to maintaining our focus on safety and our industry leading drilling performance.
This environment has been a challenging one I'm proud of the team for innovation and perseverance.
These qualities have minimized the virus effects on the neighbors extended family and on our operations Nabors has a longstanding commitment to the health is 50 of our employees at the border community, which we operate.
I have this commitment is especially noteworthy this era.
Next I would like to update you on our actions as we manage the current business environment.
Downturn required 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.
He 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're now targeting approximately $11 million additional savings is fixed costs.
This brings our targets $96 million up of 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 dividend suspension these actions plus our previous capital spending reductions totaled more than $220 million just cash savings.
That magnitude demonstrates our commitment to mitigate the impact of lower industry activity.
At the same time, we remain focused on free cash flow generation and that that reduction.
Let me now spend a few moments discussing the macro environment.
On the day of our last quarterly earnings call May near must W.P. I was $24.
Since then it has rallied above $40.
As this upward movement occurred operators executed the spending reduction plans they put in place earlier.
Consolidation has continued chevron's acquiring noble for $13 billion.
What does that doesn't oil producers have filed for bankruptcy.
Are you getting to the end of the second quarter. The Baker Hughes lower 48 land rig count declined by 451 rigs were 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.
And the lack of incremental announcements suggests we may be nearing a bottom in activity.
In our international markets that can be responses Irene.
In certain Latin American markets, the responses sharp with drilling activity ceasing for time during the second quarter.
Most of these reductions resulted from efforts to contain described the corner virus.
The longer lasting cuts investment also announced in Colombia, and Venezuela is this last 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 has started to reduce their drilling activity based on supply demand considerations.
The most impactful is a significant caught in the total rig count in Saudi Arabia.
Our neighbors that has resulted in this especially for a number of 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 second quarter is economic activity Rebounce that trend how worked out the excess inventory, which built up.
Deposits see those there's 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 imports. This EBITDA performance, we reduced ended the quarter by $170 million.
Our global rig count totaled 140 rigs a 26% decline from the first quarter.
Outside the U.S. or 48 Canadian markets, our rig count declined by just 5%.
We never like downturns, but neighbors decline has been much smaller than the industry.
This is a strong testament to the performance of value, which neighbors delivers to which were white customer base.
In our lower 48 business are reportedly big margin of 10449 exceeded the expectations laid out in the previous earnings call neighbors margin performance reflects four key factors.
First the capabilities of our briefly our second to none we offer the highest specification rigs in the lower 48.
Second we are the leaders and feel that safety performance, we believe we deliver greater value well emphasizing safety than our competitors.
Third our focus on operational excellence ever use the expenses you other than we expected benefit of free cash flow.
And fourth recognition by our customers of the value we bring to the table has allowed us to mask pricing and mitigate erosion of our average day rate 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.
Also underscores neighbors ability to deliver technology initiatives at lower costs. We achieved some notable highlights in addition to our financial results first data and digital 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 read cloud.
Cloud as a platform for digital operations, which screens real time drilling data from the edge devices to the cloud it provides real time visibility and analytics to drive performance.
We cloud enabled separation between the remote teams as customers and support centers to maximize planning execution every performance across suites.
Hi, This is an open ecosystem of apps compatible with both neighbors in third party rigs.
What's informed simple and better drilling decisions, we have launched it this month with more than 20 filling gaps and widgets that can be customized to create dashboards and tiles based on users preferences.
Second we have unified the branding of several products and services to align with neighbors smart brands.
This evolution should enhance awareness for several products and services into the neighbors portfolio, the new naming under the smart umbrella with a company value propositions reach offering will reinforce our products are British for innovation value add and quality and helped 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 40 to 65 rigs since the end of the first quarter, 66% decline.
In comparison neighbors working rig count excluding rigs stacked on rate has declined by 50% or 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 neighbors provides the best filling performance with a superior safety record into lower 48.
Looking to the future. We've spent a significant amount of time trying to understand how this market will unfold.
A recent stability in oil prices around the $40 level should improve operator confidence a handful of operators could see a modest increase in working rigs during the second half of 2020.
We're 2021, assuming global economic activity and demand for oil continue to grow we believe MP industry spending will increase.
That spend will likely pull through additional rig activity.
In this scenario, we believe lower 48 operators will be highly discriminating in their selection drilling contractors in rigs for drilling specifically, we anticipate a focus on premium high spec rigs the lower 48 operators, which are most likely to increase their drilling in the very near term includes several that paused activity completely beyond.
Shows, we expect operators with balance sheet strength free cash flow generation and a low cost space, that's the most likely to deploy rigs.
In our international markets, we have already see that can be restart Argentina and Colombia.
The middle East markets continue to evolve to spend the outlook there is less certain regardless contractors with established market share as demonstrated track record of operational efforts will be advantage.
That concludes my remarks on our second quarter results highlights in the current market before William offers his remarks I want to thank the entire neighbors team for their hard work and sacrifice in a very difficult environment also extend well wishes to all those are extended community were affected by the virus now I will turn the call over to William first discussions of financial results.
Guide.
Thank you Tony and good afternoon, everyone.
Revenue from operations for the second quarter was $534 million, a sequential reduction of 26% Oliver segment experienced revenue declined mainly related to the macroeconomic response to the global pandemic.
You is there any revenue of $174 million decreased by 101.1 million or 37% as our average rig count declined by 34%.
More 40, a rig count a 57.2 fell by 36%.
Daily rig revenue in the lower 48 at $24744 decreased by 2455 per day, reflecting lower average day rates and reduce revenue from Reimbursable expenses.
Average day rate eroded by $2000 driven by a reduction in average pricing.
As well as by a higher number of contracted rigs stacked on revenue.
But at a rate lower 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 encoded related standby peers in Latin America.
And negotiated day rate discounts across certain markets.
This deteriorations were partly offset by early termination revenue.
Canada drilling revenue was $3.6 million down 86% as rig count fell by a similar percentage.
Normally effect of seasonality with exacerbated by the week drilling market.
Drilling solutions revenue of $33.1 million declined by 40% from the previous quarter.
Our product lines decreased sharply with our casing running business holding up the best driven by strong international franchise.
This situation was driven by pricing pressure.
The reduction in the lower 48 industry rig count, which was significantly higher and the decline neighbors rig count.
This revenue for the segment fell by 46%.
Revenue in a rig technology segment was $8.6 million or 20% lower at 33.6 million.
The decrease in revenue came primarily from lower aftermarket sales in the U.S. somewhat offset 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 reductions in the lower 48, which affected several segments and by lower rig count in international coupled with pricing concessions, although some of these concession.
Our related to covert lockdown I should does prove temporary other discounts have been extended through the remainder of the year.
I would also like to highlight the quarters EBITDA benefited from $8 million in net gains.
Which came primarily from early terminations in our international markets.
It is running EBITDA of $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 10449.
With this margin improvement came from increased number of stack, but contracted rigs over.
Overall lower expenses for these rigs outweighed the reduce day rates.
Although we experienced some pricing erosion. This impact was offset by targeted cost initiatives, which we can largely replicating 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 two decreased 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 represented 20% a reduction as compared to the second quarter.
In the third quarter, we anticipate daily rig margins to tail off around the 9000 to 9500 range.
Driven primarily by lower day rates and by a moderate increase in brick operating expenses.
In addition, we expect to incur onetime costs to movements stores significant number of rigs that have been idled over the past two quarters.
International adjusted EBITDA increased by $2 million to 93.5 million in the second quarter.
During the 8 million in gains primarily related to already terminations in.
International rig count was 82.4 down 4.3 rigs.
Venezuela accounted for a 1.5 rig reduction as our main customer exited the country.
We are in the process of starting down or activity in this country.
The remaining net reduction in rig count was driven by actions taken by customers to mitigate the current supply demand imbalance, which in certain markets also resulted in reduced pricing.
Jamie gross margin, excluding the unusual items was approximately $13000.
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 decreased to come from Saudi Arabia Ethics and Colombia.
Canada, adjusted EBITDA decreased by $8.5 million to a loss of 560000 to second quarter.
Recount at 2.2 rate was 14.6 lower sequentially.
After the severe decline of obtaining the second quarter, we expect an improvement in the third quarter as we experienced the usual seasonal recovery in both retail margins.
We currently have eight rigs operating in Canada.
Turning solutions posted adjusted EBITDA of $9.4 million down from 19.4 million in the first quarter.
The declining usone activity for neighbors and third party rigs.
Hey, good 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.
Rick Technologies 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 review, our liquidity and cash generation.
In the second quarter net debt decreased by $170 million.
Two 2.78 billion.
Free cash flow defined as net cash from operating activities less net cash used for investing activities totaled 100 on $1 million.
This compares to free cash flow of approximately 8 million in the prior quarter.
The improvement was driven by lower semiannual interest payments on our senior notes and reduce capital expenditures, which more than offset the lower EBITDA, an abnormally weak collections in many markets.
Disruptions triggered by cobot delayed customer approvals are invoicing and payments by our customers.
In addition, lengthy negotiations related to day rates during koby locked down 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 split and meaningful actions taken to mitigate the impact of the current downturn, we now expect or actions and overhead capital discipline and dividend to exceed 220 million for the final three quarters of 20, twond somewhat higher than our initial target.
We anticipate having ample liquidity to meet our upcoming obligations, our cash balances closed the quarter at $434 million.
Stability on our credit facility stood at 440, Maine.
Remaining balances on our senior notes due in 2020, and 2021 now stand at 139 and $154 million respectively.
Our credit facility a key component of our available liquidity includes various covenants.
This facility expires in October 2023.
Given the current industry and certainty under certain scenarios breaching other facilities covenants in 2021 could be possible.
The removed this exposure. We're currently working on an amendment with the lenders to avoid potential covenant breaches through the facilities remaining life.
With that I will turn the call back to Tony for his concluding remarks. 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 thermal themes first integration specifically of services around the website Nabors has led this revolution, our services and one more placement and tubular running our decides to my seamlessly with our rigs in it.
Formed benefit in the current market is reduced staffing services at the well site.
Second digitalization, our systems quite comprehensive data in real time, while drilling.
This portfolio foods drilling data and high velocity diagnostic David generated by equipment.
No I recall platform, we will for class as digital workflows, which facilitate real time optimize decision making.
Third automation, which improved speed performance. The safety neighbors offers a broad range of task order. Many services. Our suite is industry, leading includes the rocket and revenue performance tools. Our portfolio also includes more recent additions sworn DAF formally named navigator as smart slide which is falling.
Rocket pilot.
Finally, SG our current focus is to set baseline for yesterday criteria. This effort in corporate initiatives already under way and completed. These include our dual fuel capable rigs engine emissions are low noise Canrig Sigma top drive and are leaving safety performance.
The breadth of our initiatives in these areas as comprehensive.
The obvious benefit is to improve operators economics.
Beyond that the improve was I'd safety produced higher quality Wellbores increased total well production and drive positive change cost of value chain, and then society broadly.
The current market is forcing extraordinary selection process in service industry and among DMP operators in the lower 48 operators, who survived 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 rebound.
[music].
By design Nabors has focused on precisely this group of operators over the past several years.
Our market share with this collection 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 25% most recently.
Taking another view amongst companies with which we had working rigs in February our shares increased from 27% to 34%.
These share gains show the growing preference for nabors rigs amongst those operators most capable of adding rigs in 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, Cots extent as well as offshore Mexico.
These markets are poised to increase activity as global oil consumption rebound.
Our position in our served markets and the value proposition, we bring to those markets are first rate.
We are confident we hold the advantage as the industry emerges from the downturn.
The leadership position in drilling requires best in class rig designs industry, leading safety an operating performance advanced technology neighbors began his commitment 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 advance rigs, we monetize much more technology to our NDS business I remind you that this business is significantly less capital intensive than the rig business.
Revenue in Mds is larger than similar business lines at other lower for your drilling contractors in recent quarters NDS as EBITDA has significantly sees the next two combined.
And demonstrated reaches its business third party rates have accounted for 15% to as much as a third of Mds is lower 48 revenue.
Our technology portfolio and develop collaboratively with customers, yielding benefits that experience expertise and perspective from a universe contributors I think these relative statistics, the technology portfolio top and bottom lines NDS and third party volume demonstrate our clear leadership position in drilling technology.
That concludes my remarks. This afternoon. Thank you for your time and attention with that we will take your questions.
Thank you we will now begin the question and answer session.
Good question you May Press Star then one on your Touchtone phone.
Our usually speakerphone, please pick up your handset before passing the keys to withdraw your question. Please press Star then Q.
This time, we will pause momentarily to assemble the roster.
The first question today comes from Conor line.
Morgan Stanley. Please go ahead.
Yeah. Thanks afternoon. Thank you.
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 and any color you can provide there would be great.
Sure. So so good question corner and.
It has multiple answer to it. Unfortunately, we have a piece of the pricing pressure really was related to the coded lockdowns. So basically the discussion was caught rigs under contract.
On standby revenue, but because of the situation our customers who are facing what kind of day rate where are we going to get for those periods and actually that has been the biggest a factor I would say we were to estimate how our revenue our pricing was affected overall in the.
The second quarter, I think it would be like a 12% hit.
Based on those are very significant reductions in those markets, which remain in Latin America by the way.
Then if we look at a more of the demand supply.
Situation that are clients are facing and some of the pressure putting both in volume on pricing.
I would say that that particular impact is.
Between zero and mid single digits.
That would be the more sustaining a reduction so we will face going forward, that's what we're seeing today.
Okay. That's that's helpful. Thank you.
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 speak 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 what's just sort of the high level.
Your plant is there.
So yeah, obviously you know we have two part part of our job is to look forward and.
Identify potential problems in the future. So we don't have any near term covenant issues.
But you know that the facility still has three more years remaining so.
Obviously, we discussed so early on rather than wait for problems to occur. So thats. We're currently in discussions with the banks, we expect to have.
An amendment pretty shortly.
That would allow us to or.
Not yet have any covenant issues through the remainder of the facility in October 2023.
We yes, we have been purchasing.
Some near term maturities.
Lets say that the volumes, we have managed to purchase.
More recently have fallen off I mean people are holding onto our to our bonds.
More than maybe a few months ago.
So.
For now we think we'll we'll pay down our 2020 square that.
With our cash whether cash generation and existing cash and 2021 is still a bit far off to be guessing alone will do but if we have opportunities to buy in 2020 ones out the market will continue to do so.
Got it appreciate the color I'll turn it back.
Okay.
Your next question is from Taylor's Archer of Tudor Pickering Holt. Please go ahead.
Hey, good afternoon, and thank you I wanted to start by asking about some of your comments and 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 you could frame how many rigs are gonna be affected by this at least in 2020 and then.
If it really is a suspension period. It do you expect those rigs to go back to work and.
At some point in 2021 or or is that it's too early to call that right now.
So in the Saudi market in general.
I think the rig count in terms of spend which is up to about 20%.
Last quarter, so it's pretty significant I think.
Given our market position as well as a great support from our customer partner I don't think were to be impacted the same extent, but we will be impacted and.
That's a situation right now.
So we estimate and impact of.
Some six rigs.
From the 43 that we have today.
Okay got it Okay and second question also internationally it sounds like working capital it was a headwind in Q2 and.
Yeah, you went through the reasons for that part of that's the pandemic that's ongoing but curious if.
At least in July or or through the first month of Q3 I have collections internationally improved at all and is there anyway to frame for us how we should think about working capital.
Hopefully tailwinds in the back half of 2020.
So so yes, I did mention that and I want to clarify that it's a relative headwind I mean, obviously, a revenue went down quite a bit and working capital did hurt did help a little bit but not nearly as much as we expected because of DSL went up by about four days.
And and yes. It was mainly Latin America I mean, it was more issues of if you're discussing with a day rate is going to be during the lock down period, obviously, you can employees and onto those negotiations are finalized.
You have to two way to employee so so we do expect to.
Recovered a lot of that.
Slowdown during the third quarter, yes, some negotiations may take longer than we would extend maybe to the fourth quarter, but in general we do expect most of that.
Slowed down when we sign collections to correct itself the third quarter.
Alright, thanks responses.
Your next question comes from what kind of Sad ATP capital markets. Please go ahead.
Sure. Thank you.
So.
The 74 rigs that you have working internationally could you provide a breakdown of veggie graphically, they're working right now.
[noise] I you know obviously, the biggest piece of Saudi Arabia, where we have 43 rigs.
And next will be Latin America or cars.
Some 20 rigs and so that are operating and then the rest is just drips and drabs any context on Russia.
We have.
One remaining rig in Algeria.
And then Kuwait Oman.
So so that's more or less the distribution I don't think we have any other country that I didn't cover many Latin America's Mexico, Colombia, and Argentina, now that Venezuela has closed down.
Yeah. So so the 74 rigs that you have looking does not extend into the eight rigs a that may come off in Saudi Arabia.
I think I think I think I said six before but.
So, yes, I think snakes yeah.
Yes, so six it sounds like someone they want to know couple couple of them are already down.
Okay. So a couple of them at all any <unk> by the way around 70 Rapids doing is very smartly, rather than suspending rigs permanently what they're doing is alternating rate to keep the rigs active and keep the raised from means that the fully and.
And those on the certification periods and so forth what they're doing is automating the rigs.
And rates are taking to add to our taking turns to go down. So I think thats very beneficial both I think for ankle, but also for for the drilling contractors because it avoid having to shuttering them fully and tried to bring it back down the road. So I think that I haven't seen this.
Done by other clients, but I think thats, a very smart way of doing [noise].
Well that's anything.
And then you have a contract to bend Oh five rigs a year do you expect to start that program next year in Saudi Arabia.
Well the turning point is the Aramco Intelsat the issue a work order with a with a term contract to initiate a process that has not happened yet and.
But we are prepared to joint ventures prepare to accept that and move forward, but so far that hasn't happened in given what we just talked about rigs.
The timing is uncertain when when in fact, they will issue that the first and workwear.
Well, we don't we don't make any rig will be delivered in 2021 right away.
Okay. Okay.
Fair enough and then.
I I know people started to come in different ways, but do you think margins in a internationally could be in that 11000, you know devil in third quarter or anything but there was.
[laughter], what car you keep going to that to the margins.
Said many times at the margin international.
He is really an average of a very widely dispersed number of race. So it's very yeah, it's very little relevance, except for modeling I guess, if but by what I can't say, what I can't say is that.
We expect to and in the second half of the year to recover some of the erosion. We saw in the second quarters through the Coleman discounts now the extension of the Kobe discounts and the activity shutdown. So we're seeing in these various countries is still uncertain when it will stop or how much are which hot.
Spots Klein decides to shutdown, but so but we do expect to recover that on the other hand, we expect a lesser impact from.
And from more permanent discount in various select markets.
So.
I think I think them the erosion that we'll see margins could be more related to having fewer 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 margins fairly well of course in the second we did have early termination, which impacted our margins until we are real normalized margins were only $13000 per day.
But.
What I can say given all the moving pieces is very difficult for me to give you a number for third quarter. So we'll do well say something similar to what we said in the second is that at this point, we're not really ready to provide guidance and international because there's several moving pieces that are being negotiated and some timing issues that can give us a wide range.
So I'll give you an example in second quarter the international market I mean, we we had a range of outcomes somewhere in that $30 million range, so could have been higher or lower.
Unfortunately, we're very close to the upper end of our outcomes.
In this 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 go. So we're not ready to give guidance, but all we can say is that our rigs will most probably go down.
And by 11 rigs.
We will have a little bit of improvement in pricing I think in the third quarter versus the second.
And we also believe that.
And that pricing will continue to be a little bit under pressure in the fourth quarter and potentially a couple more rigs could go down.
Looking out into the heart is that international as a portfolio.
Just looking out a little bit passed the next two quarters I mean, our average duration of our contracts more than two years and of course the countries that we decided to you are all developed countries with the long term markets where.
There's no question that their their long term developed markets. So I think positioned wise.
In terms of a rebound, we're very well positioned that we have some underlying strength, given our contract position and market position today.
Absolutely thanks to the should answer.
Sorry, I couldn't give you a number on the margin look higher but I'll try harder next time.
Next question today comes from Sean Meakim of JP Morgan. Please go ahead.
Thanks, Hey afternoon.
Hi, how are you.
Hi, Tony Williams, So you know instructive progress on the cost reduction program.
Hi, just it's not clear how much of this is variable versus.
The low activity versus.
He is fixed cost structure more competitive when activity improves.
Total cost out seems to align with the revenue decline give or take for the year.
Maybe just.
Elaborate a bit on how much of that cost from taking our you'd characterize this fixed versus variable and the implications.
Sure.
About.
I would say about half is that's DNA in engineering and the other half a little bit more than half is field support.
And.
I would say that.
Probably 70% of the of the cost reductions hopefully are structural and the rest are related to lowering of compensation. Given this environment. So that has some bounce back potential that's roughly the number two as seem right now, but we must admit that no I think thats exactly right.
Okay. Thank you better yeah very helpful. I appreciate it.
And then think about the U.S. specifically.
Good day margins in the quarter. The guide for its third quarter, you were able to offset some of the lower activity and some initial decline rates with cost out.
I didn't hear any any comments about the impact of rig mix, so meaning that their handle it brings you have outside of the lower 48 being a bigger piece of the overall doesn't have any impact on on the guidance that you gave and then just thinking about what the outlook for Alaska in Gulf of Mexico, How that's influencing the numbers twoq.
Thank you thanks.
So we did give specific guidance for the lower 48, Sean and you're right I mean, there's some mix impact there.
No we.
Some of the rigs, we lost or some of the weaker margin ones.
But also a I think in something that is impacting.
Several of us of the contractors margins in our favor away is that.
The rigs that are stacked overall, I mean, not for all that doesn't hold for all customers, but overall.
We lose less in revenue and the potential for reducing costs. So so the margins for those rigs.
On the average are better than our average for the whole fleet. So that that that if he wants to give a mix that probably was the biggest largest impact.
And yes, I mean, we have more hour and one thousands and 807, our highest quality X rigs working as a proportion of the fleet. Today. Then then maybe two months ago. So that does have an impact on the average margins.
And then showing Alaska and Gulf of Mexico.
Any change there.
And in the Gulf of Mexico, I think we.
Hurricane season Hurricane season comes at one rate goes out and then hurricane season ends in comes back or maybe a couple of come back so not a lot of changes we had a very very strong second quarter I think.
We expect a.
One rig negative or down in the third one or one or two maybe one or two maybe and then come back in the fourth quarter.
Alaska pretty stable I mean, yes, I mean, we have the seasonal.
Downtick than we usually see in this quarter is famous in Canada.
But but general activity stays more or less the same from what we saw in the first quarter.
Underlying entity.
Very helpful. Thank you.
Thanks, John.
The next question comes from Karl Blunden of Goldman Sachs. Please go ahead.
Thanks for the timing.
Yeah, good to see the progress on cost cutting.
A question on the on the balance sheet and the bond buyback activity. It seemed to slow quite markedly since may and was curious if you could provide a little bit of context on the tradeoff that youre looking at when when doing those bond buybacks. It feels like it. These are the 22, so trading well below.
Apart would make some some way to create a bit of value by going going after those a bit more aggressively.
Turning to 23, so we don't have any 20, twos 20 ones and 20 threes.
And.
Any anything within the.
The next couple of years is pretty fungible in terms of cash flow and obligations that we have right would define as near term so.
Being able to buy some of those bonds.
On the market at a discount is certainly attractive obviously.
We tried to do it within the constraints on our cash flow generation to make sure we don't.
We don't.
Go to big on on a revolving credit facilities. So that's what we've been doing in taking a measured approach trying to take advantage of the market, but not going but not going crazy in terms of trying to buy too much.
So just maybe live living within our cash generation.
Actually so we're trying to do.
Yes that makes sense.
So the 21.
And then I'm just not meet the bank lender discussion maybe you there's not much you can share at this point in time, but.
What are some of the things that are getting them, you and the banks comfort with providing the wafers at your acquire something they better cash flow outlook, I'd say than many expected but.
What else is part of that discussion this morning.
No I mean, I think I think a discussion that's ongoing by its nature confidential and that's something we'd like to talk about.
But it's just I mean, if you look at it.
If you know what banks doing testing would neighbors has done in the past I think we.
It's just the normal kind of discussions to get some covenant relief.
Hi, Thanks very much.
Your next question comes from Jason Verity of Millennium. Please go ahead.
Yes, thanks to the call I just had a question on Saudi Arabia, if you could provide an update on the amount of cash.
That was there a that'd be great. Thank you.
So somewhere in the 300 plus a range.
And are there any plans or have needs for you to access that cash.
Ah, Yes, I mean, we have more cash than we need for future.
Future expansion of the fleet.
So right now you know.
Given the given the current environment, then obviously is too much cash and we will continue probably two to build up some cash over the next two years. If you don't use it for the new build so we do have some mechanisms to get the cash out, but we haven't engaging those discussions with a partner because up to now we haven't really needed that cash.
Outside Stan.
Understood and then any anyway to kind of bracket pmone has excess cash out of out of that 300.
Well, if you think about it may be investment.
Potentially new rigs.
Yeah, we will be somewhere in the range of a couple of hundred million dollars.
And maybe hitting most of that hitting 2022.
So obviously, we won't be meeting those 300.
And whatever 300 and change meaning daughters over the next year and a half of two years.
Got it thank you.
Last question today comes from Dan John did create as capital. Please go ahead.
Thank you had a question regarding the process [noise].
Or.
Recovery in other words.
Once their demand starts coming back what happens to those old contracts from from clients. So those contracts [noise].
If the clients have demand to those do you have to start new contracts and looking forward what do you see the process for recovery.
Well.
I think right right now we're into mode, where.
Aren't any new contracts, maybe its extensions or renewals and yes.
Not a rebound obviously those customers our core customers, we will hopefully engage with them and there would be additional contracts and part price would be agreed to at that time, reflecting the then market So that's where food.
Valving <unk>.
In some cases, we have reset or stacked on rate. So there's still on revenue is no contracted so those rates to just turning off there's no.
Need to do any new contract.
And maybe the countries, where we have Kobe shutdowns again, we have contracts that are covering those race. So there's no need to do any new contracts. So I think some of that would be known contracts, but as Tony mentioned, a if clients one more rigs yeah. They have to do contracts it'll be new contract.
Terrific. Thank you.
This concludes our question and answer session I would like to turn the conference back over to William Conroy for any closing remarks.
Thank you illegible wind up the call there. Thank you ladies and gentlemen for joining our call. This afternoon. If you have any questions. Please get off the call or email us as always.
[noise]. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.