Q3 2020 Nabors Industries Ltd Earnings Call
[music].
Good afternoon, and welcome to the neighbors third quarter 2020, <unk> earnings release Conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then too.
Please note. This event is being recorded I would now like to turn the conference over to William Conroy, Vice President of Investor Relations. Please go ahead.
Good afternoon, everyone. Thank.
Thank you for joining Nabors third quarter 2020, <unk> 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 and.
Along with insights into our markets and how we expect nabors to perform in these markets instead.
In support of these remarks is a slide deck is available both as a download within the webcast in the Investor Relations section of Nabors Dot 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 933, and the Securities Exchange Act of 934.
Such forward looking statements are subject to certain risks and uncertainties at this.
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 web site and in our earnings release.
Likewise, unless the context, clearly indicates otherwise references to cash flow mean free cash flow as that non-GAAP measure as 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.
As you are aware neighbors currently has a capital markets transaction under way.
Accordingly, while we welcome your questions regarding our results outlook and view of the markets, we will not feel any inquiries regarding this transaction.
With that I will turn the call over to Tony to begin.
Good afternoon. Thank you for joining us as we review our results for the third quarter of 2020.
I will begin with comments on our actions in light of the current environment.
Then I will follow with a discussion of the markets and highlights from the quarter.
William will follow with the financial results I.
My wrap up comments today will focus on the evolution of the market for advanced technology, and our leadership position driving this progress.
I would like to start by recognizing the neighbor staff for their efforts and performance.
The twin challenges of the pandemic and the industry environment are unprecedented.
Our team has excelled in maintaining the continuity of our global operations, while improving our industry leading safety record.
The health and safety of our employees is Paramount.
We continue to make progress towards mission zero with the ultimate goal of zero hurts.
On the financial front, our third quarter results illustrate the full impact of the expense reductions implemented earlier this year and.
I am pleased with the progress to date.
I am also challenging the team to optimize our business processes and to add focused on cost avoidance.
Our outlook on capital spending has also improved and we are now targeting approximately $200 million for the full year 2020.
This amount is 40 million lower than our previous target yes.
Substantially below last years spending of 424 million.
Our immediate financial priorities remain free cash flow generation and that debt reduction.
As a result of our persistent efforts, we continue to make material progress on these goals.
Now I will spend a few moments discussing the macro environment.
During the third quarter near month W. T I traded in a relatively narrow band around $40.
This lower volatility is a market change from the extremes, we saw in the first half.
Also in the third quarter global oil consumption increased by almost 11% versus the second quarter.
That restoration demands has contributed to increase operator confidence against this backdrop, we have also seen additional consolidation activity.
Comparing the third quarter average to the second quarter, the Baker Hughes lower 48 land rig count declined by 37%.
The rig count appears to have bottomed in August of 226 rigs.
Since then activity has increased the Baker count recently stood at 278, a gain of 23% from the bottom this increase in the industry rig count as mainly resulted from activity increases among second and third tier clients.
The 20 largest operators as we characterize them have been mixed some of added rigs others have released units in the aggregate. This group is essentially flat.
In this environment, our relative market share performance against competitors has been notable.
Based on quarterly average rig counts, we gained three points of share in the third quarter.
In our international markets, the current activity tempo varies by country.
In Argentina, and Colombia, the active rig count has increased.
You will recall that in both those markets. The response to the krona virus. This spring was the total shutdown of drilling.
In our major markets in the eastern Hemisphere.
Customer reactions were initially muted subs.
Subsequently several of these customers implement a deeper cuts.
Our largest international market, Saudi Arabia experienced an expected decline.
We believe activity there will begin to increase at the beginning of next year.
To summarize our view of the markets global oil demand continues to grow oil inventories, which built substantially earlier this year are being liquidated.
These factors and the resultant stability in commodity prices appear to have improved operator confidence in the future outlook.
The customer base has begun to respond with activity increases.
The recent resurgence in Cove, it and its effect on oil prices could temper. These positive developments at this point the impact is difficult to predict.
I will now highlight a few aspects of our third quarter results.
Total adjusted EBITDA was $114 million in the quarter. These results reflect activity, which was largely in line with our expectations.
Our financial performance, specifically in our lower 48 operation and international segment exceeded our expectations.
With this EBITDA performance and after funding interest payments on our notes, we reduced net debt in the quarter by approximately $6 million.
Our global rig count for the third quarter totaled 132 rigs and 11% decline from the second quarter. This.
This scale and our geographic diversification continues to generate value and enabled us to make progress on our strategic imperative to reduce net debt.
In our lower 48 business, our reported daily rig margin of $9527. Once again exceeded expectations that we laid out on the previous earnings call.
In light of this performance I would like to reiterate the driving factors first in the lower 48, our rig capabilities are the industry's highest in this market environment. These capabilities enable our clients to pursue their programs as efficiently as possible.
Second we remain the industry front runner in both operational and safety performance. This combination is a real differentiator for nabors.
Third our relentless focus on reducing expenses across the enterprise continues to reinforce our margins.
And fourth our pricing has been supported by our industry, leading value proposition, enabling us to mitigate the erosion in the market.
We achieved some notable highlights in addition to our financial results.
We introduced our rig cloud platform for digital operations in the second quarter sales.
Since then we have migrated to 65% of our legacy user base over to Rick cloud.
Our offering currently includes more than 25 analytic apps with more to come.
Great Cloud recently took first place in the digital App development challenged organized by a super major rig.
Great Cloud beat the group of competing drilling contractors and technology companies. This type of head to head win bolsters our position as the digital leader in the drilling space.
In the U.S., we added installations of both smart slide our directional steering system as smart drill our drilling process automation system. We also grew our well count for both Smartside and smart NAV, our directional guidance platform.
In fact, our well count in the third quarter for both Smartside as smart NAV increased over the respect to second quarter levels in the third quarter Smart NAV in Smartside were installed on 44% of our lower 48 rigs in other words that 44% of our rigs are running wellbore placement other fully remote which reduce.
Directional drilling crews that is a 15 point increase in penetration versus the second quarter.
For smart drill our penetration increased to 90% of nabors rigs up from 6% a quarter earlier I think this sequential growth illustrates the market's rapid acceptance of our smart apps.
We run smart Aro S., our advanced rig operating system on our entire lower 48 AC rig fleet. We are now actively marketing to third party rig contractors and have a multi rig installation with one customer in the lower 48.
We remain focused on E.S.G. and our goal is to improve our standing this quarter, we improved our ISS social score significantly. We also improved our environmental score by one notch. This progress demonstrates our commitment TSG and we look forward to reporting additional progress in the future.
I will now discuss our view of the market in more detail.
Last week, the lower 48 land rig count stood at 278.
That is up by 11% since the end of the second quarter Nabors.
Neighbours working rig count over the same timeframe is up 14%.
Comparing quarterly averages neighbors third quarter, working rig count excluding rigs stacked on rate declined by 20% versus the second quarter we.
We fared much better than the industry, which dropped by 37%.
The lower 48 industry has had a 52 rigs or 23% since its slow in August looked.
Looking forward, we see evidence of the recent stability in oil prices, leading to an improvement in operator confidence we have visibility to adding rigs over the next several weeks we are in discussions for several more through the end of the year.
In our international markets, we have already seen our activity increased gradually in Argentina and Colombia.
We believe we have line of sight to rig restarts in Saudi Arabia as.
As market activity rebounds, we believe that clients will prefer contractors with established share and records of operational excellence.
I am convinced Nabors will prevail in this environment.
That concludes my remarks on our third quarter results highlights and the market before William offers his remarks I would like to recognize the neighbors team for their perseverance in this challenging environment on behalf of the company I would also offer our concern and best wishes to all of those who continued to be impacted by the virus now.
Now I will turn the call over to William for his discussion of the financial results and guidance.
Thank you Tony and good afternoon, everyone.
Net loss from continuing operations of $161 million in the third quarter represented a loss of $23.42 per share.
Third quarter results compared to a loss of $162 million or $22.13 per share in the second quarter.
The second quarter included total pre tax charges of $58 million related to asset impairments and severance costs.
This compares to charges of $5 million in the third quarter.
The third quarter also saw a $22 million pretax sequential reduction in gains on debt repurchases.
Revenue from operations for the third quarter was $438 million.
Sequential reduction of 18%.
With the exception of Canada drilling, which benefited from the usual seasonal recovery all of our segments experienced a revenue decline.
In the U.S. and in most international markets activity in pricing continued to weaken.
Lower 48 drilling revenue of $96 million decreased by 32.4 million or 25%.
As our average rig count declined and pricing deteriorating.
In addition, zero margin Reimbursable revenue decreased by $8.4 million versus the second quarter as we negotiated with our suppliers significant reduction in various reimbursable expenses although.
Although these negotiations reduce the revenue they also reduce our operating expenses by a similar amount.
Lower 48 average rig count at 48.2 from sequentially by 15.7%.
Our average pricing for the fleet did.
Deteriorated by approximately 6%.
Any rig revenue in the lower 48 at $21760 decreased by just under $3000 per day.
Reductions on daily Reimbursable revenue accounted for $1500, while pricing reductions accounted for another $1500.
Revenue in our other units markets decreased by a combined $11 million due to the release of two offshore rigs coupled with the temporary idling on standby rate of an Alaska rig.
International drilling revenue and $248 million decreased by 52.7 million or 17%.
This decrease was primarily related to a decline in activity across several markets as average rig count dropped by 11 rigs or 13%.
The third quarter benefited from the recognition of out of period revenue falling negotiations with our customers in several international markets. However, these pricing adjustments were more than offset by the absence of early termination revenue in the prior quarter.
Canada drilling revenue was $10.8 million, an increase of $7.2 million on increased rig count.
Due to the normal seasonal ramp up in activity.
The improvement in Canada was more than offset by a reduction of 5.1 million and $3.8 million in rig technologies and drilling solutions respectively.
The deterioration in drilling solutions was essentially driven by pricing pressure and by the sharp reduction in the lower 48 industry rig count.
This decline was somewhat buffered by sequentially higher revenue coming from our international casing running business.
This revenue for the drilling solutions segment fell by 37%, while international held up better loosing around 9%.
Recognizing the deal.
Was also impacted by the lower drilling activity levels.
For capital equipment sales of ground to a halt.
Aftermarket sales and repairs have also fallen in line with the lower rig count.
Adjusted EBITDA for the quarter was $114 million compared to $154 million in the second quarter.
The decrease was driven by material reductions in our international and us drilling segments.
More modest reductions in drilling solutions on rig technologies were almost fully offset by the Canadian seasonal improvement and by decrease expenses in corporate.
I would also like to point out that both second quarter and third quarter benefited from unusual events in our international segment.
The second quarter had a net gain of $8 million, which came primarily from early terminations. The third quarter benefited from pricing adjustments mentioned previously which totaled approximately $6 million.
Use drilling EBITDA of $60.5 million was down by 17.1 million or 22.1% sequentially sales.
Lower 48 performance came in slightly better than expected.
Average rig count for the quarter was 48.2.
Daily rig margin of $9527 Justin.
Just above the high end of our previous guidance represented a reduction of $922 per day versus the second quarter.
The reduction reflected the unfavorable pricing impact of $1500 per day mentioned earlier.
Offset by a $600 per day reduction in compensation and maintenance expenses.
Namely expenses of 12200 fell by $2100.
Negotiated reductions in Reimbursable costs, which we fully invoiced to our customers accounted for $1500 per day.
Going into the fourth quarter, we expect daily rig margin to fall between 80, $509000 driven mainly by the repricing of renewals as rigs roll off contracts.
We are targeting operating costs in line with the third quarter.
After reaching the lower 45 rigs in the third quarter, our lower 48 business exited the period when the rig count of 48.
Looking to the fourth quarter, we expect average rig count or improved by approximately three rigs from the third quarter average.
International EBITDA decreased by $21.6 million to $71.2 million in the third quarter.
The third quarter continue to include the trends, we experienced during the second quarter, namely multiple rates and temporary standby or colder day rigs offset.
Offset by a very strong operational performance in Saudi Arabia.
International rig count with some anyone down 11 rigs in line with our expectations for the quarter.
While eight of these 11 rigs were suspended temporarily the other three had their contracts cancelled towards the end of the second quarter.
Then as a reduction in rig count was driven by actions taken by customers to mitigate the ongoing commodity supply demand imbalance, which in certain markets also resulted in reduced pricing.
Daily gross margin for the quarter was $12678 as compared to 14091 for the prior quarter.
As mentioned before both quarters included nonrecurring benefits.
Excluding those benefits in each quarter daily margin was 13000 and 11800 for the second and third quarters, respectively.
The sequential erosion in daily margins was driven by the suspension and termination of a large number of rigs with higher than average margins.
In addition to lower rig count resulted in less efficient absorption of our field overhead.
We currently expect international fourth quarter rig count to decrease by approximately four additional middle eastern rigs with relatively high margins.
Although two of these rigs have been suspended temporarily.
The remaining two have been released.
In the fourth quarter, we expect a lower coven and standby rates to persist.
In addition, we anticipate results for Saudi Arabia operation to revert closer to historical norms, particularly as we expect to bring back late in the year several Saudi rigs that are scheduled to resume operations in the first quarter.
This ramp up will add cost to the fourth quarter without any corresponding revenue.
Finally, one of our platform rigs in Mexico will be impacted by a 90 move that should reduce EBITDA by $3 million.
Because of these items as well as the absence of the exceptional gains of $6 million in the second quarter. We are forecasting daily margins for the fourth quarter in the low to mid 10000 dollar range.
That said, we are seeing improvement in Latin America.
We have the potential to add incremental rigs in the first quarter.
In addition to multiple rigs on standby rate due to the market environment or decoded restrictions, we anticipate that most of these rates will return to work and to full day rigs by the end of the year.
We also expect up to 10 middle Eastern rigs, which are now in temporary suspension and zero day rate to resume operations progressively during the first quarter.
Consequently, we would anticipate a material increase in rig count early next year.
Also as currently suspended high margin rigs start to contribute and we recover full day rates on multiple rigs. We also expect a significant increase in daily margins compared to the levels of the fourth quarter.
Canada, adjusted EBITDA increased by 2.7 million to $2.2 million in the third quarter.
Rig count at 7.4 rigs was 5.2 higher sequentially due to seasonality, we expect both rig count and the margins to improve in the fourth quarter.
We currently have eight rigs operating in Canada.
Turning solutions posted adjusted EBITDA of $7.1 million.
Alan from $9.4 million in the second quarter.
The decline in newness drilling activity for Nabors, and third party rigs affected volumes for this segment.
In addition pricing pressure has impacted our results we expect adjusted EBITDA in the fourth quarter at least equivalent to the third quarter.
Great technologies reported EBITDA of $1.3 million in the third quarter, a decrease of $1.9 million.
The fourth quarter EBITDA should be approximately in line with the third quarter.
Now, let me review, our liquidity and cash generation.
In the third quarter net debt declined by $6 million to 2.78 billion free.
Free cash flow defined as net cash from operating activities less net cash used for investing activities totaled $9 million.
This compares to free cash flow of approximately $101 million in the prior quarter.
The third quarter included a semi annual interest payments of approximately $80 million as compared to minimal interest payments in the second quarter.
During the third quarter, we experienced some weakness in collections as we had numerous ongoing negotiations with customers that delayed final invoicing Nonetheless.
Nonetheless, we managed to once again deliver positive free cash flow by controlling our capital expenditures.
Capital expenses in the third quarter of $39 million were 10 million lower than the prior quarter.
We are now targeting $200 million in Capex for the full year 2020.
In the fourth quarter. We also expect to delivered positive free cash flow our target for the quarter is set at $90 million to $100 million.
Our interest payments will drop sharply and collections are forecast to improve.
Our credit facility a key component of our liquidity includes various covenants I would like to highlight that during the quarter. We were able to successfully negotiating an amendment to our credit facility that remove the leverage ratio and at the same time maintained the same total capacity and interest rate.
The Amendment also provides our company with additional flexibility to issue up to $500 million of new bonds senior to all of our existing notes.
At the end of the third quarter, our revolver draw stood at $763 million Paul.
Following the repayment at maturity of $139 million in notes expiring in September.
We also repurchased 47 million of our debt maturities.
The remaining balance on our senior notes due in 2021 now stands at $129 million.
Our cash and short term investment balance is closed the quarter at $514 million.
One final item before Tonys conclusion late last week, we completed a private transaction in which $115 million of the zero point 75 convertible notes due in 2024 or exchange for roughly $50.5 million of newly issued 6.5%.
Senior priority guaranteed notes due in 2025.
In addition last week, we launched an offer to exchange our standing notes for up to $300 million in newly issued 9% 2025 senior priority guaranteed notes.
For more information I refer you to our October 29 press release and related filings.
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.
A quarter ago on this call I highlighted it for transformation themes, which have gained traction among our stakeholders. These.
These themes include integration specifically of services around the well site.
Second.
Digitalization, which uses the volumes of available data to facilitate real time optimize decision making.
Third automation, which improves speed performance and safety and finally, SG, which prioritizes the impact of our operations and company on the wide ranging set of constituencies in society.
The breadth of our initiatives is dressing these four themes is comprehensive and growing well.
When we began these initiatives through clear benefit to clients was an improvement in their well costs.
These benefits have expanded to now include the following advancements in well side safety higher quality Wellbores increased total well production and.
And positive change across the value chain and in our stakeholder community.
Initially the uptake for these initiatives was driven by the Super majors, they recognize the inherent value and have the resources to utilize these products and services.
At the same time theres sensitivity around MSG was high.
More recently, we see growing demand for our advanced portfolio coming from smaller operators as well.
Traditionally theres smaller scale prevented them from utilizing our advanced portfolio.
They simply lack the resources to realize its full benefits as our portfolio has evolved we have taken the approach to simplify the implementation by customer.
Let me offer two examples first we provide remote wellbore placement co located in our operation Center in Houston.
This enables the operator to realize the benefits of remote directional drilling while leveraging the investment neighbors made here in our operational headquarters.
The customer's investment is negligible.
The second example is our rig cloud platform rig cloud, we provide the data collection analytics and streaming that operators need to optimize planning execution and rig performance. It's an open ecosystem, it's compatible with neighbors and third party rigs in short neighbors consolidates absent.
Client data from all sources. It then delivers information in the clients preferred format to any destination that kind of infrastructure was beyond the reach of all but the largest operators today, we can bring it across the industry. It has been said that the current downturn is like no. Other we view this environment.
But as an opportunity for nabors.
To reinforce its position as a technology leader in our market and to drive the adoption of digitalization and automation in the industry.
That concludes our remarks. This afternoon. Thank you for your time and attention with that we will take your questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Kurt Hallead of RBC. Please go ahead.
Hey, good afternoon.
Guys, how you doing.
Hi, Thanks for thanks.
Thanks for all that color and content.
Hey, what I want to do initially we just kind of start off maybe on the outlook on the international front, that's a little bit more.
Difficult to kind of get our hands around that need to be the U.S. and Canadian markets. For example, you indicated that you expect to see a significant increase in activity going into the first part of next year and to also see a significant increase in cash margins. So I was wondering if you can get to provide that your.
Roddick context for that and maybe you know how.
How how should we think about it.
In context relative to say third quarter or second quarter of 2014, okay.
Okay.
Well as we indicated with respect to the.
International the yen next quarter were envisioning.
Down the downturn in rig count by about four rigs three of the four is in the middle East and one is effectively spread out amongst the different bunch of different markets. We also indicated that the.
A growth the margin per rig would go down to the mid low to mid 10 10000 dollar range. The way to think about that is that there's probably about 1400 miles of costs.
In the expected in the quarter that consists of coated related costs.
Saudi friction before all the stuff, that's going on up and down if in Saudi Arabia, and the and a platform rig moving in that quarter. So probably there the normalized earnings power in the fourth quarters could probably be about $12000 per rig. So that gives you an idea of where the fourth quarter is looking forward out from the fourth quarter to next year.
As William signaled we see about a 10 rigs progressively go on to work throughout the first quarter.
In the Middle East and then in Latin America, probably right now we have line of sight to one rig in the first quarter and three additional ones in the second quarter. So I wouldn't say internet I want to say international is a bottom, but it kind of feels that way right now we've taken altogether, obviously, the big caveat is OPEC and Covance.
In terms of the second wave, but that gives you some feel for the landscape I hope so.
Yeah, that's great that's fantastic. Thank you.
And then Glenn Tony.
I want to maybe also touch on the technology.
Dynamics you guys outlined there is quite a few years ago.
Your your analyst day in and clearly you've gained quite a bit of traction traction with it how do we how do we think about the overall kind of growth dynamics, you kind of referencing in your press release that the drilling solutions group, Canada will track overall rig count I cannot see how that can play out but should there be an opportunity for that business.
To add a differentiated performance relative to overall rig activity.
Just kind of give you a sense on how we can think about how a kind of a growth rate over the next couple of years for that business sure well.
I think.
Let's go back to analyst day, I think we sort of set the set the landscape for automation on a rig site. In fact, I think the slide that we showed at that at that.
Initial I'll say outlined towers.
Directional drilling well can be done with the push of a button that we had a slide in actually showed that today of course that everybody is interested in doing that and we were the first to come up with that I think can and as you can see from narcissistic have reported there has been increasing adoption and penetration of our smart tight smart slide software package I think what we've done.
Per per the issue just raised in terms of getting scale. On this thing is we've actually spent more time, making this platform more available not just on nabors rigs would have everyone's rigs to open up the market for us really worldwide and as we also indicated we're actually going to do the same thing for our rig operating system.
Which will be intelligent rig operating system, which.
For your what you the way you might want to think about that it's novus on steroids. Okay. In other words. It has everything novus could do but a lot more as the sequencing engine that can allow you to do different different optimizations and it just has to total total flexibility. So the idea there is to take this that and the reclass.
Platform and then enable that in them in a wider ecosystem and then make the apps available to that and therefore, that's where we hope we get increased scale of visa of all this technology, but Thats division and I'm pretty pretty happy with the progress. We've made to date I think the bet. We made four years ago in the space was the right.
And now we just got to make kind of make some bread with it that that's the goal.
Okay, any any any thoughts on that.
Is it a 20% year per year kind of growth rate.
Right anything along those lines that you can potentially help us calibrate.
Right now I'm reluctant to give you a number but I can I can say, it's obviously double digits growth I'm looking at I mean that that's for sure. So.
But putting a specific number on it but it is definitely double digit double digit growth, 20% would be on the low end.
All right, Hey, Tony Thanks, fair enough of keeping their yep.
The next question comes from Connor Lynagh of Morgan Stanley. Please go ahead.
Thanks, Good afternoon.
John.
I was wondering.
If we could just discuss these abuse potential rig resumption in the middle East.
At this point how confirmed.
Or locked in it is that.
And to the extent meetings is somewhat fluid could you help us think through you had there's been some discussion that there might be incremental OPEC cuts or delay and the resumption of some production how should we sensitize our.
Thinking around that based on those potential outcomes in the world.
Yes, Conor will feel that we're feeling confident right now that those rigs will return I think.
Given.
The rigs that were.
Put on suspension and.
Communications, we have with our client in that particular area, we feel fairly confident very confident actually that those will return.
The the actual average for those 10 rigs is in question. We are assuming a four to five increase in average rig count versus the fourth quarter for those for that market.
That's just in Q1, youre, saying that before.
Yes.
Okay got it and then just just wanted to get an update.
Obviously, the synagogue plan was withdrawn and are different times that we're in today so could.
Could you just discuss your general expectations on.
The pace of cash accumulation. If you think that will be sufficient to fund the Newbuild program. How you expect the Newbuild program too.
To be executed over time, and I guess, where this ultimately driving is as we think about.
Capital expenditures for next year and the year after how should we think about that portion of the model.
I guess, so so basically when this.
Program has arrived at obviously it wasn't an era, where aramco was thinking about the.
The rig count going up by more than 100 rigs over the next 10 years and the concept was half those half that rig count would be allocated so scientists as part of the deal that with that that with the objective and the past couple of years, we probably have got off to a fit as fastest starts we thought but thats been a good thing because as you can see we've actually been building.
Cash from our operations there.
In the Kingdom.
Today right.
Ramcos is studying their needs and their assessing whether they want to pull the trigger on issuing the first order for five newbuilds that it's it's going through their process and until such time as it actually issue that said, we have no obligation issue. The PEO too to have the rigs built the rigs only get built if a ramp will come.
That decision and obviously they have a lot of issues on their own mind. So whether they are reassessing that in the context of other capex are moving forward with it right now I think the likelihood is more more likely that they'll probably issue something maybe in the first of the around the first of the year, but no event, we see any of those newbuilds hitting and.
Total.
Toward event after that late very late to 2021 at all probably 20 to 22.
And just just to reaffirm your commentary.
Honor in answer to your question about the funding.
I think between the cash we have incentive today.
And what we're accumulating going forward.
You know the first three years, probably taking care of.
And my then you know that's that's a breakeven point in terms of.
Cash flows so.
Cash flow being generated from the new rigs versus the new capex. So so I think we we are pretty comfortable with the situation Senate right now in the sense that we think its self funding.
Yes, I understand and I just wanted to clarify Tony's comment there the big Newbuilds not hitting until very late 21 is I don't think Daniel I would comment or an activity going there.
That would be there would be very optimistic in my opinion, and we have a read delivered.
By year end and I mean, there's of course, a lot of discussions with.
With a customer a lot of moving pieces in terms of whether it would be prefunding or not and.
So this is a lot of stuff that is not yet with too many moving pieces for us too.
To give any.
Any feedback, but we think the impact on Capex in 2021 should.
It should be minimal.
Got it thanks very much.
The next question comes from Karl Blunden of Goldman Sachs. Please go ahead.
Hi, good afternoon. Thanks.
Oh, yes, really impressive cash flow performance recently and for Fourq Your guide maybe.
Yeah, maybe it's a little early to jump into 21, but do you think that your capex, Ken can be controlled to a level that can allow you to generate cash or be neutral in 2021, given your assumptions about the market today.
I'll, let my Taskmaster internationally, we think that the capex, though should not be any higher than what it was this year, which we're we're really proud of but let though I'll, let William amplify.
Yeah.
Obviously, if so.
So lost a lot of uncertainty still about what activity levels will be like next year, but.
But what I can tell you is that based on our latest forecast that we assumed for next year.
We think that we will deliver.
Cash next year.
Someone somewhere in the mid double figures millions of dollars. So.
Again, I think part of that part of it is because we are continuing to tap is discipline.
But we're also very focused on becoming more efficient and keeping our costs and overhead under control.
And and then we do see a.
Some rebound from the activity levels that we have today.
So all in all I think.
That forecast, it's not as if it's not going to be as good as 22 and 2020, but it certainly will be a positive number in our view.
Okay. That's helpful and then just.
With regard to other levers that you have to.
Helped from a liquidity standpoint, and I'm thinking about liquidity relative to near term maturities. Obviously, you've got the exchange. That's that's ongoing so I won't ask about that but.
Where we're gonna thanks, it in some of the feasibility of.
Extracting cash from this on our JV.
And then in addition to that you haven't been as extra.
Priority guaranteed capacity remaining at about 150 million.
That's something that you could.
Good luck to its also just extend our maturities our debt discount capture.
I'll I'll refer you to the.
Press release.
In terms of the discount capture and so forth.
But.
I think there is some potential floor I do think there is some excess cash at least on a temporary basis was an extreme years in sun.
We havent really engage with aramco in those discussions so I really can't.
Give you my feel for how those discussions would.
Chris or where the success of those disks.
Discussions, but you know any any reasonable analysis of Astana today and the obligations we have in the future and does imply just a couple of hundred million dollars sitting there that are.
At least on a temporary basis.
That's all I can say on that I don't want to say much more we do think the working capital, including inventories and plus a lot of those negotiations now discuss with our clients.
That are ongoing and our fine lines, but we haven't yet build I think those are going to flow into.
Into 2022 in terms of collections and those could be fairly material numbers as well. So so we feel good about the working capital we feel good about the Capex, we feel good about our operating expenses and overhead and and I think our activity will have a little bit more less than maybe people expect so all in all we feel those.
Issues will be accretive to our cash flow next year.
Okay, Thanks, very much and good luck.
Again, if you would like to ask a question. Please press Star then one.
Our next question will come from Sean Meakim of Jpmorgan. Please go ahead.
Thank you.
Hey, Tony.
In the.
In the lower 48, you indicated even if the rig count has bottomed and we're now marginally improving activity.
The mix of contracts rolling.
And rigs being reactivated there is a headwind on average day rates and margins on a quarterly basis.
Slope of the recovery matters a lot in this equation of course, but where do you see that Cellcom point, where the addition of new rigs does from being dilutive to the average to being accretive.
Well, obviously today.
Yes, Mark margins are far below our average day rate and therefore at the incremental even at today's rates is going to cause some dilution and it's up to us and our comp.
Competitor colleagues to figure out how to match that obviously you. If you do want to grow but you don't want to grow subsidizing at ever lower rates and so that that's the balance and it's up to us to figure out how to manage that on an upturn I guess the good news is if they adopt the upturn prospect does give you the ability over time obviously.
To move those rates back up and that's what the mission is for everybody, but I'm not leaving my pricing strategy right now except that we were aware of it and that's our mission to try to incrementally add more rigs without taking.
Down that margin.
Hello Hello.
The lower number that makes sense, so, but thats the balance and you hit it right now in my head, but as I said the good. The good news is in this landscape, where there is some sort of trajectory of an upside here I think we're in a better position to make that happen and there is other people by the way they have done thus where they trade it they've traded.
New day rate on new rigs against all contracts so.
We havent done that we've we've tended to keep our contracts in place and get the best of the cash focus on a present value basis, we don't like that kind of trade. That's over other competitors have done that to I guess to accelerate their up upswing, but.
Again that I think is just playing with them mpvs and stuff. So.
What we're more concerned with is just trying to match set ups upswing right way.
Understood I appreciate that and then I.
Hi, good morning.
Good morning, Sean.
Good question I.
Well, we'll see we'll see deteriorating day rates.
Margins on through the it was a first through the first half of next year.
Right, Okay I appreciate that.
So then I was also hoping to get a little more of your thoughts around international margins.
For Q sounds pretty tough, but you're setting yourself up for a better first half and 21.
There's always a lot of moving parts on this fleet just given your on multiple continents.
Mix issues different contract durations, there's always a lot to try to get to these margins but.
Just curious in your confidence level on Fourq, you being the trough for the cycle.
Maybe you know Rob 10000, a day you peaked a few years back in the high teens I'm just thinking that way.
Risks around lower lows, but that really more importantly on a normalized basis, where do you think through cycle.
International margins can be it will be for this business.
So.
So I think Tony said it said it best that are.
Underlying.
Margins.
Excluding the Kobe penalty that were being which is revenue leakage and the Mexico.
Platform movement, which is another that's 500 alone covert maybe it's about 400 and then Saudi we're exclude calculating another 500 of leakage in terms of costs. So all of that is being absorbed in the fourth quarter. So it's.
Somewhat a typical in that sense, though.
But that indicates that the fourth quarter is really around a 12 Kate.
Today margin net square fleet right now is.
The good news is that we do have some significant number of higher margin rigs that are under suspension and that we expect to be coming back.
Last year. So so that will certainly have a positive impact and I think those coal the coal that penalty is going which I mentioned is about $400 per day, that's going to go away.
We think so you put that all into perspective.
It's difficult to give you a number but but I think if we normalize we're going to be somewhere between the two.
13 $14000 per day range.
Next year and hopefully improve on that.
The year progresses, we have absorbed a few blows our context on rig count as appropriately some of our highest margins that has eroded Colombia.
Colombia also has eroded so so those have been a big hits, so getting back to the 17 K. range that we used to seeing the pounds.
Is going to take a line.
Understood I appreciate that 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.
Andrew I will wrap up the call there. Thank you, ladies and gentlemen for joining us this afternoon.
If you have any questions [noise].
Call or email us as always.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.