Nabors Industries Ltd. (NBR) Q3 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the Nabors' Third Quarter Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Denny Smith, Vice President of Investor Relations Development. Please go ahead.

Good morning, everyone, and thank you for joining Nabors' third quarter earnings teleconference. Today, we will follow our customary format with Tony Petrello, our Chairman, President, and Chief Executive Officer; and William Restrepo, our Chief Financial Officer, providing perspective on the results, along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks we have posted some slides to our website, which you can access to follow along with the presentation if you desire. They are accessible in two ways. One, if you're participating by webcast, they're available as a download within the webcast. Alternatively, you can download the slides from the Investor Relations section of nabors.com under the submenu, Events Calendar, where you will find them listed as Supporting Materials under the conference call listing. Instructions for the replay are posted there as well, under teleconference information. With us today in addition to Tony, William, and myself are Siggi Meissner, President of Worldwide Drilling Organization; Chris Papouras, our President of Nabors Drilling Solutions; John Sanchez, our Chief Operating Officer for Canrig; and other members of our senior management team. Since much of our commentary today will include our forward expectations, they may constitute forward-looking statements within the meaning of the Securities Exchange Acts of 1933 and 1934. Such forward-looking statements are subject to certain risk and uncertainties as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may differ materially from those indicated or implied by such forward-looking statements. Also during the call we may discuss certain non-GAAP financial measures, such as adjusted operating income, EBITDA, and adjusted EBITDA. All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA as that term is defined on our website and in our earnings release. We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. Now we'll turn the call over to Tony to begin.

Good morning, everyone. Welcome to the call. We appreciate your participation as we review our operations for the third quarter of 2017 and our view of the market going forward. William will follow with a review of our financial results. I will then wrap up, and we will take your questions. The third quarter served as a great example of how Nabors continues to execute on our new business model over the contract drilling industry. First, we signed two strategic acquisition agreements this quarter. These transactions represent major steps forward in realizing the vision of providing fully automated drilling operations. On August 14, we announced the signing of an agreement to acquire Tesco Corporation. Tesco has an excellent reputation worldwide as a top-notch service provider and rig equipment manufacturer. As I noted at our Investor Day last year, our vision is to leverage the drilling rate to serve as the delivery platform for Rig Services. We are doing this successfully across multiple product lines. Now we are ready to accelerate these efforts with Tesco's premium monitor tools and automation technology. The combinations of our complementary rig equipment product lines will also enhance scale, product offering and aftermarket service to our customers. Integration teams are working hard identifying how we can hit the ground running as combined team on day one. Close of the transaction is expected by the end of the year with synergy target as initially expected. Following the Tesco announcement, we announced on September 5 that we had closed the acquisition of Robotic Drilling Systems or RDS. This exciting technology represents a fully automated robotic drill floor. It is applicable both at onshore and offshore markets, on newbuilds, as well as retrofits. By combining the RDS technology portfolio with the Nabors global drilling platform, we are uniquely positioned to integrate and scale the technology. The technology has received significant funding and support today. This support has come from major international E&P companies, as well as industry and governmental sponsors. We are already engaged in commercial discussions with multiple leading offshore drilling contractors regarding upgrades using this technology. We plan to first commercialize this technology offshore. In addition, we are field testing and offshore version of the system. This expanded capability will enable Nabors to further improve operational efficiency and drilling performance. We plan to combine RDS's technology with our operating system, Canrig equipment, Tesco casing running tools, and our new iRacker handling system. Through this combination we have the potential to transform both the offshore and onshore drilling landscape. We also are on the final stages of preparation for the commencement of operations on Sanad, our JV with Saudi Aramco. We expect to issue a press release announcing commencement shortly. Our fourth quarter outlook will include projected contributions from Sanad. This JV is a cornerstone of not just our international strategy but also our global franchise. No other contract land driller can count on the bedrock foundation of having the world's largest oil and gas company as its partner. Turning to the Lower 48, our first new quadrate commenced working under contract in the third quarter. As noted at last call, this rig represents a modification to our PACE-X package. The rig drills which stands a four drill pipe joints rather than the usual three joints per sand, it decreases the number of connections and also allows for running double joints of casing. We expect the second quadrate to commence operations shortly for second customer in West Texas. We are excited to be partnering with two premier customers in this effort. We are receiving additional inquiries and look forward to securing new opportunities to deploy this capability. Nabors vision is to be the performance driller of choice. To this end, we are building the most capable, fit-for-purpose rigs and integrating them with our cutting-edge drilling automation technology. Our Nabors Drilling Solutions or NDS penetration rates continue to increase. We now have 83% of our Lower 48 rigs running at least three NDS services up to 76% second quarter. 36% of these Lower 48 rigs are running five or more NDS services up and 34% last quarter. Our recently deployed ROCKit pilot fully automated directional joint system has successfully drilled five horizontal wells in the Permian with exciting results. The fifth well performed the fastest conventional spot to total depth under extended lateral in the lower Sprayberry or major Permian operator. This system doesn't just compute the wellbore path as some competitor offering do, it also automatically executes the drilling instructions. Along with the continued build-out of our directional joint fleet, we expect casing running to drive a substantial increase in activity after the close of the Tesco acquisition. Unfortunately due to delays caused by the massive flooding brought on by Hurricane Harvey, we were not able to finish and put our first new M1000 rig towards during the third quarter as expected. We now expect to deploy our first M1000 rig in November and the second before the end of the quarter. It's features also noted in the company slide deck include a £1 million hook load and racking capacity for up to 30,000 feet of five and 10 inch drill pipe. It will be capable of meeting the demands of the most challenging laterals today. It is ideal for emerging international shale plays, as well as in the Lower 48. In regards to Hurricane Harvey, let me thank that many of you on this call who have reached out to us to offer your support. You are fortunate not to have lost any of our Nabors family. However many of our employees around Houston and the coastal [indiscernible] suffered tremendous property damage and family displacement. These men and women appoint double shifts as they come off from work, take off their tie and get to work repairing their homes. I am very appreciative and thankful for their ongoing sacrifice. As a company, we experienced minimal equipment damage and nonrevenue downtime. Our assessment of total damages and lost revenue totaled about $50,000 that including the aforementioned construction delays or personnel lost time. Now let me turn to this quarter's results. In the third quarter Nabors generated adjusted EBITDA of $143 million on operating revenue of $662 million. This performance compares to $139 million and $631 million respectively in the second quarter. The quarter reflected strong performance for our drilling rig business based on additional Lower 48 rigs, as well as higher margins in the U.S. and international markets. However, within Rig Services continued adjusted EBITDA growth in Nabors joint solutions was more than offset by disappointing shipments of rig equipments and Canrig. Numerous customers delayed deliveries scheduled for the third quarter and several orders were canceled. Nonetheless, we expect Canrig revenue to pick up before year-end. We also plan to deploy several rigs in the U.S., Canada and international markets during the fourth quarter. In addition, our Saudi JV should bring incremental activity and finally we anticipate NDS to finish the year strong. Nabors worldwide rig activity increased 212 average rigs on revenue in the third quarter from 206 rigs in the second quarter. The Lower 48 was the largest contributor to this activity increase. The rig additions came mostly early in the quarter. The different oil prices that occurred in July dampened operators activity plans for the remainder of the 2017 budget cycle. With WTI backup above $50 for several weeks now, and Brent above $55, we are seeing increased contracting interest from our customers. We will of course be following 2018 budget announcements closely. As of now, the feedback we are receiving especially in North America leads us to cautious optimism. Now let me drill down a bit further into each of our business segments. Turning to the U.S., financial results in the U.S. drilling segment improved both in terms of activity and margin growth. For the fourth quarter, our average rig count in Lower 48 increased sequentially by 7% or just under seven rigs. This rate of growth has moderated as compared to that achieved in the last few quarters. We expect that we will maintain or slightly increase average Lower 48 rig activity levels during the fourth quarter. We currently have 100 rigs working versus the 102 average for the third quarter. This total includes three SCR and 10 smaller AC rigs. This 2-rig decline took place within lower spec 1000 horsepower AC fleet. We anticipate that two of our contracted newbuilds currently under construction will begin work in the fourth quarter. We also have additional rigs contracted or committed that are currently in [indiscernible] upgrades. We continue executing on our upgrade program and Alaska and U.S. offshore to stay in their steady contribution. Current leading-edge day rates are generally unchanged in the Lower 48 even while the highest spec rigs made essentially sold out. Client conversations indicate the potential for term contracts with the initiation of 2018 budgets. This development could generate pricing momentum given the tightness in the high spec market. Our average daily rig margins for the U.S. increased by $225 at the bottom of the guidance range we provided. Our focus remains on driving margins higher through the year into 2018. William will lay out our expected margin progression in more detail. We anticipate our revenue per day will continue to improve as our five remaining newbuilds enter the fleet over the next two quarters. Additionally, we still have some rigs to roll the current spot pricing. We again surveyed our larger Lower 48 customers earlier this month. These operators represent about a third of the total rig count, while most plants maintain a flat recount between now and the end of the year, more plans to add rigs and drop them. Based on this information, we would expect the Lower 48 rig count exit the year at or above today's total. Our previous client survey was taken prior to the impact of the low oil price affecting rig count plans. This survey indicated an increase in around 30 to 40 rigs extrapolating large plant across the operating universe. The rig count decline since last quarter has come primarily from smaller private operators as the clients we surveyed overall stayed about flat. Until we get more clarity on a price next budget cycle, it is difficult to offer 2018 forecast with much precision. However, our [conversations of late] has been positive with the supportive macro backdrop. There are considerable number of inquiries for December and January startups. Let's turn to international. In our international segment, the net average working rig count declined by slightly more than a rig in the third quarter 291 rigs. We decreased by two platforms in Mexico and one rig in Ecuador partially offset by gains in Algeria and Kuwait. We exited the quarter with 91 rigs working internationally. Despite the lower activity, adjusted EBITDA still improved internationally by $2 million on strong margins. Reported daily margin in our international segment increased by approximately $440 per day to $18,000 per day. However, some of this gain was driven by exceptional performance in certain countries. We continue to anticipate an ongoing international margin in the low to mid $17,000 range. Now let's turn to the outlook. After the third quarter pause, we should resume rig activity increases in the fourth quarter for international. We are putting an offshore platform back to work in Mexico and two in India. Since the start of October, we now have a rig deployed in running in UAE and we are in advanced discussions for additional rig activity in Algeria and Russia. The larger Middle East tenders we are excited about should be a key driver of future growth. We have strong working relationships with these customers. Our global asset base and manufacturing capabilities provides us with unique opportunity to make highly competitive proposals. Finally, our JV with Saudi Aramco is expected to start operations in the very near future. Activity in earnings will be consolidated within our international segment. We expect that three rigs will be added to the fleet from Saudi Aramco upon initiation. Early in the first quarter, two more rigs are planned to join from the Saudi Aramco side. We continue to be excited about the opportunity in tandem with our partner Saudi Aramco to optimize how wells are drilled in the kingdom. Let's turn to Canada. Canada have a strong start to the post breakup season with the low oil prices in July, fast momentum as it did in the US. We had 13.5 average rigs working there in the third quarter versus the nine average rigs working in the third quarter of last year. We have 15 currently working there as the pace of contracting increases for the winter months. The Canadian market has transitioned to more regional E&P companies with whom we have strong legacy relationship. We see both our rig and NDS margins increasing there in the next two quarters. Our targeted upgrade program converting five less capable rigs to triples as positions our fleet for additional activity and margin. We expect the fourth and first quarters to see that as a prior year and EBITDA contribution. Now the Rig Services segment. Our Rig Services segment saw offsetting trends this quarter. NDS revenues and adjusted EBITDA continue to decline. On the Canrig side however, several deferrals and cancellation hampered performance. Recently acquired RDS has been integrated in this division and as a reminder, our rotary steerable development effort also falls under this segment. While the total adjusted EBITDA for the segment dropped from $5.5 million to $1.8 million, adjusted EBITDA for NDS increased again from $7.6 million to just under $10 million. We continue to fire on all cylinders towards our target of an annualized $50 million EBITDA run rate for the fourth quarter for NDS. Speaking to NDS, adjusted EBITDA growth was the result of several factors. As I mentioned earlier we continue to increase market penetration across many of our NDS products. Average across our working Lower 48 fleet, daily margins increased by nearly $200 to almost $400 a day. RIGWATCH and directional drilling led this improvement. We expect directional drilling to drive additional impact in the fourth quarter with the delivery of incremental tools. Looking forward to 2018, we expect several new factors to take the baton for the next leg of growth. The Tesco acquisition is important incremental driver. Tesco is currently running a substantial number of jobs in the Lower 48 with plenty of room for expansion on Nabors’ rates. Integrating Tesco with its best-in-class people and tools will overnight transform that product line. As I mentioned on the last call we received the qualification for wellbore placement in the critical Saudi Arabia market. We expect to generate a significant revenue from this service in 2018. This market will likely be the next big driver of NDS growth beyond the Lower 48. These developments combined with the 2018 commercialization of our rotary steerable technology, gives us confidence for continued rapid growth in 2018 and we reiterate our $250 million target for 2020. Canrig took a step back this quarter primarily due to part deferrals with some cancellations. We expect Canrig to contribute positive EBITDA next quarter and thereafter as deferred maintenance spending continues to materialize in the drilling industry. More critically the addition of Tesco's equipment sales and aftermarket service business will create a more profitable operation on a global scale. Combined with the new Robotic Technology added to Canrig’s existing product line, we believe Nabors has the potential to become the leading provider of drilling automation systems both on and offshore. This concludes my comments. William will now review the quarter's financial results and provide additional thoughts on the outlook.

Good morning and thanks for joining us today. Net loss from continuing operations attributable to Nabors of $121 million represented a loss per diluted share of $0.42. These numbers are slightly lower than the second quarter’s totals of a $117 million and $0.41 per share respectively. The reduction in income resulted from lower tax benefit than in the prior quarter. Revenue from operations for the third quarter was $662 million as compared to $631 million in the prior quarter, a 5% improvement. U.S. earning revenue increased by 19% to $223 million reflecting seven more rigs in the Lower 48 along with margin improvement for the segment. Lower 48 revenue increased by 18% as the higher volume was supplemented by an overall improvement in the average daily revenue of about $1600 per day. Renewals and new contracts increased our average day rate as multiple rigs were signed at spot rates exceeding the fleet average. In addition reimbursable expenses and limited to no margin also increased. We expect the favorable day rate trend to continue, especially with the five remaining new builds joining the fleet over the next two quarters and additional rigs rolling on to higher day rates. International revenue decreased by 2% to $374 million. This decrease reflected a reduction in average rig activity of just over one rig, partially compensated by higher margins of nearly $500. As Tony mentioned some of this margin increase was driven by exceptional performance of certain regions. We also anticipate a return to more normal performance levels following the strong second quarter. Canada began its recovery from the typical seasonal breakup. Revenue improved by 6% to $18 million as average rig count for the quarter increased from 12 to nearly 14. The improvement was somewhat dampened as compared to initial expectations. As clients showed some restraint following softening oil prices early in the quarter. Rig services revenue dropped 6% in the third quarter to $87 million. While NDS revenues grew by 18% from $32 million to $38 million, Canrig’s revenue of $50 million was down 18% from the second quarter’s $61 million. The projected increase in third party sales of Canrig did not materialize due to deferrals and some cancellations. In NDS we benefited from strong performance software sales on additional penetration as well as our pricing for wellbore placement contracts. Adjusted EBITDA for the quarter was $143 million compared to $139million in the second quarter. Gains were driven primarily by the U.S. segment while the Rig Services represented $3.7 million offset to the negative side. The $5.5 million increase in the U.S. primarily reflected an improvement in Lower 48 activity and margins. Lower 48 EBITDA rose by $4.9 million, with 2.6 million driven by an increase in the incremental rig count from an average of 95 working rigs to 102. Higher daily margins delivered an additional $2.3 million increase versus the prior quarter. Drilling margins for the Lower 48 increased by approximately $250 per day to $4160. The improvement was driven by about $1000 per day from more favorable pricing, offset mainly by higher labor costs as several deployments and upgrades were delayed with the additional crews remaining idle. I would like to point out that some of these delayed deployments were related to hurricane Harvey’s impact. We believe that with the anticipated additional rig redeployments, the increased daily labor cost will fall back to expected levels. The international segment delivered additional adjusted EBITDA even with the lower rig count. The third quarter total of 137 million increased by $2 million over the prior quarter. The decline of a little over one average working rig was more than offset by the roughly $450 increase in margin over 18,000. Canada adjusted EBITDA declined by $1.6 million or 38% to 2.6 million driven by a roughly $1600 drop in margin. As with the Lower 48, we ramped our cost somewhat early as activity levels were not as strong as we expected. In addition during the spring break-up in the second quarter several clients kept our most capable rigs drilling in multi-well pads translating into higher day rates and more efficiency in the second quarter. Rig Services provided a lower adjusted EBITDA contribution from $5.5 million in the second quarter to $1.8 million in the third. NDS adjusted EBITDA increased 28% from $9.8 million for the quarter compared to 7.6 million in the second quarter. A lower revenue of Canrig had a negative impact on adjusted EBITDA, which was some $8 million lower than we expected. Now let me make a few comments on items affecting our liquidity and cash generation. CapEx for the third quarter was $130 million down from 136 million in the second quarter. I expect our CapEx for the year to finish in the $500 million to $550 million range. Net debt for the third quarter ended at $3.7 billion. A quarterly increase was affected by several factors. As usual the third quarter along with the first is when our biannual interest payments of roughly $90 million are made. The acquisition of RDS along with an unrelated final legal settlement and discontinued operations accounted for another cash outflow for a combined $75 million. Finally the higher revenues translated into increased working capital requirements. We expect the fourth quarter to provide positive cash flow operationally with limited interest payments furthered by the closing of the Tesco acquisition and cash contributions from our JV partner. Our longer-term forecast continued to indicate material cash flow generation starting 2018 and ramping up through 2020. Our free cash flow will be allocated primarily to debt reduction. Finally are available revolver capacity and our cash balances give a significant flexibility to address our 2018 maturity, which currently stand at about $460 million. Looking ahead with the continued tightness among Lower 48 high-spec rigs, we still have rigs expiring in the fourth quarter with room to price to spot. To provide additional detail we have 15 Lower 48 term contracts that were signed in either the first quarter of 2017 or the fourth quarter 2016 that have terminated or will terminate in the fourth quarter. We expect to keep these rigs working and to do so at high rates than the prevailing prices at the time of the signing. Given the current level of customer interest and existing commitments we would expect to average in the range of 102 to 104 average working rigs in the fourth quarter. As a reminder we had a 100 working rigs in the in the Lower 48 as of yesterday. Lower 48 margins for the next quarter should end in a $4500 to $4700 a day range. We expect the improvement to come in roughly equal measure between continued dayrate increases and lower daily OpEx. We expect to end the year with a solid increase in Q4 for international rig count. As Tony mentioned we have added and currently are adding rigs across multiple locations and expect to begin the Saudi Aramco joint venture shortly. We are putting rigs back to work in Canada and we stand at 15 rigs as of yesterday. We anticipate an average fourth quarter rig count in the mid to high teens with improved margins in the mid-4000. And finally the Rig Services segment should regain its momentum from additional growth in both activity and margins and Nabors Drilling Solutions as well as a recovery for Canrig. NDS services are benefiting from increased market penetration as well as new product development such as ROCKit AutoPilot. We also expect a sharp increase in wellbore placement revenue. In 2018 we expect additional growth from geographic expansion for instance wellbore placement in Saudi Arabia as well as from our rotary steerable tool and from a strong increase in casing running activity. We continue to target an annualized run rate of $50 million in Q4 for NDS as compared to $40 million in the third quarter. Finally, we expect substantial improvement at Canrig in the fourth quarter with the capture of deferred third-party orders. With that, I will turn the call back to Tony for his concluding remarks.

Thank you, William. I want to conclude my remarks this morning with the following summary. This quarter we took significant steps to increase our technology leadership in the drilling industry. We are adding a leading global KP and tubular running services provider to our drilling technology portfolio. We boasted our manufacturing operations with additional products and scale. And finally we took a big step forward in developing the goal of a manless fully automated drilling flow and both out and offshore. With these strategic acquisitions we believe that both our technology and rigs are second to none in the marketplace. Our mission now is to market in next Q to drive maximum cash flow from these investments. As William mentioned our leveraging cash generation will continue to be an area of focus. We will continue to enforce capital discipline. We will also keep squeezing for out of our operations to compensate for increased working capital requirements. These requirements have arisen as a result of our strong and sustained growth. I will finish my comments by saying that the market we're facing still present some challenges. However, we are experiencing increased interaction with our customers on future activity and on the introduction of new technology. These interactions indicate our customers are busy and focused on future projects. With the operators continued focus on lowering dollars spent per BOE we’re finding that their interest in technology is increasing. We are positioned to meet that need in terms of both drilling efficiency and resource recovery. From that point of view the environment certainly feels better than three months ago and it seems to be playing to our strength. We have invested both in our asset and in new technology and we are now position to reap the benefits of these efforts. That concludes my remarks this morning. Thank you for your time and attention. With that I will take your question.

[Operator Instructions] Today's first question comes from Ole Slorer of Morgan Stanley. Please go ahead.

The drilling operations team came in pretty much in line with what we were looking for in Canada maybe a little weak. But Canada, the surprise this quarter was out of Canrig, I wondered whether you could sort of discuss a little bit just exactly what went wrong there why the weak numbers and clearly you’re in the process of putting together something much bigger on that front. So the strategy between RDS and RSS how far away you are from what you think integrating this and delivering something that, it's actually they can allow you take a bigger role of share in a rig market affects bit maybe leveling off in the 130/140 level?

Well first of all just go to thank - I am equally annoyed and disappointed about the number as the shortfall. And it make no mistake about it. And it’s not really acceptable what happened. But I also have to put things in context, first of all what happened in Canrig. I think the first you can point out, the 2Q numbers as we pointed out Tesco list, as Tesco the 2Q numbers reflected particularly the margin and in fact that our value did an exceptional good job that quarter you were getting raise on that, so therefore they see working longer during that 2Q than normal. And actually if you look at the share of the rig count in the 2Q versus the first quarter, actually our market share in the 2Q we’re not disproportional then the so-called practice because of that. So the delta between the 2Q and 3Q is very good to something that was exceptional to 2Q that’s point one. Point two, what nearly happened, as we had a core customer that once the prices start turning they dropped two rates on us and the second customer deferred queries as well up there. So that combines with the cost to choose of having people on the payroll made to do that work that’s all contributes to the delta. Now that being said, we have put this in context that the fourth quarter we're going up a couple rigs and also the margin we expect to increase that by 30%. I’ll return to Canrig next. So on Canrig the issue there was frankly that we had five different flowing contractors all of whom cancelled orders at the last minute in the quarter. Those orders range from up to six top drives four engine and five catalogs collectively and that affected as you recall - at the end of end of second quarter we were getting a little bullish about the order book up in Nabors and what happened was as the quarter progressed and people got worried everyone started taking a step back and that’s what changed the dynamics of the orders. And so as they were prepared to fulfill these orders and staffing up and moving up the rig - manufacturer get to do that that what happened. Now should they have gotten so far over the [indiscernible] looking back maybe not, and maybe they should have - been a little more diligent by following on the strength as was resolved of those customers but I think even though you told us that deferred, at least half of the people are back talking to us about winding the equipment so that’s the situation that we’re in and obviously the response to the macro environment. The third point I want to make is yes, we have some context the Canrig rig services numbers even on run rate basis just talking about 3% to 4% of EBITDA let suppose it’s a 3, 4 parts of the business as you alluded to. The first one is Lower 48. Lower 48 as we said in terms of our rig count unlike some other people guessing we’re still saying that third quarter numbers we exited at a 100, we think we’re going to exit the fourth quarter at about 105 or average to the rig will be slightly up because we are starting down for the reasons was alluded to in our remarks that we had two lower sub rigs given the contract and we also think our margins in U.S. are going to go up as well, as when you said in 10%. International, the rig count in international this quarter wasn’t decent quarter in the international I think the margin came out better than expected again because of some exceptional performance even playing that with we don’t repeat it exceptional quarter or if its mid to 17 low mid 1700 - and 70,000 in dayrate we will still expect several rig years additional in international. And at RDS we said had a good record of continued growth of roughly 7.5 to 9.8 run rate respected quarters second versus third. So those three areas are the core of the company and that’s where the numbers are and that part is very strong and as I said the other two, I think are disappointed for I don’t think they of course very, very if you set the whole company because it's not limited to those two areas. I hope that answer your question.

It does Canrig, so you highlighted that there is very big cancellations I purse with those cancelations come with equipment that said pretty hefty down payments on that would that be correct?

Down payments are typically - down payments that are not refundable I mean they are not refundable so that’s the problem in this market today that’s the situation so that’s the issue.

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

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

Sure, so first of all so with Tesco acquisition, Tesco acquisition, the closing expect to occur sometime before the end of the year number one. Number two, I think the casing running business is a natural fit with our NDS strategy and they have huge inventory of existing unused assets which will kick start. There is a lot of room to grow in the U.S. alone on Nabors rigs where Tesco in terms of penetration today. And if we apply our NDS model so that casing running business as opposed to how the business is run by the major case running companies today we’re going to use interest raise and the way reduce the number of labor that we need on casing et cetera. I think we have a process back forth as significant a growth in 2018 with that casing business. The rest is performing and so we cost these are the manufacturing side of all the union with Canrig. So the way we see this performance combined with a sort of hyper growing accelerating the casing running business. But in terms of synergies I think at least $20 million for 2018 and $30 million to $35 million to 2019 based on the core side that’s not revenue synergies, that’s just core synergies that’s when we look at that today. And in terms of RDS, I think RDS and some of you are aware we already have one of the RDS pipe handlers working on our new rack continue to make this in the yard which we’re expecting to add for customer shortly. So that will be two commercialization of the technology. We’re in discussions with several large very large offshore drilling companies that have interest in the RDS technology for new drilling packages or retrofits on existing rates. And we are also looking at combined some of the RDS stuff with our iRacker stuff to make even more robotic. So those things I think we’re going to start, and you start to see those rolling out in the first two quarters of 2018.

So looking into the middle of '18 and we should have an optimal size cost efficient rig building division, would that be fair?

Well, we are not reading [indiscernible] between those optimal rig building or that’s cost efficient, I mean if you actually look at it Canrig's numbers historically, their returns on capital their willingness et cetera it was actually very cost effective this is midst because of these orders and the order magnitude yes its $5 million but your put it all in context.

No sure, I was putting in the context of Tesco as well so yes thanks very much.

And ladies and gentlemen our next question comes from Marshall Adkins of Raymond James. Please go ahead.

I was just curious,[indiscernible] tickets this weekend just kidding, that's a joke, now don’t answer that never mind. Recognizing obviously Canrig’s is not huge component of the story going forward but that’s question. As for we’re going to be getting questions on today I just want to drill down a little bit more on that particular issue. Can you give us some sense of kind of what type of equipment was canceled or delayed, where was the equipment going geographically I mean was it mainly definitely U.S. and I guess the last component - go ahead.

I’d say it was all the U.S. and six, seven were top drives and the rest were cat walks and ranches I love that.

I don’t want to read anything in this but are you getting any customer pushed back I mean you guys are pushing the envelope on putting together some bad rigs here for your own use so you’re getting a customer push back at all between selling the equipment to other contract drillers?

Yes, there is one or two competitor in the marketplace that seems to have the view that they don’t want to buy from Nabors because we compete - Nabors of course we buy from everybody including people don’t compete us people like Weatherford we buy stuff from Weatherford even though we compete with them internationally. But the point is that I think the case that we have a number of contracts in the U.S. they actually like the fact that Nabors is using equipment and Nabors is behind it because first of all have the credibility and they know it works and it’s a good product. So the answer is yes, so current penalize it’s a mix bag so are those that give us but right now the cause is that out last them and as we get more interesting stuff out there people are becoming are even more interested, I find it very interesting that we are noticed, Canrig is not known its being in the offshore part of the segment even though we do have a bunch of top drives 750 drives these more towards offshore rigs but we’re not knowing but since this RDS acquisition people are thinking a second look at Canrig and realizing that they may offer a different path. So one way it’s really packaged that they can’t get anywhere else. So survey know I am moving this in fact the every this you really look at them in that whole arena which is a new frontier here for us.

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

So Marshall the markets - the only really bidding activities ongoing it’s in the Middle East, Latin America rightly be flat and maybe Argentina but not that much exciting stuff going on right now I would say.

Outside of Middle East you say.

There is some activity in Russia as well but as you probably know those thing take a long time. As there you added some activity but it’s nothing I mean it’s relatively flat I would say besides the activity in the Middle East.

And overall it's probably bottomed?

I hope so.

Thank you all very much.

Marshall the indication of the Middle East for example can reach this quarter it should be shipping to catwalks to Kuwait, so gives you an idea we’re supporting the cost of this we’ll be saying that there is activity there in the marketplace.

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

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

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

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

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

Yes Marshall on the people issue - unlike before where I think I said this last call where can dig into a reservoir of existing people that reservoir obviously much more limited therefore the timing effort training issues there is more cost there and we had to give some increases to some people but as you know generally we share those with the first customer. So I think it’s fair to say though compared to the prior up cycle, we don’t have the labor pain that was putting us back then right now I wish not yet.

And then maybe just kind of one additional one, just coming back around to the totality of Rig Services going forward, once you roll in Tesco and RDS how should we as an investment community kind of think the revenue generation from that Rig Services business in 2018, what kind of level we’re looking at?

So we were hoping nobody would ask that question because in the middle of putting together all the numbers and the synergies with Tesco but we feel that Tesco does accelerate our initial plan and nothing that we’re going to go beyond our $200 million, $250 million target for 2020 but we do think we’ll get there faster. I think we expect the very material growth in 2018 versus our run rate for the fourth quarter which as I mentioned was $50 million. So we’re not ready yet to give you a specific number but definitely very material growth year-on-year and versus the run rate of the fourth quarter.

Just to clarify so that $50 million run rate was for the totality of Rig Services not just for the NDS?

No, that’s NDS, that’s NDS. Yes, Rig Services and then I mean Canrig if you look at last year the numbers for Canrig were much worse than this year. So we’ve really made some strides in getting closer to breakeven and we fully expect to be breakeven in the fourth quarter and then positive for Canrig even without Tesco next year. So Tesco will just see an incremental to those numbers as well.

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

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

The Tesco position obviously is very helpful to the covenant calculations on our debt and it takes it down by roughly close three percentage points depending on what the closing share price for Nabors is, but that's the expectation including the cash that comes in with Tesco plus the equitization coming from the RDS is about three percentage point turnaround. So it is very helpful to our metrics.

And then any early thoughts on CapEx for 2018?

I think you should not expect the number higher than this year.

Okay.

And to put it in perspective remember that we’ve really been working very hard in capital discipline. First year I was here a few years back on the drilling we spent about $1.5 billion, the next year we cut that down to about $900 million and last year we had about $430 million. So - and this year we’re traveling at about a $500 million range despite the fact that maintenance CapEx that we’re developing of the rigs went up - somewhat. So that’s going to continue be our focus next year making sure that we really spend the money where its going to give us the most payback and try to limit how much we spend overall.

And could you also talk about maybe Tony on the arrangement with Weatherford house that proceeding?

So, we have our technical team making progress. It identified can work together and we’re just carrying that out and so we hope to conclude something this quarter.

On managed special drilling.

Yes, on managed special drilling.

We're starting to run close on time. Let's just take one more question and wrap up the call please.

Today's final question will come from of Jim Wicklund of Credit Suisse. Please go ahead.

I think that’s great you guys just saved the best for last that was incredibly smart I’ll include in my note? Good job. Tony you talked about robotics on offshore rigs first, you got platform rigs, your rigs that you're building are state-of-the-art. Longer-term how much of that business is going to be captive business for you guys and how much of it is going to be third-party commercial?

I would like a significant part to be third party commercial offshore basically Exxon pipe, I think it should be authored for you obviously and I’m sure I think we have a way to go ahead get penetration on our own rigs first, there could be component - remember to make motivation there is several components of tool kit that you need, you need all of that, first you need rolling skating mouthful different things and these components I think we’re going to starting letting third-parties buy some of the components because the dozen stuff is only existing marketplace. So it will be a partial third-party build-up of stuff of the onshore versus but offshore we're ready to let offshore have it.

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

Okay, that's helpful. And my follow-up if I could. We've seen companies obviously do the running case against tubing you already directional drilling. Is there any temptation to put your toe back in the water on cold tubing or high end workover rigs or heaven forbid pressure pumping or any of those type completions related are you just stick with everything that’s kind of more ancillary to a drilling rig?

Jim though hit our blood pressure on that.

Our place is pretty full right now Jim. Our place is pretty full though we have right now may work. So we want to do the best to work on right now okay.

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

I just want to reiterate, thanks for everybody participating today and if we didn’t get to your questions or you have any other questions just feel free to give us a call or email us at anytime. Thank you very much.

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