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Lower 48 Rig Count Steady-to-Higher at Year’s End, Based on Nabors Client Survey

Nabors Industries Ltd., which operates the world's largest land-based drilling rig fleet, posted a 7% gain in Lower 48 rig activity and margins during the third quarter, with rising expectations for the onshore, based on client conversations.

The current rig drawdown isn’t as big of a deal to the biggest players, CEO Tony Petrello said during a conference call Wednesday.

Nabors, as it does routinely, surveyed its clients earlier this month. Together, its client base represents about one-third of the Lower 48 total rig count.

“While most plan to maintain a flat rig count from now until the end of the year, more plan to add rigs than drop them,” Petrello said. “Based on this information, we would expect the Lower 48 rig count exits the year at or above today’s totals.”

Nabors’ latest survey “indicated an increase of around 30-40 rigs, extrapolating large clients across the operating universe.”

The rig count decline since the end of the second quarter “has come primarily from smaller, private operators,” Petrello said.

“Until we get more clarity on our clients’ next budget cycle, it is difficult to offer a 2018 forecast with much precision. However, our conversations of late have been positive with a supportive macro backdrop. There are a considerable number of inquiries for December and January startups.”

High-Spec Sold Out

Nabors current leading-edge dayrates generally are unchanged in the Lower 48, “even while the highest spec rates remain essentially sold out,” the CEO said. “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.”

During the third quarter, average daily rig margins for the U.S. market increased by an average of $225, which was at the bottom of Nabors guidance range. The focus now is to drive margins higher into 2018 on a tighter market and high-tech offerings.

“We anticipate our revenue per day will continue to improve as our five remaining newbuilds enter the fleet over the next two quarters,” Petrello said. “Additionally, we still have some rigs to roll to current spot pricing.”

In the Lower 48, Nabors ran on average 107.2 rigs, versus 57.3 a year ago. In Canada, the rig run rate was 13.5 versus 8.8 in 3Q2016. The average number of Canadian rigs working during the third quarter was 14, with average daily rig margins of $3,497. The international rig count fell year/year to 91.3 from 97.4.

Nabors averaged 212 global rigs that worked at an average gross margin of $10,749/rig day, compared to the second quarter, when it averaged 206 rigs at $10,809/rig day.

“Further increases in margins are expected as costs normalize and some expiring contracts renew to higher current spot rates,” Petrello said.

“Results should also benefit from the expected deployment, before year end, of the first two of the company's Pace-M1000 newbuild SmartRig units that are currently under construction. This rig features pad capabilities equivalent to the Pace-X800 rig, but with one million pounds of hook load and higher racking capacity.”

Innovations Advancing

The third quarter marked several milestones designed to help Nabors gain more technology share.

The Rigtelligent software operating system was installed on 95 Lower 48 rigs and and is performing in line with expectations, Petrello said.

“The features of this software, along with our extensive focus on key performance indicators, is being increasingly recognized by our customers,” along with the outperformance of the high-spec, alternating current rig classes, including the pad-optimal PACE-X line.

The first Quad PACE-X800 rig was deployed in South Texas in the third quarter, with a second Quad rig soon beginning work in the Permian Basin of West Texas, Petrello said.

The Quad configuration incorporates the ability to rack and handle four joints of drill pipe in a single stand, yielding higher racking capacity and speeding up pipe tripping in and out of the well. It also allows casing to be racked and run in double lengths, which reduces the time required to install casing into the well.

Initial field testing also has begun for the ROCKit AutoPilot, a fully automatic directional drilling system.

“In these tests, we successfully completed five horizontal wells in a timeframe consistent with our best-in-class directional drillers,” Petrello said. “One of these wells set a new record for this operator in this particular field. Our iRacker and robotic pipe handling systems are also close to commercial deployment."

Nabors also clinched two key acquisitions in the quarter to accelerate the automation and services integration strategy.

“In mid-August, we announced the signing of an agreement to acquire Tesco Corp., a high-quality provider of tubular running services and manufacturer of drilling equipment, which we anticipate will close before year end,” Petrello said. “In early September, we announced the acquisition of the Norwegian company, Robotic Drilling Systems,” a market leader in robotic drill floor systems for land and offshore rig applications.

“The addition of both of these highly respected companies significantly accelerates our programs to integrate additional services into our rigs and implement surface and downhole drilling automation."  

Further supporting growth expectations is the imminent start of a groundbreaking joint venture (JV) with Saudi Aramco.  The Saudi Aramco Nabors Drilling, i.e. Sanad, JV “represents a new paradigm in the operator-contractor relationship that will provide significant long-term benefits to both parties,” Petrello said.

Net losses in 3Q2017 totaled $121 million (minus 42 cents/share) versus a year-ago loss of $99 million (minus 35 cents) and a sequential loss of $117 million (minus 41 cents). Operating revenues totaled $662 million, up sequentially from $631 million.

The rig services business posted a sequential decline in profits of $1.8 million in 3Q2017 from $5.5 million. Most of the lower Canrig volume was attributed to “delivery deferrals triggered by commodity concerns by several customers into subsequent quarters.” Additionally, there were “outright cancellations” from the “loss of momentum in the U.S. Lower 48 rig count,” Petrello said.

"I believe the steady progression in our operational results, in light of this year's oil price-induced weakness across all of our markets, illustrates the validity of our strategy,” he said. “Declining global oil and product inventories and better-than-expected demand should move the oil market close to balance in the near future.”

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