The U.S. oil and gas business is bad and getting worse, with the pullback in drilling to continue well into next year, Nabors Industries Ltd. CEO Tony Petrello said this week.

Petrello, who oversees one of the top drilling contractors in the world, said the third quarter was particularly challenging for the U.S. industry. Domestic operations were impacted by rig rates “resetting to the current market. Margins were also impacted by a reduction in the number of rigs stacked on rate.” Overseas results were more resilient, but dangers exist there too, both in rig years and in daily margin.

Worldwide rig activity declined in 3Q2015 to 242 rig years from 256; U.S. drilling operational cash flow declined 31%.

“We saw two distinct phases to the third quarter,” Petrello said. At the beginning of July, West Texas Intermediate (WTI) oil prices were approaching $60/bbl, and through the first two weeks of August, “optimism was building, at least among some customers. The Lower 48 land rig count increased by nearly 25 rigs during that time.”

The short-lived happy days ended from mid-August through the end of September as the U.S. rig count fell by 71 rigs, or 9%. Nabors’ rig count fell by 7%.

“That decline in market utilization, which has continued through last week, has led to additional declines in spot pricing,” Petrello said. “For the rigs that are continuing to work after existing contracts roll off, the downward reset in pricing is significant,” which in turn has impacted Lower 48 daily margin.

He doesn’t see any blue skies ahead.

Petrello wouldn’t guess where the market is headed. However, he said during a conference call to discuss third quarter results that he surveyed 10 of the biggest customers, which together represent “a large chunk” of U.S. drilling.

“Of the 10 customers, only two of the 10 refer to any possibility of an uptick in rig count over the next six months,” he said. “Six were flat, two were down and three of the 10 had some rigs on contract they were trying to farm out. So that gives you a sense where we think we are. And I think that’s a sense of 10 of the real players in the marketplace…

“With commodity prices where they are, we believe U.S. drilling activity will continue to deteriorate into next year,” Petrello said. “Our visibility in this current market is limited. At the same time, U.S. oil production has begun to decline. That trend should eventually support higher commodity prices and ultimately increase oilfield activity. Before that increase occurs, operators will have to become convinced that higher cash flows are sustainable. That level of confidence is not yet evident among our customer base.”

Several things likely will impact Lower 48 results going forward.

“First, commodity prices remain low,” he said. “WTI is down to between $45 and $50. Natural gas remains below $3.00.” The pricing environment is going to impact operator cash flows and capital spending, “especially as we approach the typically slower end of the year and the exhaustion of budgets. Third, going into 2016 we assume operator budgets will be set later rather than sooner. This delay could potentially create a further deceleration of drilling activity and the rig count.”

Against that dire backdrop, Nabors has adopted a strategy to survive, cutting deals and organic spending. Staffing is down by 29% since the end of last year.

Nabors also is working again with its vendors to further optimize the supply chain.

Nabors rig count as of this week stood at 82 rigs in the Lower 48, down from 86 at the end of September. Of the 86 rigs, 60 were working on term contracts.

“For the fourth quarter, our rig count could average in the mid-70s and exit the quarter somewhat below that range,” Petrello said. “We also expect the fourth quarter average daily margin to decline by approximately $1,000 as the fleet increasingly reprices to current market.”

With the probable weak finish to 2015 industry activity, Nabors’ rig count and revenue are likely to deteriorate, he said.

“Based on the number of well-to-well contracts and longer-term contract expirations, we are seeing average rig margins reset rapidly toward current spot market pricing,” the CEO said. “Second, the drilling market in Canada remains depressed along with commodity prices. An early start to the usual holiday-related pause in rig activity could challenge sequential growth in the Canadian market in the fourth quarter.”

Nabors posted a $296 million loss (minus $1.02/share) in 3Q23015, versus year-ago profits of $106 million (36 cents). Revenue decreased by 2% sequentially, with North American drilling market market revenue down by 15%. Rig services revenue fell by 27% as new building decelerated further and demand for directional drilling services continued to trend down.

Operating income margin of 0.9% fell sequentially by 720 basis points. Daily gross margin for rigs in the Lower 48 decreased sequentially to $8,609/day from $11,205.

“Given the current environment, we anticipate a further reduction in drilling margins of up to $1,000/day,” CFO William Restrepo said during the conference call. “We will continue to align our overhead to the new reality by implementing additional reductions before year-end. We’ll continue to work with our vendors to further reduce our costs, and we will remain vigilant on our activity levels to ensure we keep the direct costs in our rigs in line with the anticipated activity levels.”