Nabors Industries Ltd., which owns and operates the world's largest land-based drilling rig fleet, saw substantial utilization increases in the Lower 48 market during the third quarter, although spot market pricing remained competitive.
The Lower 48 operations saw a 13% increase in rigs working compared to the second quarter, with an average rig count of 50. Nabors today is working 61 rigs in the Lower 48.
"We again surveyed the larger Lower 48 customers following the end of the third quarter," CEO Anthony Petrello said during a conference call Wednesday. "These customers represent over 25% of the total rig count. Of those, almost 60% have plans to add rigs into the 2017 timeframe. None indicate a reduction in rig count. Our own marketing activity shows about 10 customers could add about the same number of rigs over the next couple of months.
"More tellingly, the confidence indicated by our customers is evident in contracts they have signed with us. We have eight pending deployments this quarter, already under contract. In addition, we have commitments today for a handful more."
Between July and September, Nabors averaged 163.5 rig years operating at an average gross margin of $14,029/rig day, compared to 159.1 rigs at $15,850 in 2Q2016 and 187.9 rig years at an average gross margin of $13,407 in 1Q2016. Rig contracts continue to roll off, creating a challenge for average fleet margins, but there's a bright spot-- increased demand for top-of-the-line rigs, which has begun to exert pressure on pricing and contract terms, Petrello said.
"After a challenging downturn, we are experiencing significant utilization increases in our Lower 48 market, although spot market pricing continues to remain competitive," he said. The recent uptick in Lower 48 activity and stabilizing oil prices "are encouraging."
Recent increases in Lower 48 activity and stabilizing oil prices have led to utilization increases across many of Nabors' alternating current (AC) rig classes, particularly its pad-optimal PACE-X line and recently introduced M800 rigs, "which are rapidly approaching full utilization."
For the PACE-M800, the company already has contracts for the first four, including two already deployed, and awards for two more, as more efficient drilling technology pulls in customers. The first PACE-M800 rig was deployed in the Permian Basin of West Texas and the second is drilling in the Haynesville Shale.
"The third and fourth are going to two different customers in South Texas," Petrello said. "It is noteworthy that these South Texas operators are returning customers. Our previous rigs with them were early casualties of the downturn. These units are some of the early additions.
"We think it says a lot about our offering that they have decided to deploy our M800 rigs. We remain committed to build an additional two, for six in total. Customer interest for the two remaining units under construction remains high. We already have customer commitments and process for both,” he added.
"All of our newbuild rigs are deployed with our new 'Rigtelligent' modular-code operating system, and we have commenced retrofitting most of our AC fleet," the CEO said. "This operating system effectively automates routine tasks and integrates downhole processes with the rig.
“The incorporation of this operating system, together with ongoing enhancements to our other AC rig classes, will give us 100 pad-optimal, high-specification, automated rigs by mid-2017."
Strong demand for the PACE-X rig line alone "has brought the utilization of that fleet to over 80%," PetreLowerllo said. "This increased demand is beginning to exert upward pressure on pricing for these top-end rigs, although, in the near-term, our fleet average margins will remain under pressure" because of expiring long-term contracts.
The quarterly performance confirmed the positive trends foreseen a few months ago, said CFO William Restrepo.
"First, our international business has remained healthy and continues to provide strong cash generation," he said. "Second, our rig count in the Lower 48 market has rebounded. Our working rigs have increased by 66% since our trough in early April, and we have gained market share, mainly on strong demand for our PACE-X rigs. Third, as anticipated, the daily margins for our Lower 48 rigs eroded some more, some term contracts expired, and we added more rigs at the currently lower spot rates.
"We expect this deterioration to continue near-term," Restrepo said. "Finally, our focus on costs at all levels of the organization has paid off, as we have mitigated the impact of average dayrate declines in the U.S." and contained general/administrative expenses, "in the face of an uptick in rig count and controlled our capital expenditures."
Nabors is implementing "a cost-effective plan to enhance other classes" of its existing AC rig fleet to incorporate most of the features of the top-of-the-line rigs.
"Regardless of how the recovery unfolds, we expect our reduced cost structure, improved performance and our various technology initiatives to significantly increase operating leverage across our global fleet," Petrello told analysts.
Net quarterly losses narrowed year/year to $111.2 million (minus 39 cents/share) from $295.8 million (minus $1.02). Revenue declined 36% to $520 million. Adjusted operating income was a loss of $72.0 million, with drilling and rig services suffering an adjusted loss of $38.4 million. The U.S. drilling segment posted adjusted gross profits of $37.3 million, reflecting further margin erosion that was offset by a 7% increase in rig years.