Earnings Call Transcript - NBR Q2 2020

Operator, Operator

Good day, and welcome to the Nabors' Second Quarter 2020 Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to William Conroy, Vice President, Investor Relations, and Corporate Development. Please go ahead.

William Conroy, Vice President, Investor Relations

Good afternoon, everyone. Thank you for joining Nabors' second-quarter 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 along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks, a slide deck is available, both as a download within the webcast and in the investor relations section of nabors.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 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to risks 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 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 website 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 is 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. Furthermore, the results discussed during the call are preliminary and unaudited and are subject to change and finalization based on the completion of the company's normal quarter-end procedures, particularly as it relates to impairments and valuations or reserves around the carrying value of various assets on our balance sheet. As a result, these preliminary results may be materially different than the actual results reflected on the company's Form 10-Q when it is filed. We do not expect there to be any differences in revenues, adjusted EBITDA, adjusted operating income, free cash flow, or net debt, or any of the rig activity or daily rig financial information, but there could be material differences to net loss from continuing operations attributable to Nabors' common shareholders and earnings per share. Before I turn the call over to Tony, I would like to mention that we have attempted to incorporate your suggestions to improve this call's usefulness to you. As such, we are streamlining our prepared remarks, which should permit more time for your questions. With that, now I will turn the call over to Tony.

Tony Petrello, CEO

Good afternoon. Thank you for joining this review of our results for the second 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. My wrap-up comments today will focus on three timely and key subjects: First, Nabors' positioning to capitalize on several emerging themes in the industry; second, our advantaged position in the market as the industry navigates the downturn; and third, Nabors' standing as a technology leader in our industry. Let me first lead off by commending each member of the Nabors' global team on their management of the impact of the pandemic. The health and safety of our worldwide staff are paramount. Nabors remains committed to ensuring the well-being of our workforce at each location around the globe. As well, we are dedicated to maintaining our focus on safety and our industry-leading drilling performance. This environment has been a challenging one. I am proud of the team for its innovation and perseverance. These qualities have minimized the virus effects on the Nabors' extended family and on our operations. Nabors has a long-standing commitment to the health and safety of our employees and the broader community in which we operate. The value of this commitment is especially noteworthy in this era. Next, I would like to update you on our actions as we manage the current business environment. This downturn requires swift and decisive actions. The spending reductions, which we announced earlier, have been fully implemented. As those were put in place, I also challenged our team to reevaluate our structure and processes. The team responded, and we are targeting additional savings to those previously announced. These measures to reduce our overhead costs and further support our free cash flow. We are now targeting approximately $11 million in additional savings in fixed costs. This brings our target to $96 million, up from the $85 million which we announced previously. I think it is important to note, we expect to realize the additional $11 million during 2020. Combined with the common dividend suspension, these actions, plus our previous capital spending reductions totaled more than $220 million of cash savings. That magnitude demonstrates our commitment to mitigate the impact of lower industry activity. At the same time, we remain focused on free cash flow generation and net debt reduction. Let me now spend a few moments discussing the macro environment. On the day of our last quarterly earnings call in May, near-month WTI was $24. Since then, it has rallied above $40. As this upward movement occurred, operators executed the spending reduction plans they had put in place earlier. Consolidation has continued. Chevron is acquiring Noble for $13 billion. More than a dozen oil producers have filed for bankruptcy. From the beginning to the end of the second quarter, the Baker Hughes Lower 48 land rig count declined by 451 rigs or 64%. The pace of decline has slowed dramatically since the beginning of June. Based on our conversations with the largest Lower 48 operators, we believe that their planned activity reductions are nearly complete. That and the lack of incremental announcements suggest we may be nearing a bottom in the activity. In our international markets, the activity response is varied. In certain Latin American markets, the response was sharp with drilling activity ceasing four times during the second quarter. Most of these reductions resulted from efforts to contain the spread of the coronavirus. Some longer-lasting cuts in investment were also announced in Colombia and Venezuela. In this last market, the exit of our main customer has led to a shutdown of our activity. In other markets, customer actions were initially more measured. However, some of our customers outside of Latin America have started to reduce their drilling activity based on supply and demand considerations. The most impactful is a significant cut in the total rig count in Saudi Arabia. For Nabors, that has resulted in the suspension of a number of rigs until year-end. In addition, our customer in Kazakhstan has terminated contracts on two of our rigs. More recently, some of our clients are beginning to reverse the actions taken earlier this year. Global oil demand has increased from the low point in the second quarter as economic activity rebounds. That trend should help work down the excess inventory, which built up. These are positive signals, but it's still too early. Next, I would like to highlight a few aspects of our second-quarter results. William will cover our results in more detail as well as our forward guidance. Total adjusted EBITDA was $154 million in the quarter. These results benefited in part from one-time items in our international markets, which totaled approximately $8 million. Thanks in part to this EBITDA performance, we reduced net debt in the quarter by $117 million. Our global rig count totaled 148 rigs, a 26% decline from the first quarter. Outside of the U.S. Lower 48 and Canadian markets, our rig count declined by just 5%. We never like downturns, but Nabors' decline has been much smaller than the industry. This is a strong testament to the performance and value which Nabors delivers to its worldwide customer base. In our Lower 48 business, our reported daily rig margin of $10,449 exceeded the expectation we laid out on the previous earnings call. Nabors' margin performance reflects four key factors: first, the capabilities of our rig fleet are second to none. We offer the highest specification rigs in the Lower 48. Second, we are the leaders in field of safety performance. We believe we deliver greater value while emphasizing safety than our competitors. Third, our focus on operational excellence and reducing expenses yielded the expected benefit of free cash flow. And fourth, recognition by our customers of the value we bring to the table has allowed us to manage pricing and mitigate the erosion of our average day rate for the fleet. In our rig technologies segment, we delivered the highest quarterly EBITDA in five years. This performance reflected improved margins in the Canrig operation. It also underscores Nabors' ability to deliver technology initiatives at lower costs. We achieved some notable highlights in addition to our financial results. First, data and digital workflows are coming to the forefront as a means to create significant value in our drilling services. The latest addition to our digital portfolio is RigCloud. RigCloud is a platform for digital operations which streams real-time drilling data from the edge devices to the cloud. It provides real-time visibility and analytics to drive performance. RigCloud enables preparation between the remote teams of customers and support centers to maximize planning, execution, and re-performance across fleets. RigCloud has an open ecosystem of apps compatible with both Nabors and third-party rigs. It promotes informed, simple and better drilling decisions. We have launched it this month with more than 20 drilling apps and widgets that can be customized to create dashboards and tiles based on users' preferences. Second, we have unified the branding of several products and services to align with Nabors' smart brands. This evolution should enhance awareness for several products and services in Nabors portfolio. The new naming under the smart umbrella with accompanying value propositions for each offering will reinforce our products' reputation for innovation, value-add and quality, and help drive demand. Now, I will discuss our view of the market in more detail. Last week, the Lower 48 land rig counts stood at 236. That is down by 465 rigs since the end of the first quarter, a 66% decline. In comparison, Nabors' working rig count, excluding rigs stacked on rate has declined by 53%, or 13 points better over the same period. This environment is challenging, and clients are highly selective when determining their contractors. Our share gain clearly demonstrates our position as the leading performance driller. Nabors provides the best drilling performance with a superior safety record in the Lower 48. Looking to the future, we have spent a significant amount of time trying to understand how this market will unfold. The recent stability in oil prices around the $40 level should improve operator confidence. A handful of operators could see a modest increase in working rates during the second half of 2020. For 2021, assuming global economic activity and demand for oil continue to grow, we believe E&P industry spending will increase. That spend will likely pull through additional rig activity. In this scenario, we believe Lower 48 operators will be highly discriminating in their selection of drilling contractors and rigs. For drilling specifically, we anticipate a focus on premium, high-spec rigs. The Lower 48 operators, which are most likely to increase their drilling in the very near term, includes several that paused activity completely. Beyond those, we expect operators with balance sheet strength, free cash flow generation, and a low-cost base as most likely to deploy rigs. In our international markets, we have already seen activity restart in Argentina and Colombia. The Middle East markets continue to evolve. The spending outlook there is less certain. Regardless, contractors with established market share and a demonstrated track record of operational excellence will be advantaged. That concludes my remarks on our second quarter results, highlights in the current market. Before we involve prepared remarks, I want to thank the entire Nabors' team for their hard work and sacrifice in a very difficult environment. I also extend well wishes to all those in our extended community who are affected by the virus. Now I will turn the call over to William for his discussion of the financial results and guidance.

William Restrepo, CFO

Thank you, Tony. And good afternoon, everyone. Revenue from operations for the second quarter was $534 million, a sequential reduction of 26%. All of our segments experienced revenue declines, mainly related to the macroeconomic response to the global pandemic. U.S. Drilling revenue of $174 million decreased by $101.1 million or 37% as our average rig count declined by 34%. Lower 48 rig count of 57.2 fell by 36%. Daily rig revenue in the Lower 48 at $24,744 decreased by $2,455 per day, reflecting lower average day rates and reduced revenue from reimbursable expenses. Average day rate eroded by $2,000, driven by a reduction in average pricing as well as by a higher number of contracted rigs stacked on revenue, but at a rate lower than the operational day rate. International drilling revenue at $301 million decreased by $36 million or 11%, primarily due to a 5% reduction in rig count, pricing concessions and COVID-related standby periods in Latin America and negotiated day rate discounts across certain markets. These deteriorations were partly offset by early termination revenue. Canada drilling revenue was $3.6 million, down 86% as rig count fell by a similar percentage. The normal impact of seasonality was exacerbated by the weak drilling market. Drilling solutions revenue of $33.1 million declined by 40% from the previous quarter. All of our product lines decreased sharply with our casing running business holding up the best, driven by a strong international franchise. This deterioration was driven by pricing pressure and by a reduction in the Lower 48 industry rig count which was significantly higher than the decline in Nabors' rig count. U.S. revenue for the segment fell by 46%. The revenue in our Rig Technologies segment was $8.6 million or 20% lower at $33.6 million. The decrease in revenue came primarily from lower aftermarket sales in the U.S., somewhat offset by more stable international activity. Adjusted EBITDA for the quarter was $154 million compared to $188 million in the first quarter. The decrease was driven by activity reductions in the Lower 48, which affected several segments and by lower rig count in international coupled with pricing concessions. Although some of these concessions are related to COVID lockdowns and should thus prove temporary. Other discounts have been extended for the remainder of the year. I would also like to highlight that the quarter's EBITDA benefited from $8 million in net gains, which came primarily from early terminations in our international markets. U.S. Drilling EBITDA of $77.7 million was down by 23.7% sequentially. Although Lower 48 average rig count fell by 36%, daily margins increased by just over $500 per day to $10,449. Some of this margin improvement came from the increased number of stacked but contracted rigs. Overall, the lower expenses for these rigs outweighed the reduced day rates. Although we experienced some pricing erosion, this impact was offset by targeted cost initiatives, which we can largely replicate in future course. We exited the second quarter with a Lower 48 rig count of 49 rigs. Our current Lower 48 count remains at 49. We expect average rig count in the third quarter to decrease by two to three rigs from the second-quarter exit rate of 49 and then to level off for the balance of the year. The third-quarter rig count represents a 20% reduction as compared to the second quarter. In the third quarter, we anticipate daily rig margin to tail off to around the $9,000 to $9,500 range, driven primarily by lower day rigs and by a moderate increase in rig operating expenses. In addition, we expect to incur one-time costs to move and store a significant number of rigs that have been idled over the past two quarters. International adjusted EBITDA increased by $2 million to $93.5 million in the second quarter, including the $8 million in gains primarily related to early terminations. International rig count was 82.4, down 4.3 rigs. Venezuela accounted for a 1.5 rig reduction as our main customer exited the country. We are in the process of shutting down our activity in this country. The remaining net reduction in rig count was driven by actions taken by customers to mitigate the current supply demand imbalance, which in certain markets also resulted in reduced pricing. Daily gross margin, excluding the initial items, was approximately $13,000. In the second half of the year, we anticipate third-quarter EBITDA to decline from the second-quarter level driven by a decrease in rig count of approximately 11 rigs and pricing reductions in select markets. We expect most of the rig count decrease to come from Saudi Arabia, Kazakhstan, and Colombia. Canada adjusted EBITDA decreased by $8.5 million to a loss of $560,000 in the second quarter. Rig count at 2.2 rigs was 14.6% lower sequentially. After the severe decline of activity in the second quarter, we expect an improvement in the third quarter as we experience the usual seasonal recovery in both rig count and margins. We currently have eight rigs operating in Canada. Drilling solutions posted adjusted EBITDA of $9.4 million, down from $19.4 million in the first quarter. The decline in U.S. Drilling activity for Nabors and third-party rigs affected volumes for this segment. In addition, pricing pressure has impacted our results. For the third quarter, we're expecting adjusted EBITDA to remain approximately flat. Rig technologies reported adjusted EBITDA of $3.2 million in the second quarter, an increase of $6.4 million despite the decline in the market. International sales and significant cost reductions drove this improvement. The third-quarter EBITDA should be in line with the second quarter. Now let me review our liquidity and cash generation. In the second quarter, net debt decreased by $117 million to $2.78 billion. Free cash flow defined as net cash from operating activities plus net cash used for investing activities totaled $101 million. This compares to free cash flow of approximately $8 million in the prior quarter. The improvement was driven by lower semi-annual interest payments on our senior notes and reduced capital expenditures, which more than offset the lower EBITDA and a normally weak collections in many markets. Disruptions triggered by COVID delayed customer approvals, our invoicing, and payments by our customers. In addition, lengthy negotiations related to day rates during COVID lockdowns in Latin America prevented us from invoicing several customers during the quarter. Capital expenses in the second quarter of $49 million were $11 million lower than the prior quarter. Our CapEx target for 2020 remains at $240 million. Our solid cash flow generation is a result of swift and meaningful actions taken to mitigate the impact of the current downturn. We now expect our actions on overhead, capital discipline, and dividends to exceed $220 million for the final three quarters of 2020, somewhat higher than our initial target. We anticipate having ample liquidity to meet our upcoming obligations. Our cash balances closed the quarter at $484 million, and availability on our credit facility stood at $440 million. Remaining balances on our senior notes due in 2020 and 2021 now stand at $139 million and $154 million, respectively. Our credit facility, a key component of our available liquidity includes various covenants. This facility expires in October of 2023. Given the current industry uncertainty, under certain scenarios, breaching of the facilities' covenants in 2021 could be possible. To remove this exposure, we're currently working on our amendment with our lenders to avoid potential covenant breaches through the facility's remaining life. With that, I will turn the call back to Tony for his concluding remarks.

Tony Petrello, CEO

Thank you, William. I will now conclude my remarks this afternoon with the following. We are witnessing several transformations across our industry. Even in the current environment, we see accelerating interest from our stakeholders and several themes: First, integration, specifically of services around the well-site. Nabors has led this revolution. Our services and wellbore placement and tubular running are designed to run seamlessly with our rigs. An important benefit in the current market is reduced staffing of services at the well-site. Second, digitalization. Our systems collect comprehensive data in real-time while drilling. This portfolio includes drilling data and high-velocity diagnostic data generated by equipment. Using our RigCloud platform, we offer cloud to edge digital workflows, which facilitate real-time optimized decision-making. Third, automation, which improves speed, performance, and safety. Nabors offers a broad range of task automating services. Our suite is industry-leading. It includes the ROCKit and REVit performance tools. Our portfolio also includes more recent additions. SmartNAV, formerly named Navigator; and SmartSLIDE, which was formerly called ROCKit pilot. Finally, ESG. Our current focus is to set baselines for our ESG criteria. This effort incorporates the initiatives already underway and completed. These include our dual fuel capable rigs, engine emissions control, our low-noise Canrig Sigma top drive, and our leading safety performance. The breadth of our initiatives in these areas is comprehensive. The obvious benefit is to improve operators' economics. Beyond that, they improve well-site safety, produce higher quality wellbores, increase total well production, and drive positive change across the value chain and in society broadly. The current market is forcing an extraordinary selection process in the service industry and among E&P operators. In the Lower 48, operators who survive this process are likely those with financial strength and advantaged cost structures. This is a group we think most likely to deploy additional rigs as the industry rebounds. By design, Nabors has focused on precisely this group of operators over the past several years. Our market share with this collection of 20 companies was increasing prior to the downturn. Since then, it has jumped significantly. In terms of working rigs, we calculate our overall share within these 20 has increased from approximately 18% at the end of February to 25% most recently. Taking another view among the companies with which we had working rigs in February, our shares increased from 27% to 34%. These share gains show the growing preference for Nabors' rigs among those operators most capable of adding rigs in an upturn. In international markets, we maintained a significant global footprint in countries with significant reserves and relatively low breakeven prices. These markets include Saudi Arabia, Kuwait, Kazakhstan, as well as offshore Mexico. These markets are poised to increase activity as global oil consumption rebounds. Our position in our served markets and the value proposition we bring to those markets are first-rate. We are confident we hold the advantage as the industry emerges from the downturn. The leadership position in drilling requires best-in-class rig designs, industry-leading safety and operating performance, and advanced technology. Nabors began its commitment to technology leadership years ago. We heavily invested in R&D even through the downturns. We have a robust drilling technology portfolio supported by proprietary and patented systems. We expect this to continue to expand the breadth of this portfolio. In addition to our advanced rigs, we monetize much of our technology through our NDS business. I remind you that this business is significantly less capital-intensive than the rig business. Revenue in NDS is larger than similar business lines at other Lower 48 drilling contractors. In recent quarters, NDS' EBITDA has significantly exceeded the next two combined. And demonstrating the reach of this business, third-party rigs have accounted for 15% to as much as a third of NDS's Lower 48 revenue. Our technology portfolio is developed collaboratively with customers, yielding benefits of experience, expertise, and perspective from the universe of contributors. I think these relative statistics, the technology portfolio, top and bottom line of NDS and third-party volume, demonstrate our clear leadership position in drilling technology. That concludes my remarks this afternoon. Thank you for your time and attention. With that, we will take your questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question today comes from Connor Lynagh of Morgan Stanley. Please go ahead.

Connor Lynagh, Analyst

Yeah, thanks. Afternoon. I think you had brought up, in the prepared remarks, some degree of pricing pressure in international markets. I was wondering if you could quantify or at least directionally speak to the magnitude where it was worse, where it was better. Any color you could provide there would be great.

William Restrepo, CFO

It's a good question, Connor, and unfortunately, it has multiple answers. Part of the pricing pressure was related to the COVID lockdowns. The discussion arose regarding the contract on standby revenue, and due to the challenges our customers faced, we had to consider what kind of day rate we would receive during those periods. This was a significant factor in estimating how our pricing impacted our revenue in the second quarter, which I think resulted in about a 12% hit mainly due to substantial reductions in markets, particularly in Latin America. Looking at the demand-supply situation our clients are encountering, along with the pressures they are applying on volume and pricing, the impact from that aspect would likely fall between zero and mid-single digits. These reductions seem more sustainable as we move forward, and that is what we are observing today.

Connor Lynagh, Analyst

That's helpful. Thank you. You raised the issue of the covenant on the credit facility, which certainly seems like, thus far, banks have generally been willing to work with lender still on that front. But could you just sort of speak more holistically, how should we think about maturity management over the next few years? Is your intention to continue to repurchase near-term maturities? What's just sort of the high-level view of what your plan is there?

William Restrepo, CFO

So, we obviously need to look ahead and identify potential future issues. Currently, we don’t have any immediate covenant concerns. However, since the facility has three years remaining, it’s better to address these matters early rather than wait for problems to arise. We are in discussions with our banks and expect to have an amendment soon that will ensure no covenant issues arise until the facility matures in October 2023. We have been buying back some near-term maturities, but I have to note that the volume of bonds we can purchase has recently declined, as more people are holding onto our bonds than they did a few months ago. For now, we plan to use our cash generation and existing cash to pay down our 2020 maturities. As for 2021, it's still too early to predict our actions, but if opportunities arise to buy back the 2021s in the market, we will pursue those.

Taylor Zurcher, Analyst

Good afternoon, and thank you. I wanted to start by asking about your comments regarding Saudi Arabia. It seems that a few of your rigs will be suspended through the end of the year. Could you clarify how many rigs will be impacted by this in 2020? Additionally, if this is indeed a suspension period, do you anticipate those rigs will return to work in 2021, or is it too early to make that determination?

Tony Petrello, CEO

So, in the Saudi market, in general, I think the rig count in terms of specific is up to about 28% since last quarter. So, it's pretty significant. I think, given our market position, as well as great support from our customer partner, I don't think we're going to be impacted to the same extent, but we will be impacted. And that's kind of the situation right now.

William Restrepo, CFO

So, we estimate an impact of some six rigs from the 43 that we have today.

Taylor Zurcher, Analyst

Okay, got it. And second question also internationally. It sounds like working capital was a headwind in Q2 and you went through the reasons for that. And part of that's the pandemic that's ongoing. But curious, at least in July or through the first month of Q3, have collections internationally improved at all? And is there any way to frame for us how we should think about working capital, hopefully tailwinds, in the back half of 2020?

William Restrepo, CFO

Yes, you did mention that. And I want to clarify that it's a relative headwind. I mean, obviously, our revenue went down quite a bit and the working capital did help a little bit, but not nearly as much as we expected because our DSO went up by about four days. And yes, it was mainly in Latin America. I mean, it was more issues of if you’re discussing what the day rate is going to be during the lockdown period, obviously, you can’t invoice. And until those negotiations are finalized, you have to wait to invoice. So, we do expect to recover a lot of that slowdown during the third quarter. You know, some negotiations may take longer and could extend maybe into the fourth quarter. But in general, we do expect most of that slowdown in our signed collections to correct itself into the third quarter.

Waqar Syed, Analyst

So, the 74 rigs that you have working internationally, could you provide a breakdown of where geographically they're working right now?

William Restrepo, CFO

You know, obviously, the biggest piece is Saudi Arabia where we have 43 rigs. And next will be Latin America, Waqar. We have about 20 rigs operating. And then the rest is just drips and drabs, I mean, Kazakhstan, Russia. We have one remaining rig in Algeria. And then Kuwait, Oman. So that's more or less the distribution. I don't think we have any other country that I didn't cover. In Latin America, it's Mexico, Colombia, and Argentina, now that Venezuela has closed down.

Waqar Syed, Analyst

Sure. So, the 74 rigs that you have working does not still include the eight rigs that may come off in Saudi Arabia?

William Restrepo, CFO

I think I said six before, but a couple of them are already down.

Waqar Syed, Analyst

Okay. So, a couple of them are already...

William Restrepo, CFO

By the way, Aramco was doing this very smartly. Rather than suspending rigs permanently, what they're doing is alternating to keep the rigs active and to keep the rigs from being stacked fully and losing on the certification periods and so forth. What they're doing is alternating the rigs and rigs are taking turns to go down. So, I think that's very beneficial, both, I think, for Aramco, but also for the drilling contractors because of always having to shut a rig down fully and then try to bring it back down the road. So, I haven't seen this done by other clients, but I think that's a very smart way of doing it.

Waqar Syed, Analyst

Absolutely, yes. And then you have a contract to build five rigs a year. Do you expect to start that program next year in Saudi Arabia?

Tony Petrello, CEO

The key point is that Aramco needs to sell out in order to issue a work order with a term contract to start a process. This has not occurred yet, but we are ready. The joint venture is prepared to accept that and proceed. However, so far, it has not taken place, and based on our previous discussion about rigs, the timing of when they will issue the first work order remains uncertain.

William Restrepo, CFO

So, we don't think any rig will be delivered in 2021, by the way.

Waqar Syed, Analyst

Okay. Fair enough. And then I know people have tried to come in different ways, but do you think margins in international could be in that $11,000 level in the third quarter? Or you think better or worse?

William Restrepo, CFO

Waqar, you keep asking about margins. I've mentioned before that the margin in international operations is just an average of a wide range of rigs, making it not particularly relevant, except for modeling purposes. However, we anticipate that in the second half of the year, we will recover some of the margin erosion we experienced in the second quarter due to COVID discounts. The duration of these discounts and the activity shutdowns in various countries remains uncertain, including when they will end and which hotspots clients might choose to shut down. Nonetheless, we do expect to recover some ground. On the flip side, we foresee a lesser effect from more permanent discounts in select markets. Consequently, we believe the margin erosion will primarily relate to having fewer rigs in operation and our challenge in reducing direct overhead proportionately as rig counts decline, although we will do our utmost. We are confident in sustaining our margins reasonably well. In the second quarter, we experienced early termination issues that adversely affected our margins, resulting in a normalized rate of only $13,000 per day. Given the numerous variables at play, it’s difficult to provide a specific number for the third quarter. For now, we are not prepared to offer guidance on international margins, as several factors are still being negotiated and timing issues could lead to significant variations. For instance, in the second quarter, we had a range of outcomes around $30 million, which ended up closer to the upper limit. In the third quarter, we expect a potential difference of $10 million to $20 million based on how negotiations with clients progress. While we're not ready to give specific guidance, we can say that our rig count is likely to decrease by 11 rigs. We believe there will be a slight improvement in pricing in the third quarter compared to the second, although pricing may remain under pressure in the fourth quarter, and the rig count could drop further.

Tony Petrello, CEO

Hope we had answered that, Waqar, is that international as a portfolio, you know, just looking out a little bit past the next two quarters, I mean, our average duration of our contract is more than two years. And of course, the countries that William recited to you are all developed countries with long-term markets where there's no question that they're long-term developed market. So, I think, position-wise, you know, in terms of a rebound, we're very well positioned, and we have some underlying strength given our contract position and market position today.

Waqar Syed, Analyst

Absolutely. Thanks. Appreciate the answer.

William Restrepo, CFO

Sorry I couldn't give you a number on the margin, Waqar, but I'll try harder next time.

Operator, Operator

The next question comes from Sean Meakim of JP Morgan. Please go ahead.

Sean Meakim, Analyst

Tony, William, you've made positive progress on the cost reduction program, but it's unclear how much of this is variable and related to decreased activity versus how much is about making your fixed cost structure more competitive when activity picks up. The total cost reduction appears to correspond with the revenue decline for the year. Could you explain how much of the costs you have eliminated would be considered fixed versus variable and what the implications are?

Tony Petrello, CEO

Sure. I would estimate that approximately half of the costs are related to selling, general, and administrative expenses and engineering, while the other half, which is slightly more, is for field support. I believe that around 70% of the cost structure is likely to be permanent, with the remainder linked to reduced compensation due to the current environment, which suggests there’s potential for recovery. That's about where we stand right now. I'll let William address that.

William Restrepo, CFO

No, I think that's exactly right.

Sean Meakim, Analyst

Yeah. Very helpful. I appreciate it. And so then thinking about the U.S. specifically, day margins in the quarter, the guide for third quarter, you were able to offset some of the lower activity and some – the initial decline in rates with cost out. I didn't hear any comments about the impact of rig mix. So, meaning there are a handful of rigs you have outside of the Lower 48 being a bigger piece of the overall. Does that have any impact on the guidance that you gave? And then just thinking about the outlook for Alaska and Gulf of Mexico, how that's influencing the numbers 2Q to 3Q.

William Restrepo, CFO

We did provide specific guidance for the Lower 48, and you are correct about the mix impact. Some of the rigs we lost were among those with weaker margins. However, several contractors are experiencing favorable margin impacts because the overall stacked rigs tend to generate less revenue loss compared to the potential cost reductions. On average, the margins for those stacked rigs are better than the average for our entire fleet. If we consider the mix, this was probably the most significant impact. Additionally, we currently have a higher proportion of our M1000s, M800s, and top-quality X rigs operational compared to two months ago, which positively affects our average margins.

Sean Meakim, Analyst

And then just on Alaska and Gulf of Mexico, any change there?

William Restrepo, CFO

In the Gulf of Mexico, as hurricane season approaches, one rig may go offline. After the season ends, it typically returns, and perhaps a couple more will as well. Therefore, not much changes. We had an extremely strong second quarter, and we anticipate that one rig might go down in the third quarter.

Tony Petrello, CEO

Yeah, one or two, maybe.

William Restrepo, CFO

One or two, maybe. And then we will revisit in the fourth quarter. Alaska remains fairly stable. Yes, we experience the usual seasonal decline this quarter, similar to Canada. However, overall activity stays roughly consistent with what we observed in the first quarter, underlying activity.

Operator, Operator

The next question comes from Karl Blunden of Goldman Sachs. Please go ahead.

Karl Blunden, Analyst

Thanks for the time. And good to see the progress on the cost-cutting. Just a question on the balance sheet and the bond buyback activity. It seems to slow quite markedly since May. And I was curious if you could provide a little bit of context on the trade-offs that you're looking at when doing those bond buybacks? Because, you know, it feels like at least the '22s still trading well below par would make some way to create a little bit of value by going after those a bit more aggressively?

William Restrepo, CFO

You mean the 2023 bonds? We don't have any 2022 bonds. So, we have 2021 and 2023 bonds. Anything within the next couple of years is quite interchangeable regarding cash flow and obligations that I consider to be near term. Therefore, buying some of those bonds on the market at a discount is definitely appealing. Of course, we aim to operate within the limits of our cash flow generation to ensure we don't overly extend our revolving credit facilities. That's the approach we've been taking. We're being cautious, trying to capitalize on the market, but not going overboard in our purchasing. So, we're focused on maintaining our cash generation capabilities.

Karl Blunden, Analyst

Got it. That makes sense. That was the focus of the '21. And then just on the bank lender discussion, maybe there's not much you can share at this point in time. But what are some of the things that are giving them, you and the banks comfort with providing the waivers that you require, certainly a better cash flow outlook, I'd say, than many had expected. But what else is part of that discussion at this point?

William Restrepo, CFO

I believe that an ongoing discussion is inherently confidential, and that's something we would prefer to keep internal. However, if you consider the typical activities of banks and what Nabors has accomplished in the past, it appears to be standard procedure for us to engage in discussions aimed at obtaining some covenant relief.

Operator, Operator

Our next question comes from Jason of Millennium. Please go ahead.

Unidentified Analyst, Analyst

Thanks for the call. I just had a question on Saudi Arabia. If you could provide an update on the amount of cash that was there, that would be great. Thank you.

William Restrepo, CFO

So somewhere in the $300 million plus range.

Unidentified Analyst, Analyst

And are there any plans or avenues for you to access that cash?

William Restrepo, CFO

Yes. I mean, we have more cash than we need for future expansion of the fleet. So right now, you know, given the current environment, I mean, obviously, there's too much cash, and we will continue probably to build up some cash over the next two years if we don't use it for the new builds. So, we do have some mechanisms to get the cash out, but we haven't engaged in those discussions with our partner because up to now we haven't really needed that cash outside of Sanaa.

Unidentified Analyst, Analyst

Understood. And then any way to kind of bracket the amount of excess cash out of that $300 million?

William Restrepo, CFO

Well, if you consider it, investment in potentially new rigs could be in the range of a couple of hundred million dollars, primarily occurring in 2022. Therefore, we will not require that $300 million over the next year and a half to two years.

Operator, Operator

The last question today comes from Dan Johnedis of Cratus Capital. Please go ahead.

Dan Johnedis, Analyst

Thank you. I have a question about the recovery process. Specifically, once demand begins to return, what will happen to the old contracts from clients? If clients have demand, will you need to initiate new contracts? Looking ahead, what is your perspective on the recovery process?

Tony Petrello, CEO

Well, I think right now, we're in the mode where there aren't any new contracts, mainly it's extensions or renewals. And on a rebound, obviously, those customers, our core customers, we would hopefully engage with them, and there would be additional contracts. And pricing would be agreed to at that time reflecting to the end market. So that's why we would see none evolving.

William Restrepo, CFO

In some instances, we have added on rate, so they remain on revenue and are still contracted. Those rigs can simply be turned off without the need for any new contracts. Similarly, in countries experiencing COVID shutdowns, we have contracts in place covering those rigs, so again, there's no requirement for new contracts. I believe some of this would align with normal contracts. However, as Tony noted, if clients want additional rigs, they will need to establish new contracts.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to William Conroy for any closing remarks.

William Conroy, Vice President, Investor Relations

Thank you. Let's go ahead and wind up the call there. Thank you, ladies and gentlemen, for joining our call this afternoon. If you have any questions, please give us a call or email us, as always.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.