Nabors Industries (NBR) Q2 2020 Earnings Call Transcript

Nabors Industries (NBR 2.80%)
Q2 2020 Earnings Call
Jul 29, 2020, 2:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Nabors' second-quarter 2020 conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to William Conroy, vice president, investor relation, and corporate development. Please go ahead.

William Conroy -- Vice President, Investor Relation, and Corporate Development

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 -- Chairman, President, and Chief Executive Officer

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 and 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 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 onetime 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 reperformance 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 William for his discussion of the financial results and guidance.

William Restrepo -- Chief Financial Officer

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 onetime 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 -- Chairman, President, and Chief Executive Officer

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 is 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 is formerly made ROCKit pilot. Finally, ESG. Our current focus is to set baselines for our ESG criteria. This effort incorporates the initiatives already under way and completed.

These include our dual fuel capable rigs, engine emissions, 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 to develop 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.

Questions & Answers:

Operator

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

Connor Lynagh -- Morgan Stanley -- 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 -- Chief Financial Officer

Sure. It's a good question, Connor, and it has multiple answer to it, unfortunately. We have a piece of the pricing pressure really was related to the COVID lockdowns. So basically, the discussion was raised on the contract on standby revenue, but, you know, because of the situation our customers were facing, what kind of day rate were we going to get for those periods.

And actually, that has been the biggest factor, I would say we were to estimate how our revenue -- our pricing was affected overall in the second quarter. I think it would be like a 12% hit based on those -- on significant reductions in those markets, which were mainly in Latin America, by the way. Then if we look at more of the demand-supply situation that our clients are facing and some of the pressures they are putting both on volume and pricing, I would say that that particular impact is, you know, between zero and mid-single digits. That would be the more sustaining reductions that we will face going forward.

That's what we're seeing today.

Connor Lynagh -- Morgan Stanley -- Analyst

OK. 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 -- Chief Financial Officer

So, yeah, obviously, we have to -- part of our job is to look forward and identify potential problems in the future, you know. So, we don't have any near-term covenant issues. But, you know, the facility still has three more years remaining. So obviously, we discussed so early on rather than wait for problems to occur.

So that -- we're currently in discussions with our banks. We expect to have an amendment pretty shortly. That would allow us to not have any covenant issues through the remainder of the facility in October 2023. We -- yes, we have been purchasing some near-term maturities.

I must say that the volumes we have managed to purchase more recently have fallen off. I mean, people are holding on for -- to our bonds a bit more than maybe a few months ago. So, you know, for now, we think we'll pay down our 2020s with our cash generation and existing cash. And 2021 is still a bit far off to be guessing on what we'll do.

But if we have opportunities to buy the 2021s off the market, we'll continue to do so.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. Appreciate the color. I'll turn it back.

Operator

The next question is from Taylor Zurcher of Tudor, Pickering, Holt. Please go ahead.

Taylor Zurcher -- Tudor, Pickering, & Holt Co. -- Analyst

Hey. Good afternoon, and thank you. I wanted to start by asking about some of your comments in Saudi. It sounds like at least a handful of your rigs are going to be suspended through year-end.

And I'm curious if you could frame how many rigs are going to be affected by this, at least in 2020? And then if it really is a suspension period, do you expect those rigs to go back to work at some point in 2021? Or is that -- is it too early to call that right now?

Tony Petrello -- Chairman, President, and Chief Executive Officer

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 a 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 -- Chief Financial Officer

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

Taylor Zurcher -- Tudor, Pickering, & Holt Co. -- Analyst

OK. Got it. OK. 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 -- Chief Financial Officer

So -- 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 would extend maybe into the fourth quarter.

But in general, we do expect most of that slowdown when we sign collections to correct itself into the third quarter.

Taylor Zurcher -- Tudor, Pickering, & Holt Co. -- Analyst

All right. Thanks for the [Inaudible]

Operator

The next question comes from Waqar Syed of ATB Capital Markets. Please go ahead.

Waqar Syed -- ATB Capital Markets -- 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 -- Chief Financial Officer

You know, obviously, the biggest piece is Saudi Arabia where we have 43 rigs. And next will be Latin America, Waqar. We have some 20 rigs-or-so that are 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 -- ATB Capital Markets -- 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 -- Chief Financial Officer

I think I said six before, but...

Waqar Syed -- ATB Capital Markets -- Analyst

Six. Yes, sorry. Six rigs, yes. So, six...

William Restrepo -- Chief Financial Officer

Couple of them are already down.

Waqar Syed -- ATB Capital Markets -- Analyst

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

William Restrepo -- Chief Financial Officer

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 keep the rigs from being stacked fully and lose 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 think that I haven't seen this done by other clients, but I think that's a very smart way of doing it.

Waqar Syed -- ATB Capital Markets -- 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 -- Chairman, President, and Chief Executive Officer

Well, the triggering point is the Aramco sells out to issue a work order with a term contract to initiate a process. That has not happened yet. And -- but we are prepared. The joint venture is prepared to accept that and move forward.

But so far, that hasn't happened. And given what we just talked about in rigs, the timing is uncertain when in fact they will issue the first work order.

William Restrepo -- Chief Financial Officer

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

Waqar Syed -- ATB Capital Markets -- Analyst

OK. OK. 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, you know, level in third quarter? Or you think better or worse?

William Restrepo -- Chief Financial Officer

Waqar, you keep going to the margins. I've said many times that the margin in international is really an average of a very widely dispersed number of rigs. So, it's very little relevance except for modeling, I guess, if -- but what I can say is that we expect, in the second half of the year, to recover some of the erosion we saw in the second quarter through the COVID discounts. Now, the extension of the COVID discounts and the activity shutdowns that we're seeing in these various countries is still uncertain when it will stop or how much or in which hotspots that a client decides to shut down.

But -- so -- but we do expect to recover that. On the other hand, we expect a lesser impact from more permanent discounts in various select markets. So, I think the erosion that we will see in margins could be more related to having fewer rigs operating and us being unable to fully reduce the direct overhead as much as the rig counts fall, but we're certainly going to try our best. So we think we're going to be able to sustain our margins fairly well.

Of course, in the second, we did have early termination which impacted our margins. And so, we are -- real normalized margins were only $13,000 per day. But, you know, what I can say, given all the moving pieces, it's very difficult for me to give you a number for the third quarter. So, we'll say something similar to what we said in the second is that, at this point, we're not really ready to provide guidance on international because there are several moving pieces that are being negotiated and some timing issues that can give us a wide range.

So, I'll give you an example in the second quarter. The international market, we had a range of outcomes somewhere in the $30 million range. So, it could have been higher or lower. Fortunately, we were very close to the upper end of our outcomes.In the third quarter, we do have a couple of, I would say, $10 million to $20 million difference in potential outcomes, depending on how negotiations and some discussions we're having with the clients go.

So, we're not ready to give guidance. But all we can say is that our rigs will most probably go down by 11 rigs. We will have a little bit of improvement in pricing, I think, in the third quarter versus the second. And we also believe that, you know, pricing will continue to be a little bit under pressure in the fourth quarter and potentially a couple more rigs could go down.

Tony Petrello -- Chairman, President, and Chief Executive Officer

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 -- ATB Capital Markets -- Analyst

Absolutely. Thanks. Appreciate the answer.

William Restrepo -- Chief Financial Officer

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

Operator

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

Sean Meakim -- J.P. Morgan -- Analyst

Thanks, Hi. Good afternoon.

William Restrepo -- Chief Financial Officer

Hi, Sean. How are you?

Sean Meakim -- J.P. Morgan -- Analyst

Tony, Williams, so constructive progress on the cost reduction program, but just -- it's not clear how much of this is variable versus -- and tied to lower activity versus making your fixed cost structure more competitive when activity improves. Total cost out seems to align with the revenue decline give or take for the year. Can you maybe just elaborate a bit on how much of the costs you've taken out, you'd characterize as fixed versus variable and the implications?

Tony Petrello -- Chairman, President, and Chief Executive Officer

Sure. About -- I would say, about half is SG&A and engineering and the other half, a little bit more than half is field support. And I would say that probably 70% of the cost structures, hopefully, are structural, and the rest are related to lowering of compensation given this environment, so it has some bounce-back potential. That's roughly the numbers where it seems right now.

I'm going to let William answer that.

William Restrepo -- Chief Financial Officer

No, I think that's exactly right.

Sean Meakim -- J.P. Morgan -- Analyst

OK. 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 -- Chief Financial Officer

So, we did give specific guidance for the Lower 48, Sean, you're right. I mean, there's some mix impact there. You know, some of the rigs we lost are some of the weaker margin ones. But also, I think something that is impacting several of the contractors' margins in a favorable way is that the rigs that are stacked overall, I mean, it's not for all -- it doesn't hold for all customers.

But overall, we lose less in revenue than the potential for reducing costs. So, the margins for those rigs, on the average, are better than our average for the whole fleet. So that -- if we want to speak of a mix, then it probably was the biggest -- the largest impact. And yes, I mean, we have more our M1000s, M800s, and our highest-quality X rigs working as a proportion of the fleet today than maybe two months ago.

So that does have an impact on the average margins.

Sean Meakim -- J.P. Morgan -- Analyst

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

William Restrepo -- Chief Financial Officer

And in the Gulf of Mexico, I think, we -- hurricane season comes, one rig goes out. And then hurricane season ends and it comes back, or maybe a couple come back. So not a lot of changes. We had a very, very strong second quarter, I think, we expect one rig maybe to go down in the third.

Tony Petrello -- Chairman, President, and Chief Executive Officer

Yeah, one or two, maybe.

William Restrepo -- Chief Financial Officer

One or two, maybe. And then come back in the fourth quarter. Alaska pretty stable. I mean -- yes, I mean we have the seasonal downtick that we usually see in this quarter, same as in Canada.

But general activity stays more or less the same from what we saw in the first quarter, underlying activity.

Sean Meakim -- J.P. Morgan -- Analyst

Very helpful. Thank you.

William Restrepo -- Chief Financial Officer

Thanks, Sean.

Operator

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

Karl Blunden -- Goldman Sachs -- 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 -- Chief Financial Officer

You mean the '23s? We don't have any '22s. So, we have '21s and '23s. And, you know, anything within the next couple of years is pretty fungible in terms of cash flow and obligations that we have, what I would define as near term. So being able to buy some of those bonds on the market at a discount is certainly attractive.

Obviously, we try to do it within the constraints of our cash flow generation to make sure we don't -- you know, we don't go too big on our revolving credit facilities. So that's what we've been doing. I mean, we're taking a measured approach, trying to take advantage of the market, but not going crazy in terms of trying to buy too much. So just living within our cash generation means actually is what we're trying to do.

Karl Blunden -- Goldman Sachs -- 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 bank's 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 -- Chief Financial Officer

I mean, I think a discussion that's ongoing is, by its nature, confidential, and that's something we'd like to talk about. But it's just -- I mean, if you look -- if you know what banks do, and if you've seen what Nabors has done in the past, I think, we -- it's just the normal kind of discussions to get some covenant relief.

Karl Blunden -- Goldman Sachs -- Analyst

Got it. All right. Thanks very much.

Operator

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

Unknown speaker

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 -- Chief Financial Officer

So somewhere in the $300 million plus range.

Unknown speaker

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

William Restrepo -- Chief Financial Officer

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.

Unknown speaker

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

William Restrepo -- Chief Financial Officer

Well, if you think about it, maybe investment in potentially new rigs will be somewhere in the range of a couple of hundred million dollars, maybe hitting -- most of that hitting in 2022. So obviously, we won't be needing those $300 million and change million over the next year and a half or two years.

Operator

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

Dan Johnedis -- Cratus Capital LLC -- Analyst

Thank you. I had a question regarding the process for recovery. In other words, once the demand start coming back, what happens to those old contracts from clients? Are those contracts -- if the clients have demand, are those -- do you have to start new contracts? And looking forward, where do you see the process for recovery?

Tony Petrello -- Chairman, President, and Chief Executive Officer

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 -- Chief Financial Officer

In some cases, we have -- we sort of stacked on rate. So, they're still on revenue. They're still contracted. So those rigs you just turn them off.

There's no need to do any new contract. And maybe the countries where we have COVID shutdowns, again we have contracts that are covering those rigs. So, there's no need to do any new contracts. So, I think some of that would be normal contracts.

But as Tony mentioned, if clients want more rigs, youknow, they have to do new contracts.

Dan Johnedis -- Cratus Capital LLC -- Analyst

They will do new contract, right? Terrific. Thank you.

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 Relation, and Corporate Development

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 signoff]

Duration: 53 minutes

Call participants:

William Conroy -- Vice President, Investor Relation, and Corporate Development

Tony Petrello -- Chairman, President, and Chief Executive Officer

William Restrepo -- Chief Financial Officer

Connor Lynagh -- Morgan Stanley -- Analyst

Taylor Zurcher -- Tudor, Pickering, & Holt Co. -- Analyst

Waqar Syed -- ATB Capital Markets -- Analyst

Sean Meakim -- J.P. Morgan -- Analyst

Karl Blunden -- Goldman Sachs -- Analyst

Unknown speaker

Dan Johnedis -- Cratus Capital LLC -- Analyst

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