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Nabors Industries (NYSE:NBR)
Q3 2020 Earnings Call
Nov 04, 2020, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, and welcome to the Nabors third-quarter 2020 earnings release 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 of investor relations. Please go ahead.

William Conroy -- Vice President of Investor Relations

Good afternoon, everyone. Thank you for joining Nabors's third-quarter 2020 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 certain 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. As you are aware, Nabors currently has a capital markets transaction under way. Accordingly, while we welcome your questions regarding our results, outlook, and view of the markets, we will not field any inquiries regarding this transaction. With that, I will turn the call over to Tony to begin.

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

Good afternoon. Thank you for joining us as we review our results for the third 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.

Our wrap-up comments today will focus on the evolution of the market for advanced technology and our leadership position driving this progress. I would like to start by recognizing the Nabors' staff for their efforts and performance. The twin challenges of the pandemic and the industry environment are unprecedented. Our team has excelled in maintaining the continuity of our global operations while improving our industry-leading safety record.

The health and safety of our employees is paramount. We continue to make progress toward Mission Zero with the ultimate goal of zero hurts. On the financial front, our third-quarter results illustrate the full impact of the expense reductions implemented earlier this year. I am pleased with the progress to date.

I'm also challenging the team to optimize our business processes and to add focus on cost avoidance. Our outlook on capital spending has also improved, and we are now targeting approximately $200 million for the full-year 2020. This amount is $40 million lower than our previous target and substantially below last year's spending of $424 million. Our immediate financial priorities remain free cash flow generation and net debt reduction.

As a result of our persistent efforts, we continue to make material progress on these goals. Now, I will spend a few moments discussing the macro environment. During the third quarter, near month WTI traded in a relatively narrowband around $40. This lower volatility is a market change from the extremes we saw in the first half.

Also, in the third quarter, global oil consumption increased by almost 11% versus the second quarter. That restoration of demand has contributed to increased operator confidence. Against this backdrop, we have also seen additional consolidation activity. Comparing the third-quarter average to the second quarter, the Baker Hughes Lower 48 land rig count declined by 37%.

The rig count appears to have bottomed in August at 226 rigs. Since then, activity has increased. The Baker count recently stood at 278, a gain of 23% from the bottom. This increase in the industry rig count has mainly resulted from activity increases among second and third-tier clients.

The 20 largest operators, as we characterize them, have been mixed. Some have added rigs, others have released units. In the aggregate, this group is essentially flat. In this environment, our relative market share performance against competitors has been notable.

Based on quarterly average rig counts, we gained 3 points of share in the third quarter. In our international markets, the current activity tempo varies by country. In Argentina and Colombia, the active rig count has increased. You will recall that in both of those markets, the response to the coronavirus in the spring was a total shutdown of drilling.

In our major markets in the Eastern Hemisphere, customer reactions were initially muted. Subsequently, several of these customers implemented deeper cuts. Our largest international market, Saudi Arabia, experienced an expected decline. We believe activity there will begin to increase at the beginning of next year.

To summarize our view of the markets, global oil demand continues to grow. Oil inventories, which built substantially earlier this year, are being liquidated. These factors and the resulting stability in commodity prices appear to have improved operator confidence in the future outlook. The customer base has begun to respond with activity increases.

The recent resurgence in COVID and its effect on oil prices could tamper these positive developments. At this point, the impact is difficult to predict. I will now highlight a few aspects of our third-quarter results. Total adjusted EBITDA was $114 million in the quarter.

These results reflect activity, which was largely in line with our expectations. Our financial performance, specifically in our Lower 48 operation and International segment, exceeded our expectations. With this EBITDA performance and after funding interest payments on our notes, we reduced net debt in the quarter by approximately $6 million. Our global rig count for the third quarter totaled 132 rigs, an 11% decline from the second quarter.

This scale and our geographic diversification continue to generate value and enabled us to make progress on our strategic imperative to reduce net debt. In our Lower 48 business, our reported daily rig margin of $9,527 once again exceeded expectations that we laid out on the previous earnings call. In light of this performance, I would like to reiterate the driving factors. First, in the Lower 48, our rig capabilities are the industry's highest.

In this market environment, these capabilities enable our clients to pursue their programs as efficiently as possible. Second, we remain the industry front-runner in both operational and safety performance. This combination is a real differentiator for Nabors. Third, our relentless focus on reducing expenses across the enterprise continues to reinforce our margins.

And fourth, our pricing has been supported by our industry-leading value proposition, enabling us to mitigate the erosion in the market. We achieved some notable highlights in addition to our financial results. We introduced our RigCLOUD platform for digital operations in the second quarter. Since then, we have migrated 65% of our legacy user base over to RigCLOUD.

Our offering currently includes more than 25 analytic apps with more to come. RigCLOUD recently took first place in the digital app development challenge organized by a super major. RigCLOUD beat the group of competing drilling contractors and technology companies. This type of head-to-head win bolsters our position as the digital leader in the drilling space.

In the U.S., we added installations of both SmartSLIDE, our directional steering system, and SmartDRILL, our drilling process automation system. We also grew our well count for both SmartSLIDE and SmartNAV, our directional guidance platform. In fact, our well count in the third quarter for both SmartSLIDE and SmartNAV increased over the respective second-quarter levels. In the third quarter, SmartNAV and SmartSLIDE were installed on 44% of our Lower 48 rigs.

In other words, that 44% of our rigs are running wellbore placement either fully remote or with reduced directional drilling crews. That is a 15-point increase in penetration versus the second quarter. For SmartDRILL, our penetration increased to 90% of Nabors's rigs, up from 6% a quarter earlier. I think this sequential growth illustrates the market's rapid acceptance of our smart apps.

We run SmartROS, our advanced rig operating system, on our entire Lower 48 AC rig fleet. We are now actively marketing to third-party rig contractors and have a multi-rig installation with one customer in the Lower 48. We remain focused on ESG, and our goal is to improve our standing. This quarter, we improved our ISS Social Score significantly.

We also improved our environmental score by one notch. This progress demonstrates our commitment to ESG, and we look forward to reporting additional progress in the future. I will now discuss our view of the market in more detail. Last week, the Lower 48 land rig count stood at 278.

That is up by 11% since the end of the second quarter. Nabors's working rig count over the same time frame is up 14%. Comparing quarterly averages, Nabors's third-quarter working rig count, excluding rigs stacked on rate, declined by 20% versus the second quarter. We fared much better than the industry, which dropped by 37%.

The Lower 48 industry has added 52 rigs or 23% since its low in August. Looking forward, we see evidence of the recent stability in oil prices leading to an improvement in operator confidence. We have visibility to adding rigs over the next several weeks. We are in discussions for several more through the end of the year.

In our international markets, we have already seen our activity increase gradually in Argentina and Colombia. We believe we have line of sight to rig restarts in Saudi Arabia. As market actually rebounds, we believe that clients will prefer contractors with established share and records of operational excellence. I am convinced Nabors will prevail in this environment.

That concludes my remarks on our third-quarter results, highlights on the market. Before William offers his remarks, I would like to recognize the Nabors's team for their perseverance in this challenging environment. On behalf of the company, I would also offer our concern and best wishes to all of those who continue to be impacted by the virus. Now, I will turn the call over to William for his discussion of the financial results and guidance.

William Restrepo -- Chief Financial Officer

Thank you, Tony. and good afternoon, everyone. The net loss from continuing operations of $161 million in the third quarter, represented a loss of $23.42 per share. Third-quarter results compared to a loss of $152 million or $22.13 per share in the second quarter.

The second quarter included total pre-tax charges of $58 million related to asset impairments and severance costs. This compares to charges of $5 million in the third quarter. The third quarter also saw a $22 million pre-tax sequential reduction and gains on debt repurchases. Revenue from operations for the third quarter was $438 million, a sequential reduction of 18%.

With the exception of Canada Drilling, which benefited from the usual seasonal recovery, all of our segments experienced revenue decline. In the U.S. and in most international markets, activity, and pricing continued to weaken. Lower 48 drilling revenue of $96 million decreased by $32.4 million or 25%, as our average rig count declined and pricing deteriorated.

In addition, zero margin reimbursable revenue decreased by $8.4 million versus the second quarter as we negotiated with our suppliers' significant reduction in various reimbursable expenses. Although these negotiations reduced their revenue, they also reduced our operating expenses by a similar amount. Lower 48 average rig count at 48.2, fell sequentially by 15.7%. Our average pricing for the fleet deteriorated by approximately 6%.

Daily rig revenue in the Lower 48 at $21,760, decreased by just under $3,000 per day. Reductions in daily reimbursable revenue accounted for $1,500, while pricing reductions accounted for another $1,500. Revenue in our other U.S. markets decreased by a combined $11 million due to the release of two offshore rigs coupled with a temporary idling on standby rate of an Alaska rig.

International drilling revenue at $248 million, decreased by $52.7 million or 17%. This decrease was primarily related to a decline in activity across several markets as average rig count dropped by 11 rigs or 13%. The third quarter benefited from the recognition of out-of-period revenue following negotiations with the customers in several international markets. However, these pricing adjustments were more than offset by the absence of early termination revenue in the prior quarter.

Canada Drilling revenue was $10.8 million, an increase of $7.2 million on increased rig count due to the normal seasonal ramp-up in activity. The improvement in Canada was more than offset by a reduction of $5.1 million and $3.8 million in Rig Technologies and Drilling Solutions, respectively. The deterioration in Drilling Solutions was essentially driven by pricing pressure and by the sharp reduction in the Lower 48 industry rig count. This decline was somewhat buffered by sequentially higher revenue coming from our international casing running business.

U.S. revenue for the Drilling Solutions segment fell by 37%, while International held off better losing around 9%. Rig Technologies was also impacted by the lower drilling activity levels. While capital equipment sales have grown to a halt, aftermarket sales and repairs have also fallen in line with the lower rig count.

Adjusted EBITDA for the quarter was $114 million, compared to $154 million in the second quarter. The decrease was driven by material reductions in our International and U.S. Drilling segments. More modest reductions in Drilling Solutions and Rig Technologies were almost fully offset by the Canadian seasonal improvement and by decreased expenses in corporate.

I would also like to point out that both second quarter and third quarter benefited from unusual events in our International segment. The second quarter had a net gain of $8 million, which came primarily from early terminations. The third quarter benefited from the pricing adjustments mentioned previously, which totaled approximately $6 million. U.S.

Drilling EBITDA of $60.5 million was down by $17.1 million or 22.1% sequentially. The Lower 48 performance came in slightly better than expected. Average rig count for the quarter was 48.2. Daily rig margin of $9,527, just above the high end of our previous guidance, represented a reduction of $922 per day versus the second quarter.

The reduction reflected the unfavorable pricing impact of $1,500 per day mentioned earlier, offset by a $600 per day reduction in compensation and maintenance expenses. Daily expenses of $12,200 fell by $2,100. Negotiated reductions in reimbursable costs, which we fully invoiced to our customers, accounted for $1,500 a day. Going into the fourth quarter, we expect daily rig margin to fall between $8,500 and $9,000, driven mainly by the pricing of renewals as rigs roll off contracts.

We are targeting operating costs in line with the third quarter. After reaching a Lower 45 rigs in the third quarter, our Lower 48 business exited the period with a rig count of 48. Looking to the fourth quarter, we expect average rig count to improve by approximately three rigs from the third-quarter average. International EBITDA decreased by $21.6 million to $71.9 million in the third quarter.

The third quarter continued to include the trends we experienced during the second quarter, namely multiple rigs and temporary standby or COVID day rates, offset by a very strong operational performance in Saudi Arabia. International rig count was 71, down 11 rigs, in line with our expectations for the quarter. While eight of these 11 rigs were suspended temporarily, the other three had their contracts canceled toward the end of the second quarter. The net reduction in rig count was driven by actions taken by customers to mitigate the ongoing commodity supply demand imbalance, which in certain markets also resulted in reduced pricing.

Daily gross margin for the quarter was $12,678 as compared to $14,091 for the prior quarter. As mentioned before, both quarters included nonrecurring benefits. Excluding those benefits in each quarter, daily margin was $13,000 and $11,800 for the second and third quarters, respectively. The sequential erosion in daily margins was driven by the suspension and termination of a large number of rigs with higher-than-average margins.

In addition, our lower rig count resulted in less efficient absorption of our field overhead. We currently expect International fourth-quarter rig count to decrease by approximately four additional Middle Eastern rigs with relatively high margins. Although two of these rigs have been suspended temporarily, the remaining two have been released. In the fourth quarter, we expect the lower COVID and standby rates to persist.

In addition, we anticipate results for our Saudi Arabia operation to revert closer to historical norms, particularly as we expect to bring back late in the year, several Saudi rigs that are scheduled to resume operations in the first quarter. This ramp-up will add cost to the fourth quarter without any corresponding revenue. Finally, one of our platform rigs in Mexico will be impacted by a lengthy move, that should reduce EBITDA by $3 million. Because of these items, as well as the absence of the exceptional gains of $6 million in the second quarter, we are forecasting daily margins for the fourth quarter in the low to mid $10,000 range.

That said, we are seeing improvement in Latin America. We have the potential to add incremental rigs in the first quarter. In addition, multiple rigs are on standby rate due to the market environment or to COVID restrictions. We anticipate that most of these rigs will return to work and to full-day rates by the end of the year.

We also expect up to 10 Middle Eastern rigs, which are now on temporary suspension and zero-day rate, to resume operations progressively during the first quarter. Consequently, we would anticipate a material increase in rig count early next year. Also, as currently suspended high-margin rigs start to contribute and we recover our full-day rates on multiple rigs, we also expect a significant increase in daily margins compared to the levels of the fourth quarter. Canada adjusted EBITDA increased by $2.5 million to $2.8 million in this third quarter.

Rig count at 7.4 rigs was 5.2 higher sequentially due to seasonality. We expect both rig count and daily margins to improve in the fourth quarter. We currently have eight rigs operating in Canada. Drilling Solutions posted adjusted EBITDA of $7.1 million, down from $9.4 million in the second 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. We expect adjusted EBITDA in the fourth quarter at least equivalent to the third quarter.

Rig Technologies reported EBITDA of $1.3 million in the third quarter, a decrease of $1.9 million. The fourth-quarter EBITDA should be approximately in line with the third quarter. Now, let me review the liquidity and cash generation. In the third quarter, net debt declined by $6 million to $2.78 billion.

Free cash flow, defined as net cash from operating activities less net cash used for investing activities, totaled $9 million. This compares to free cash flow of approximately $101 million in the prior quarter. The third quarter included semiannual interest payments of approximately $80 million as compared to minimal interest payments in the second quarter. During the third quarter, we experienced some weakness in collections as we had numerous ongoing negotiations with customers that delayed final invoicing.

Nonetheless, we managed to once again deliver positive free cash flow by controlling our capital expenditures. Capital expenses in the third quarter of $39 million were $10 million lower than the prior quarter. We're now targeting $200 million in capex for the full-year 2020. In the fourth quarter, we also expect to deliver positive free cash flow.

Our target for the quarter is set at $90 million to $100 million. Our interest payments will drop sharply, and collections are forecast to improve. Our credit facility, a key component of our liquidity, includes various covenants. I would like to highlight that during the quarter, we were able to successfully negotiate an amendment to our credit facility that removed the leverage ratio and at the same time, maintain the same total capacity and interest rate.

The amendment also provides our company with additional flexibility to issue up to $500 million of new bonds, senior to all of our existing notes. At the end of the third quarter, our revolver draw stood at $753 million, following the repayment and maturity of $139 million in notes expiring in September. We also repurchased $47 million of other maturities. The remaining balance on our senior notes due in 2021, now stands at $129 million.

Our cash and short-term investment balances closed the quarter at $514 million. One final item before Tony's conclusion. Late last week, we completed a private transaction, in which $115 million of the 0.75 convertible notes due in 2024 were exchanged for roughly $50.5 million of newly issued 6.5% senior priority guaranteed notes due in 2025. In addition, last week, we launched an offer to exchange our outstanding notes for up to $300 million in newly issued 9% 2025 senior priority guaranteed notes.

For more information, I will refer you to our October 29 press release and related filings. 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. A quarter ago on this call, I highlighted four transformation themes, which have gained traction among our stakeholders. These themes include integration, specifically of services around the well site; second, digitalization, which uses the volumes of available data to facilitate real-time optimized decision-making; third, automation, which improves speed, performance, and safety; and finally, ESG, which prioritizes the impact of our operations in company on the wide-ranging set of constituencies in society.

The breadth of our initiatives addressing these four themes is comprehensive and growing. When we began these initiatives, a clear benefit to clients was an improvement in their well costs. These benefits have expanded to now include the following: advancements in well-site safety; higher quality wellbores; increased total well production; and positive change across the value chain and in our stakeholder community. Initially, the update for these initiatives was driven by the supermajors.

They recognize the inherent value and have the resources to utilize these products and services. At the same time, their sensitivity around ESG was high. More recently, we see growing demand for our advanced portfolio coming from smaller operators as well. Traditionally, their smaller scale prevented them from utilizing our advanced portfolio.

They simply lack the resources to realize its full benefits. As our portfolio has evolved, we have taken the approach to simplify the implementation by customer. Let me offer two examples. First, we provide remote wellbore placement co-located in our operations center in Houston.

This enables the operator to realize the benefits of remote directional drilling while leveraging the investment Nabors made here in our operational headquarters. The customer's investment is negligible. The second example is our RigCLOUD platform. On RigCLOUD, we provide the data collection, analytics, and streaming that operators need to optimize planning, execution, and rig performance.

It's an open ecosystem. It's compatible with Nabors and third-party rigs. In short, Nabors consolidates apps and client data from all sources. It then delivers information in the client's preferred format to any destination.

That kind of infrastructure was beyond the reach of all but the largest operators. Today, we can bring it across the industry. It has been said that the current downturn is like no other. We view this environment as an opportunity for Nabors to reinforce its position as a technology leader in our market and to drive the adoption of digitalization and automation in the industry.

That concludes our remarks this afternoon. Thank you for your time and attention. With that, we will take your questions.

Questions & Answers:


Operator

[Operator instructions] And our first question comes from Kurt Hallead of RBC. Please go ahead.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hey, good afternoon, guys. How are you doing? Thanks for all that color and content. I think what I want to do initially, we just kind of start off maybe on the outlook on the international front, that's a little bit more difficult to kind of get our hands around that vis-a-vis the U.S. and Canadian markets, for example.

You indicated that you expect to see a significant increase in activity going into the first part of next year and to also see a significant increase in cash margins. So I was wondering if you can kind of provide a context to that. And maybe how should we think about it in context relative to, say, third quarter or second quarter of 2020?

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

OK. Well, as we indicated with respect to International, the next quarter, we're envisioning a downturn in rig count by about four rigs, three of the fours in the Middle East, and one is effectively spread out among a bunch of different markets. We've also indicated that the margin per rig would go down to the low to mid-$10,000 range. The way to think about that is that there's probably about $1,400 of cost expected in the quarter that consists of COVID-related costs, Saudi friction for all the stuff that's going on up and down in Saudi Arabia, and a platform rig move in that quarter.

So probably, the normalized earnings power in the fourth quarter is going to probably be about $12,000 per rig. So that gives you an idea of where the fourth quarter is. Looking forward out from the fourth quarter to next year, as William signaled, we see about 10 rigs progressively going to work throughout the first quarter in Middle East. And then in Latin America, probably, right now, we have a line of sight to one rig in the first quarter and three additional ones in the second quarter.

So I won't say International is at bottom, but it kind of feels that way right now. We take it all together. Obviously, the big caveat is OPEC and COVID in terms of a second wave. That gives you some feel for the landscape, I hope.

Kurt Hallead -- RBC Capital Markets -- Analyst

Yeah, that's great. That's fantastic. Thank you. And then, Tony, I want to maybe also touch on the technology dynamics.

You guys outlined this quite a few years ago at your analyst day, and then clearly, you've gained quite a bit of traction with it. How do we think about the overall kind of growth dynamics you kind of referenced in your press release that the Drilling Solutions group kind of will track overall rig count? I kind of see how that can play out. But shouldn't there be an opportunity for that business to kind of differentiate its performance relative to overall rig activity? And just kind of give your sense on how we could think about kind of a growth rate over the next couple of years for that business.

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

Sure. Well, let's go back to analyst day. I think we sort of set the landscape for automation out of rig site. In fact, I think the slide that we showed at that initial analyst day outlined how a directional drilling well can be done with a push of a button that we had a slide that actually showed that.

Today, of course, everybody is interested in doing that, and we were the first to come up with that, I think. And as you can see from our statistics that we reported, there's been increasing adoption and penetration of our SmartSLIDE software package. I think what we've done for the issues just raised in terms of getting scale on this thing is we've actually spent more time making this platform more available, not just on Nabors' rigs, but on everyone's rigs to open up the market for us really worldwide. And as we also indicated, we're actually going to do the same thing for our rig operating system, which we call the intelligent rig operating system, which, for the way you might want to think about that, it's Nabors on steroids, OK? In other words, it has everything Nabors could do with a lot more.

It has the sequencing engine that allow you to do different optimizations, and it just has total flexibility. So the idea there is to take the stat in the RigCLOUD platform and then enable that in a wider ecosystem and then make the apps available to that. And therefore, that's where we hope we get increased scale of all this technology. But that's the vision, and I'm pretty happy with the progress we've made today.

I think the bet we made four years ago in this space was the right bet, and now, we just got to make some bread with it. That's the goal.

Kurt Hallead -- RBC Capital Markets -- Analyst

OK. Any thoughts on -- like is it a 20% per year kind of growth rate? Anything along those lines that you can potentially help us calibrate?

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

Right now, we'd like to give you a number, but I could say it's obviously double-digits growth I'm looking at. I mean, that's for sure. But putting a specific number on it, it's definitely double-digit growth. 20% would be on the low end.

Kurt Hallead -- RBC Capital Markets -- Analyst

Fair enough. I'll keep it there. Thanks.

Operator

The next question comes from Connor Lynagh of Morgan Stanley. Please go ahead.

Connor Lynagh -- Morgan Stanley -- Analyst

Thanks. I was wondering if we could just discuss these potential rig resumptions in the Middle East. At this point, how confirmed or locked in is that? And to the extent it is somewhat fluid, could you help us think through -- there's been some discussion that there might be incremental OPEC cuts or delay in the resumption of some production. How should we sensitize our thinking around that based on those potential outcomes in the world?

William Restrepo -- Chief Financial Officer

Connor, we're feeling confident right now that those rigs will return. I think given the rigs that were put in suspension and communications we have with our client in that particular area, we feel fairly confident, very confident, actually, that those will turn. The actual average for those 10 rigs is in question. We are assuming a four to five increase in average rig count versus the fourth quarter for that market.

Connor Lynagh -- Morgan Stanley -- Analyst

That's just in Q1 you're saying, that four to five increase?

William Restrepo -- Chief Financial Officer

Yes.

Connor Lynagh -- Morgan Stanley -- Analyst

OK. Got it. And then just wanted to get an update. Obviously, the SANAD plan was drawn in far different times than we're in today.

So could you just discuss your general expectations on the pace of cash accumulation, if you think that will be sufficient to fund the newbuild program? How you expect the newbuild program to be executed over time? And I guess where this is ultimately driving is as we think about capital expenditures for next year and the year after, how should we think about that portion of the model?

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

So, basically, when this program was arrived at, obviously, it was in an era where Aramco was thinking about the rig count going up by more than 100 rigs over the next 10 years. And the concept was half that rig count would be allocated to SANAD as part of the deal. That was the objective. And the past couple of years, we probably haven't gotten off to as fast a start as we thought.

But that's been a good thing because, as you can see, we've actually been building cash from our operations there in the kingdom. Today, Aramco is studying their needs, and they're assessing whether they want to pull the trigger on issuing the first order for five new drills. And it's going through their process. And until such time that they actually issue that SANAD, we have no obligation to issue the PL to have the rigs built.

The rigs only get built if Aramco comes to that decision. And obviously, they have a lot of issues on their own mind. So whether they're reassessing that in the context of other capex or moving forward with it, right now, I think the likelihood, it's more likely that they'll probably issue something maybe around the first of the year, but in no event we see any of those new builds hitting until sort of after the very late 2021, probably 2022.

Connor Lynagh -- Morgan Stanley -- Analyst

And just to reaffirm what you mean, there is a --

William Restrepo -- Chief Financial Officer

Connor, an answer to your question about the funding, I think between the cash we have in SANAD today and what we're accumulating going forward, the first three years probably taken care of. And by then, that's a breakeven point in terms of cash flow. So cash flow being generated from the new rigs versus the new capex. So I think we're pretty comfortable with the situation in SANAD right now and the sense that we think it's self-funding.

Connor Lynagh -- Morgan Stanley -- Analyst

Yeah. Understood. And I just wanted to clarify Tony's comment there. The newbuild is not hitting until very late '21.

Is that a capex comment or an activity comment?

William Restrepo -- Chief Financial Officer

That would be very optimistic, in my opinion, that we have a rig delivered by year-end. And I mean, there's, of course, a lot of discussions with our customer, a lot of moving pieces in terms of whether it will be for funding or not. So there's a lot of stuff that is not yet -- with too many moving pieces for us to give any feedback. But we think the impact on capex in 2021 should be minimal.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. Thanks very much.

Operator

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

Karl Blunden -- Goldman Sachs -- Analyst

Thanks for the time. A really impressive cash flow performance recently and for the 4Q guide. Yes, maybe it's a little early to jump into '21, but do you think that capex can be controlled to a level that can allow you to generate cash or be neutral in 2021 given your assumptions about the market today?

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

I'll let my taskmaster answer that. But we think that the capex, though, should not be any higher than what it was this year, which we're really proud of. But I'll let William amplify.

William Restrepo -- Chief Financial Officer

Yeah. You know, obviously, there's a lot of uncertainty still about what activity levels will be like next year. But what I can tell you is that based on our latest forecast of what we assume for next year, we think that we will deliver cash next year somewhere in the mid-double figures millions of dollars. Again, I think part of it is because we are maintaining our capex discipline, but we're also very focused on becoming more efficient and keeping our costs overhead under control.

And then we do see some rebound from the activity levels that we have today. So all in all, I think that forecast, it's not going to be as good as 2020, but it certainly will be a positive number in our view.

Karl Blunden -- Goldman Sachs -- Analyst

That's helpful. And then just with regard to other levers that you have to help you from a liquidity standpoint and thinking about liquidity relative to near-term maturities, obviously, you've got the exchange that's ongoing. So I won't ask about that. But where do things sit in terms of feasibility of extracting cash from the SANAD JV? And then in addition to that, you have a bit of extra priority guaranteed capacity remaining about $150 million.

Is that something that you could look to also just extend maturities or debt discount capture?

William Restrepo -- Chief Financial Officer

Well, I'll refer you to the press release in terms of the discount capture and so forth. But I think there is some potential for -- I do think there is some excess cash, at least, on a temporary basis over the next three years in SANAD. We haven't really engaged with Aramco in those discussions. So I really can't give you my feel for how those discussions would progress or the success of those discussions.

But any reasonable analysis of SANAD today and the obligations we have in the future does imply there's a couple of hundred million dollars sitting there that are excess at least on a temporary basis. So that's all I can say on that. I don't want to say much more. We do think the working capital, including inventories plus a lot of those negotiations that I discussed with our clients that are ongoing and are finalized but we haven't yet built, I think those are going to flow into 2022 in terms of collections.

And those could be fairly material numbers as well. So we feel good about the working capital. We feel good about the capex. We feel good about operating expenses and overhead.

And I think our activity will have a little bit more legs than maybe people expect. So all in all, we feel all those issues will be accretive to our cash flow next year.

Karl Blunden -- Goldman Sachs -- Analyst

Thanks very much and good luck.

Operator

[Operator instructions] And our next question will come from Sean Meakim of JP Morgan. Please go ahead.

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

Thank you. Tony, in the Lower 48, as you indicated, even if the rig count has bottomed, and we're now marginally improving activity, the mix of contracts rolling and rigs being reactivated. There's a headwind on average day rates and margins on a quarterly basis. The slope of the recovery matters a lot in this equation, of course, but where do you see that fulcrum point where the addition of new rigs, those from being dilutive to the average to being accretive?

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

Well, obviously, today, rig margins are below our average day rate. And therefore, anything incremental even at today's rates is going to cause some dilution. And it's up to us and our competitor colleagues to figure out how to manage that. Obviously, you do want to grow, but you don't want to grow subsidizing at ever lower rates.

And so that's the balance and it's up to us to figure out how to match that on an upturn. I guess the good news is if the upturn prospect does give you the ability over time, obviously, to move those rates back up and that's what the mission is for everybody. And that maybe my pricing strategy right now, except that we were aware of it. And that's our mission to try to incrementally add some more rigs without taking down that margin below a number that makes sense.

But that's the balance, and you hit it right at nail on the head. But as I said, the good news is, in this landscape where there is some trajectory of an upside here, I think we're in a better position to make that happen. There's other people, by the way, who have done this, where they've traded new day rate on new rigs against old contracts. So we haven't done that.

We've tended to keep our contracts in place and get the benefit of the cash flow on a present-value basis. We don't like that kind of trade. But some of our other competitors have done that, I guess, to accelerate their upswing. But again, that I think is just playing with NPVs and stuff.

But we're more concerned with it just trying to manage that upswing right way.

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

Understood. I appreciate that. And then --

William Restrepo -- Chief Financial Officer

I think we don't expect it in 2020, Sean, to answer your question. I think we will see deteriorating day rates -- margins, I'm sorry, through the first half of next year.

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

Right. OK. I appreciate that. And I was also hoping just to get a little more of your thoughts around International margins.

4Q sounds pretty tough, but you're setting yourself up for a better first half in '21. There's always a lot of moving parts on this fleet, just given you're now in multiple continents, mix issues, different contract durations. There's always a lot to try to get to these margins. But I'm just curious to get your confidence level on 4Q being the trough for the cycle.

Maybe you're around $10,000 a day. You peaked a few years back in the high teens. Just think about risks around lower lows, but then really more importantly, on a normalized basis, where do you think through-cycle International margins can be and will be for this business?

William Restrepo -- Chief Financial Officer

So I think Tony said it best that our underlying margins, excluding the COVID penalty that we're paying, which is revenue leakage, and the Mexico platform movement, which is another, that's $500 alone. COVID maybe it's about $400, and then Saudi, we're calculating another $500 of leakage in terms of cost. So all that is being absorbed in the fourth quarter. So it's somewhat typical in that sense.

But that indicates that the fourth quarter is really around a $12,000 per day margin. That's where our fleet right now is. The good news is that we do have some significant number of higher-margin rigs that are in suspension and that we expect to be coming back next year. So that will certainly have a positive impact.

And I think the COVID penalty, as I mentioned, is about $400 per day. That's going to go away, we think. So you put that all into perspective, it's difficult to give you a number. But I think if we normalize, we're going to be somewhere between the $13,000, $14,000 per day range next year and hopefully, improve on that as the year progresses.

We have absorbed a few blows. Our Kazakhstan rig count, that's probably some of our highest margins, that has eroded. Colombia also has eroded. So those have been big hits.

So getting back to the $17,000 range that we used to see in the past is going to take a while.

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

Understood. I appreciate that. 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 of Investor Relations

Eliza, we'll wrap up the call there. Thank you, ladies and gentlemen, for joining us this afternoon. If you have any questions, please free to call or email us, as always.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

William Conroy -- Vice President of Investor Relations

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

William Restrepo -- Chief Financial Officer

Kurt Hallead -- RBC Capital Markets -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

Karl Blunden -- Goldman Sachs -- Analyst

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

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