Nabors Industries Ltd.
Q2 2017 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Good morning and welcome to the Nabors' Second Quarter Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Denny Smith, Vice President of Corporate Development. Please go ahead.

[Dennis A. Smith:]

Good morning, everyone, and thank you for joining Nabors' second quarter earnings teleconference. 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 perspective on the results, along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks we have posted some slides to our website, which you can access to follow along with the presentation if you desire. They are accessible in two ways. One, if you're participating by webcast, they're available as a download within the webcast. Alternatively, you can download the slides from the Investor Relations section of nabors.com under the submenu, Events Calendar, where you will find them listed as Supporting Materials under the conference call listing. Instructions for the replay are posted there as well, under teleconference information. With us today in addition to Tony, William, and myself are Siggi Meissner, President of Worldwide Drilling Organization; Chris Papouras, our President of Nabors Drilling Solutions; John Sanchez, our Chief Operating Officer for Canrig; and other members of our 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 Exchange Acts of 1933 and 1934. Such forward-looking statements are subject to certain risk 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 differ 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 adjusted operating income, EBITDA, and adjusted EBITDA. 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. 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. Now we'll turn the call over to Tony to begin.

[Anthony G. Petrello:]

Good morning, everyone. Welcome to the call. We appreciate your participation as we review our operations for the second quarter of 2017 and our view of the market going forward. William will follow with a review of our financial results. I will then wrap up, and we will take your questions. Before getting into the quarter's results, I would like to make some comments regarding our technology initiatives. As we outlined last November at our Investor Day, Nabors' vision is to be the performance driller of choice. To this end, we are building the most capable fit-for-purpose rigs and integrating them with the latest automated drilling technologies. Paired with our Nabors Drilling Solutions, or NDS, products and services, we believe we will have the ultimate solution for today's unconventional oil manufacturing industry. There are three initiatives I would like to report on today. First, rig designs. Our SMARTRigs continued to deliver strong performance with 100% utilization. Our PACE-X800 rig was designed more than four years ago from the outset as super-spec. It is able to accommodate three 7,500 psi mud pumps, four engines, multidirectional walking, and 25,000 foot racking capacity. It also features the Side-Saddle, which optimizes batch drilling. We had two new builds PACE-X800 rigs start on contract in the second quarter and one more this month. Two of these three include a new revolutionary Quads Rig design. The benefits are listed in our accompanying earnings slide deck. Quad stands require fewer connections per well than triples, resulting in less time spent making and breaking connections. More importantly, building double casing stands offline reduces casing running time. The design also increases casing racking capacity for longer laterals. These are probably the first mainstream land quad rigs in the industry. We are excited to be partnering with two premier clients in this effort and are pleased by the early results of these rigs. We look forward to seeing how the market responds to this capability. We will also be pleased to get to the market our new M1000 rig. Its features, also noted in the accompanying slide deck, include a 1 million pound hook load and racking capacity for up to 30,000 feet of 5-7/8 [inches] drill pipe. The rig incorporates both the Side-Saddle and hydraulically raised substructure, the first in the industry. It will be capable of meeting the demands of the most challenging laterals today. We have one going to work in the third quarter and two in the fourth quarter with a super major. This quarter we also expect to go commercial with a new combination of performance software tools, which takes us one step closer to the vision of fully automated drilling. The first is Navigator, similar to your Waze app, it computes the instructions needed to achieve your intended well pad. This software provides a more accurate productive wellbore with additional transparency to the operator. In a heads-up competition a large independent chose Navigator over multiple competing offerings in the marketplace. The other product, which we believe is unique in the marketplace, is PILOT, which is part of our operating system and will automatically execute the Navigator instructions. This system doesn't just compute the wellbore path, it also executes the drilling instructions. Our goal with these products is to provide best-in-class consistent and repeatable execution of directional drilling paths. We also had some excellent test results on our rotary steerable tool. We are on track and targeting customer deployment around the beginning of the year with that new tool. Finally, we expect our iRacker automated tubular handling system to commence field trials in the next few months. The system will offer a fully automated rig floor for pipe handling and casing. The goal is to achieve top decile performance predictably and consistently. Another benefit is increased safety on the rig floor. Now let me turn to this quarter's results. This quarter's results reflect a substantial improvement over the previous quarter. We restored adjusted EBITDA growth in each of our segments, other than the anticipated exception of Canada, related to seasonal effects. As signaled on our last call, we addressed the exceptional items that impacted the first quarter. In the U.S. we reversed the trend in daily margins with improved pricing and cost reductions. Internationally, we recovered from the impact of mast (8

[William J. Restrepo:]

Good morning, and thank you for joining us today. Net loss from continuing operations attributable to Nabors of $117 million represented a $31 million improvement over the first quarter. Second quarter loss per diluted share of $0.41 improved upon a $0.52 loss per share in the first quarter. Included in these second quarter numbers are approximately $7.3 million after taxes or $0.03 per share relating to premiums paid on debt repurchases and certain costs associated with the formation of the new joint venture in Saudi Arabia. Revenue from operations for the second quarter was $631 million as compared to $563 million in the prior quarter, a 12.2% improvement. U.S. earning revenue increased by 15.7% to $187 million, reflecting 15% more rigs in the lower 48. Lower 48 revenue increased by 16.7% as the higher volume was supplemented by an overall improvement in the average daily revenue of almost $120 per day. An approximately $500 per day increase in average pricing, reflecting better day rates and other contractual improvements, was partially offset by a $380 per day reduction in reimbursable costs, which carry zero margin. Renewals and new contracts increased our average day rate, as multiple rigs were signed at spot rates exceeding the fleet average. We expect this trend to continue. International revenue increased by 12.5% to $380 million. This increase was driven by the reduction in downtime following last quarter's recertification project in Saudi Arabia. We also added three net working rigs. Excluding the impact of the above downtime, our international revenue grew by 8.6%. Canada revenue was impacted by the typical seasonal break-up in the second quarter. Revenue declined by 38.4% to $17.1 million, as rig count for the quarter fell from 22 rigs to 12. Revenue was over 2.5 times what we achieved in the second quarter of 2016. Rig Services revenue continued higher in the second quarter, reaching $93 million, a 30.2% sequential increase. This increase was driven by both Canrig and NDS. Canrig revenue of $61.2 million was up 38.8% from the first quarter's $44.1 million with growth in both third-party and internal sales. NDS revenue reached $31.8 million, up from $27.4 million in the first quarter, a 16.3% increase. During the quarter we benefited from strong performance software sales on the higher overall rig count and also made some progress on our pricing. Adjusted EBITDA for the quarter was $139 million as compared to $100 million in the first quarter. With the seasonal exception of Canada, all other segments increased as compared to the first quarter. The $11.2 million increase in the U.S. primarily reflected an improvement in lower 48 margins and activity. Lower 48 EBITDA rose by $9.8 million with $3.6 million driven by an increase in the incremental rig count from an average of 83 working rigs to 95. Higher daily margins delivered an additional $6.2 million increase versus the prior quarter. Drilling margins for the lower 48 increased by just under $620 per day to approximately $3,900. The improvement was driven by about $500 per day from more favorable pricing and another $120 from cost reductions primarily related to reactivation costs. The international segment delivered the largest positive impact toward total adjusted EBITDA with a $26 million increase to $135 million. $17 million of this total was related to the conclusion of the recertification program previously mentioned. The net addition of three working rigs that across several markets (26

[Anthony G. Petrello:]

Thank you, William. I want to conclude my remarks this morning with the following summary. I am pleased with our second quarter results and the rebound we saw in many of our financial metrics. Even more importantly however, the second quarter marked major progress across a number of our key technology initiatives. First, we are rolling out our new Quads upgrade on two of our PACE-X800 rigs, providing faster tripping time and the racking of casing stand. Next, we are commercializing a new combination of performance tools that automate and execute the optimal well path. Finally, we are now on the cusp of commercializing three exciting new technologies, the M1000 rig, our rotary steerable tool, and the iRacker. Taken together, with our existing platform of pad optimal SMARTRigs, we believe we can offer clients best-in-class well construction capabilities. These capabilities should sustain our ability to create value through our global rig platform in the volatile and dynamic oil market. Finally, our NDS growth profile is on track with the plan laid out at our Investor Day, ambitious as it seemed then. These products are allowing customers to drill more efficiently, safely, and consistently and earn a better return on their investment. The combination of increased penetration, improved pricing, new product offerings, geographic expansion, and operating leverage gives us confidence that there is still much room to run. That concludes my remarks this morning. Thank you for your time and attention. With that I will take your questions.

[Operator:]

We will now begin the question-and-answer session. Our first question comes from Byron Pope with Tudor Pickering Holt. Please go ahead.

[Byron K. Pope:]

Morning, guys.

[Anthony G. Petrello:]

Morning.

[Byron K. Pope:]

With regard to the U.S. lower 48, the NDS strategy, it seems like it's certainly playing out the way that you guys talked about it last November. And so if I think about the 102 rigs that are working today, could you frame how many of those you're providing multiple services on? Just trying to get some order of magnitude there.

[Anthony G. Petrello:]

Sure. I would say virtually every rig has at least one service on. And probably 60% have two, something like that, order of magnitude.

[Byron K. Pope:]

Okay.

[Anthony G. Petrello:]

And there's a whole suite of services still to get on each of those rigs. So the goal of course is to get three or four services working on each rig.

[Byron K. Pope:]

Okay. And then one quick question on the international side, Appreciate the Q3 guidance. As we think about some of the tenders that have been pushed out in the Middle East into next year, I would think that as those finally do start to come through, that those would be accretive to the overall international segment daily margin. Is that a reasonable way to think about it, once we do start to gain traction on the...

[Anthony G. Petrello:]

Absolutely, yeah. Yeah. I think point to be made here is unlike the U.S. market or any other markets in the world, I think these Middle East rig tenders are typically, especially on the gas rigs, asking for rigs that don't exist today. And those rigs of course, we are going to require replacement cost pricing to satisfy. So I think they'll be highly accretive to existing margins today.

[Byron K. Pope:]

Okay. Thanks, Tony.

[Anthony G. Petrello:]

Thanks.

[Operator:]

Our next question comes from Sean Meakim with JPMorgan. Please go ahead.

[Sean C. Meakim:]

Thank you. Hey. Good morning.

[Anthony G. Petrello:]

Morning.

[Sean C. Meakim:]

So, Tony, you made big strides on the adoption so far with NDS greatest – you're on track for the fourth quarter. So as we look ahead into 2018, I'm trying to get a sense for what are the potential gating items or things to be mindful of? So is it I guess a capacity, as you try to roll out onto more rigs? Is it customer mix? Perhaps it's easier with kind of some of the starting customers and as you expand across your fleet that gets more challenging? What's the timing mix or the sort of the timing on the Saudi market opportunities? And if there was just some interesting things to talk about?

[Anthony G. Petrello:]

Sure. I think it's all of the above, Sean. When you're trying to build a whole new sector here, I think the first thing is the mindset of the operator. To make him understand there's a different value proposition and a different path. And there's a lot of resistance in the supply chain to these ideas that we're pitching, because we're actually asking them to break the model of how they actually look at these services. A lot of the services are disruptive in terms of the workflow of what we're doing on a rig floor. And so that's an obstacle for us. So it's not only that we have to show them we have technically a good product, then we have to show them how it'll help them. And then make sure that people don't get threatened by the product. For example, the directional drilling product that we're talking about today, how do you take advantage of the fact that most of the instructions say that people relied on to get from a directional driller, sitting there, who also was a comfort factor to a company man at a rig site for other reasons. It may not be needed, because the software itself is going to generate instructions at least as good as what he's typically doing absent the singular events, which by the way you would just take care of with our remote 24/7 operation center, which is staffed by best-in-class directional drillers all the time. So that kind of value proposition really disrupts a lot of things in the process. So there's a bunch of hurdles here to make this thing successful. And I think we probably have gone out a little too far making our plans pretty clear here what we're trying to do. But that's what we're trying to do. In terms of Saudi, as we noted, we have been gated for wellbore placement for MWD. And that's going to be the first thing. And we've also done some testing of the MPD and NDS trial part (39

[Sean C. Meakim:]

Got it. Okay. Thank you for all that detail. And I guess just one other follow-up inside of NDS, just thinking about any update on the Weatherford JV? And thinking beyond that, the Weatherford partnership, other types of partnerships that could be advantageous for Nabors longer term?

[Anthony G. Petrello:]

Well, I think essentially for our industry in general, I don't think we're a dinosaur in the industry. But unlike other industries, joint ventures and partnerships to move things along have not been really widespread nor successful for to a large degree. Typically the joint ventures like this, typically end up with in a couple years, one person buying out the other person. And so I think there needs to be a mindset change in the industry that you can be cooperating on some things and not necessarily – and be competing on others to move those forward. With respect to Weatherford, we've made some progress relating to the alliance with Weatherford. We'll continue to work for – on an overall commercial and technical framework. We have great working teams identifying specific commercial opportunities in the U.S. market today. And teams have started working on the software integration to take what they have integrated into our control system. So that's what we're working on right now. Okay, William.

[William J. Restrepo:]

And it's right now mainly focused on managed pressure drilling by the way.

[Anthony G. Petrello:]

Yes, that's right, exactly.

[Sean C. Meakim:]

Okay. Thanks for the time, I appreciate it.

[Anthony G. Petrello:]

Yeah.

[Operator:]

Our next question is from Blake Hancock with Howard Weil. Please go ahead.

[K. Blake Hancock:]

Thanks. Good morning, guys. William, first on the international guide, I just wanted to make sure we understood correctly. Sort of key, 3Q margin (41

[William J. Restrepo:]

No, what I meant is if you look back over the years, our margins stay remarkably close to about $17,000 per day, absent some unusual demobs [demobilizations] or items of that sort. So we believe that $17,000 is roughly a normalized margin. So that's what we were talking about of achieving in the third quarter. In the second, we did have a very, very good operational performance in multiple markets all at the same time. We had really no negative news anywhere. So that's what I was saying. $17,800 is a little bit higher than our average normalized. That – so we're saying we'd probably gravitate more towards $17,000 going forward.

[K. Blake Hancock:]

Okay. Thank you. And then, Tony, as we think about kind of the U.S. land business and the 80% that are rolling off, I mean what's your appetite? Are we looking to secure more longer-term contracts? Or have we? And what kind of rates are we seeing or would you expect longer-term versus kind of the spot market today?

[Anthony G. Petrello:]

Sure. Well, with respect to pricing, I guess the first comment I'd make is that it's greater than that, (42

[K. Blake Hancock:]

That's great. Thank you, guys.

[William J. Restrepo:]

Yeah.

[Anthony G. Petrello:]

Yeah. The other point I'd make is I think the average rate today is $18,500, which is a little lower than the spot rate is. So there's obviously potential for improvement in our margin going forward on that basis.

[William J. Restrepo:]

And the $18,400 includes about $1,500 worth of reimbursable revenues. So in reality the implied average day rate is about $17,000 per day in our fleet. So at the current spot rates that we're getting you could see some quick appreciation going forward in terms of revenue per day.

[Operator:]

The next question is from Scott Gruber with Citigroup. Please go ahead.

[Scott A. Gruber:]

Morning, gentlemen.

[Anthony G. Petrello:]

Morning.

[Scott A. Gruber:]

William, you mentioned using cash and the revolver to pay off the Feb 2018 notes as they come due. But with crude back now around $50, is there a window opening up to refinance the notes? We just saw another SMID oil service company last night announce a private placement for notes. So just curious to hear your thoughts on the potential to pivot back towards a refinancing.

[William J. Restrepo:]

That's a pretty good question. I've tried to be pretty consistent with our shareholders on our plans going forward. We do expect to generate a significant amount of cash over the next three years. And that cash is intended for debt reduction. Right? We have a pretty public target out there of where we want to take our debt. So that means we'll need lower debt in the future. So refinancing the $400 million – what is it? $300 million that we have in 2019, and adding additional debt, not only it's a very negative NPV type transaction, but then we will have to buyback those long term bonds sometime in the future. So the idea is because we set the revolver to give us some flexibility in terms of refinancing these facilities and using our cash flow to pay down our debt, at this point we have no intentions of refinancing those $400 million. But rather just paying them down, using cash and whatever – and a portion of the revolver. And then pay down the revolver as we go forward.

[Scott A. Gruber:]

Got it. And I may have missed this during your prepared remarks. But what are your early thoughts on CapEx for next year? And if you could split out growth from maintenance that would be great.

[William J. Restrepo:]

I think maintenance is somewhere in the range of $350 million or so, I would think at our level of activity. So right now, because clients are not well advanced on their plans for next year, it's difficult to know if we will have requirements internationally. In the U.S. we're pretty much done with a lot of the investment we've done. I wouldn't expect very material numbers in the U.S. besides maintenance CapEx and maybe finalizing some upgrades next year, but those are not big numbers. I think the uncertainty would be on the international side, given those tenders that were mentioned before. I would not expect to see CapEx higher than what we have this year.

[Scott A. Gruber:]

Got it. And then how capital intensive is the NDS business? I realize you're likely investing for growth today. But when – do you have line of sight to the business starting to spit off some free cash? And once the business hits your goal of over $200 million of EBITDA, what's the maintenance CapEx associated with that business line? I just – I assume that it's accretive to the free cash potential of business. But just wanted some detail around it.

[William J. Restrepo:]

It is and it's a very good question, actually because it fits nicely with the strategy that Tony has been putting in place for the last few years, which is to take a very nice business, which is a rig business, automating and enhancing those rigs. But then integrating it with the NDS and bringing those businesses, which tend to be much lighter in terms of CapEx than the rig business. And they tend to be high margin. So a lot of the CapEx that's required for some of those businesses, because we build a rig and put the piping and some of the incremental hardware that our peers have to use are already part of our rigs, we don't have to spend as much as some others would, because of the integration potential. But secondly, the actual investment versus the margin per day is much lower. To give you an example, with all the growth that we're accomplishing this year in NDS, we're talking about $50 million CapEx investment. So it's not a – again it's not CapEx heavy. And it should change the economics of our company as a whole going forward very materially.

[Scott A. Gruber:]

Great. Appreciate it. Thank you.

[Operator:]

Our next question is from James West with Evercore ISI. Please go ahead.

[James West:]

Hey. Good morning, Tony. Good morning, William.

[Anthony G. Petrello:]

Morning.

[William J. Restrepo:]

Morning.

[James West:]

And, Tony, thanks for laying out your views on the U.S. land market and then dispelling the kind of nonsensical comments that have been made by some in the market about an imminent collapse in the rig count. I think that's very, very helpful. But what I really wanted to talk about is a piece of the business I think that's really not well understood by the market or recognized or getting any value right now in your share price, and that's the Saudi JV. And when do you guys expect that business to start building cash? And on top of that, as we think about your addition of rigs and then building rigs, is the Saudi JV – am I right I guess and correct in saying the Saudi JV is not going to require really any CapEx from you guys, because it will be mostly self-funded?

[William J. Restrepo:]

So, James, let me address that. And I think – well, in the first year we're only starting the JV in a couple, three months. So you won't see a lot of impact this year obviously, because there's only going to be some four rigs from Aramco coming in as incremental rigs into our JV. And then another rig in the beginning of 2018 coming in. So initially you won't see a significant amount of impact. It's only five rigs from Aramco coming in. But two years down the road we'll start layering in five rigs per year over a period of 10 years. Keep in mind we have about 38 land rigs today in Saudi Arabia. So that is a pretty material increase. And the good news is that the cash generation in the JV itself – of course taking into account that Aramco is also putting some funding into the JV – means we won't have to tap Nabors capital to finance that growth. And then if you do the math, yes, I mean, it's a very big increase in the rig count. A much more efficient use of our resources. And by working together with Aramco we think we can create more efficiency for our drilling JV. I think our Saudi operations is already one of the best in the world. And I think we're going to see very exciting things in terms of cash flow generation and growth in Sanad over the next even five years.

[Anthony G. Petrello:]

Yeah. To the extent that we could change the model there to have the NDS-type services become part and parcel of the base operation and illustrate to Aramco the benefits to them of doing that and doing it side by side, I think we're hopeful we'd be in a better position to do that. I think that offers even increased, enhanced return opportunities in that marketplace.

[James West:]

Got you. Thanks. The...

[William J. Restrepo:]

So thanks for bringing that out, because we haven't been very vocal about it until we started the JV itself. But of everything we've done in the past three years, I think that's probably one of most critical – or if not the most critical success Nabors has had over the last three years.

[James West:]

Yes, I totally agree. And then, Tony, on the NDS business, what do you think is the gating item on the penetration of your new products and services? Is it just the commercialization and just the normal sales process? Or is there some unwillingness by the customers to add some of your software, the new software or the directional drilling to your own rigs?

[Anthony G. Petrello:]

Well, the first thing I'd say is we have confidence in the strategy, because – excuse me. We have confidence in the strategy because of our track record with the ROCKIT product. The ROCKIT product as you all know is a software tool designed to optimize performance in the – well, as you drill the lateral. And that product is now on about 90% of Nabors rigs in the U.S. And so that was a clear indication that providing a performance tool to our operators, there's a market for it. I think the issue is as we branch out here, the typical person that a drilling contractor deals with does not necessarily deal with these other issues, like the MWD, where we think we have the best MWD tool for the unconventionals today. I mean it may be hard to understand that. But I actually believe that that is the case, because it has more of the sensors. And it's a more robust tool for the same dollars. We're not trying to by the way – in the strategy of NDS, I'm not trying to hit every high end segment of the market. For example, on downhole tools we're not trying to hit the super high temperature stuff. The reason for that is the number of tools, the number of jobs for that is limited. And the R&D to make it all happen is really expensive. So what we've talked – what we're focusing on is the fat part of the market. The stuff where we know the market needs 80% of that service. And that's where we're going. But the issue on the marketing is for a lot of this stuff, it's not necessarily the same people we typically talk to. So we have to change our own marketing organization to staff up for that. So apart from showing the value proposition, that is another hurdle.

[James West:]

Okay. Great. I appreciate it, guys. Thank you.

[Dennis A. Smith:]

Austin, we're getting close to the one hour mark. Why don't we just take one more question and then wrap up the call, please?

[Operator:]

Sure. No problem. Our last question will be from Ken Sill with SunTrust. Please go ahead.

[Ken Sill:]

Well, thanks for working me in, guys. Everybody is excited about NDS, as am I. Great outlook there. So what is the prospect of getting some of these tools and services on third-party rigs? And are – is there a percentage of the revenue that's coming from third-party rigs already? Or is all of it coming from Nabors rigs?

[Anthony G. Petrello:]

Actually there already is. And just by way of background, it's never been really touted in the marketplace. Nabors already has a product called RIGWATCH, which is the equivalent of Pacestar's (55

[Christopher Papouras:]

Probably 30%.

[Anthony G. Petrello:]

About 30% of our directional tools is on third-party rigs, which is interesting, including on some of the rigs of our leading competitors, which I would say demonstrates the fact that we do have a really good tool for the conventional shale – unconventional shale in the U.S. today. And the comment I made before about being a dinosaur industry, I think there's room for more of that with our NDS business and partner strategy. We're doing it to obviously build the business in a way that we can service a bigger market, not just the U.S. market of the Nabors rigs. We already for example, even Canrig top drives, Canrig equipment, we sell to third-parties obviously. And so we mentally we have made that adjustment that we can put it on other peoples' rigs.

[Ken Sill:]

And is that being more accessible with some of the tools, like 3D rotary steerable and MWD, than the software? Or is the uptake pretty similar on both sides?

[Anthony G. Petrello:]

I'm sorry, I didn't get – I didn't understand the question. Say it again.

[Ken Sill:]

Well, I mean Nabors Drilling Systems, and part of your offering is the automated drilling systems.

[Anthony G. Petrello:]

Right.

[Ken Sill:]

Which I kind of call it the software side of things.

[Anthony G. Petrello:]

Right.

[Ken Sill:]

Whereas 3D rotary steerables and measurement well drilling are kind of product, tool-oriented?

[Anthony G. Petrello:]

Correct. But where...

[Ken Sill:]

Is there a difference?

[Anthony G. Petrello:]

Yeah. There is a difference. With respect to some of those services, some of it we can put on – easily put on third-party rigs if they use a Canrig AC top drive, because the software is really keyed into the actual hardware. And that's because the way we decide to get past the past performance, think of an Apple iPhone compared to a Windows PC with the operating system meshing with the hardware. You get a better user experience when it's all integrated, as opposed to patched together like with a Windows thing, where it's plug and play, but you have to have flexibility. But sometimes the experience is not as good. So in our approach we've laid down with the former more, although some of the other things like we said with the tools, they can go on anybody's rig. But the software, Canrig AC top drive is kind of key right now. We have some other ideas in the background that we're looking at to see whether some of the other performance tools, whether we would make them available. But that's not fully commercial yet.

[Ken Sill:]

Okay. And then the one final question, as you roll out the five new rigs a year in the Saudi joint venture, what happens or does anything happen to the 38 rigs you already have working in Kingdom? Or do those go into...

[Anthony G. Petrello:]

Yeah. They're all managed by the joint venture in that when they come up for renewal, there is a process for them to be continued into the joint venture. And ...

[Ken Sill:]

So they all roll into the joint venture?

[Anthony G. Petrello:]

Yeah. They'll either roll into the joint venture or stay on a lease basis or a managed basis.

[Ken Sill:]

Okay. Great. Thank you very much.

[Dennis A. Smith:]

Awesome. That'll conclude the call. Thank you for participating. Ladies and gentlemen, if you have a question you didn't get to, feel free to call us or e-mail us at any time.

[Operator:]

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