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Nabors Industries Ltd (NBR) Q2 2019 Earnings Call Transcript

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Nabors Industries Ltd (NYSE: NBR)
Q2 2019 Earnings Call
Jul 30, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Nabors Second Quarter 2019 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Denny Smith, Senior Vice President of Corporate Development. Please go ahead.

Denny Smith -- Senior Vice President of Corporate Development & Investor Relations

Good morning, everyone. Thank you for joining Nabors Second Quarter 2019 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 perspective 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 and Exchange 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 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 net debt, adjusted operating income, adjusted EBITDA and free cash flow after dividents. 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, reference to cash flow or free cash flow means free cash flow after dividends is 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 I will turn the call over to Tony to begin.

Anthony G. Petrello -- Chairman, President and Chief Executive Officer

Good morning. Thank you for joining us as we review our results for the second quarter of 2019. Before discussing our quarterly performance, I will offer some comments on the macro factors that work during the quarter. These factors had a material impact on our customers activity and their future plans. The second quarter had a strong start, with WTI prices staying above $60 through late May. By some concerns about oil demand at the time of the first quarter's conference call, expectations for second half activity remained relatively bullish. Since that time, we have experienced substantial moves in oil pricing, with WTI soon dropping to $51. By mid July, pricing had once again increased to $62, but a sharp drop soon followed with WTI closing at $56 at the end of last week. This volatility, together with insistence from investors on the need for E&P [Phonetic] to company capex discipline has had some detrimental impact on lower 48 customer activity during the past two months. More declines in drilling activity are expected through the remainder of the third quarter.

During the second quarter in particular, the US lower 48 land industry rig count declined by 44 rigs, a 4.5% reduction. I will have additional thoughts on this topic, when I discussed the results for quarterly customer survey in a few minutes. In addition to the above weakness in the lower 48 market, our Canada, Gulf of Mexico and Alaska markets entered the usual seasonal downturns. Although North American rig count fell during the second quarter, our operations proved resilient. Adjusted EBITDA totaled $198 million, up from the first quarter. The lower 48 with three incremental rigs and some price increases provided a strong contribution to our sequential improvement with [Indecipherable] highs and average rig count and daily margins.

Our rig technology segment swung into the black, as strong rig equipment and aftermarket sales. This performance represents the segment's best results since the second quarter of 2015. These improvements more than offset sharp seasonal drops in Canada and Alaska relating to weather. In the Gulf of Mexico, as hurricane season started, some customers shut down the plant to resume operations later in the year.

Now, let me discuss our view of the market. The lower 48 average rig count during the second quarter was not a 156 rigs. More recently last week, the rig count stood at 914. That is down by 17 rigs from the end of the second quarter, which stood at 931. Since the beginning of the year, the rig count has declined by 135 rigs or about 13%. Customer activity levels and the future drilling plants continue to decline. We have seen additional reductions, which were indicated in our previous customer survey, as well customers have begun implementing further reductions. Our customer base in the Lower 48 remains strongly weighted toward IOCs and major independence. On balance, this group has reduced activity.

However, their [Phonetic] changes in activity have not been uniform, and several have maintained or increased the rig count. Once again, we surveyed our top 20 lower 48 customers. These clients account for approximately 39% of the total lower 48 industry rig count. The customers surveyed indicated that a further decline of about 20 rigs or 6% is planned for the remainder of 2019. The largest planned declines are in a handful of respondents. About two-thirds of the respondents indicated no change or in fact, modest increases.

The previous version of our April survey indicated a similar magnitude decline among a narrower subset of respondents. The latest version of the survey indicates those customers now intend to drop 10 more rigs than they plan three months ago. Among the companies surveyed, the latest since the April survey, the market has dropped 58 rigs. Clearly, the total number of rigs dropped for the year has significantly worsen in the last three months. During the second quarter, one client that had indicated flat activity dropped a large number of rigs. Another customer increased to more than indicated.

As a reminder, my comments on the survey reflect the responses of our customers. Their plans and activity levels can and do change relative to those responses. The survey group accounts for 62% of neighbors working lower 48 rig fleet. Based on indications from customers and our contractual coverage, our downside exposure currently appears limited. We continue to demonstrate that we can recontract, returns high specification rigs quickly even in this market. As well, we are fielding inquiries regarding high spec availability in late 2019.

In addition, certain operators are indicating an expectation of increasing activity as we enter 2020. We believe demand for the rigs with the highest specifications will remain constructive and utilization will remain high for this rig category. The resilience in our rig count is indicative of the quality of our customer base and their. was high for high specification rigs, which today comprise 93% of our working rig count.

In the second quarter, we outperformed the industry as our quarterly average rig count increased by just over three rigs. We currently have 112 rigs working in the lower 48. Within the industry, leading edge pricing has remained stable since the end of last year. At the same time, utilization for the highest spec, most capable rigs remains strong in the mid 90% range. Pricing for our rigs remains intact with average day rate for our fleet continuing to improve. We continue to successfully reset rigs with below leading edge pricing closer to the current leading edge. In our international markets, industry activity has been stable this year. Pricing in these markets appears to have bottomed with the prospect for pricing improvement for future deployments in certain markets. Going forward, we expect gradual tightening in big supply, as industry capacity is taken up by activity increases.

We have several impactful rig deployments pending over the next few quarters in multiple markets. Likewise, tender activity is improving in several of our markets. In other segments, customer interest in drilling automation remains high with increasing adoption of our newest performance systems. Offshore customers are also increasingly interested in robotic drilling components for their offshore rigs. Interactions with our customers are becoming more frequent.

Now, let me comment on our results and on segment highlights. For the second quarter, consolidated adjusted EBITDA totaled $198 million compared to $197 million in the first quarter. Revenue declines sequentially by approximately 4% to $771 million. Several factors drove our results for the second quarter. Adjusted EBITDA in the US segment was essentially flat. Additional rig count, pricing and margin improvement in the lower 48 was offset by seasonal activity declines in Alaska and the Gulf of Mexico. International results improved sequentially, though not at the rate we anticipated. In Argentina, two of our rigs were temporarily idle as they completed recertifications prior to commencing new long term contracts. Our efforts to improve the operations in Latin America began to pay off. We expect more in the third quarter.

In Canada, the market was somewhat weaker than we expected, in addition to the normal seasonal downturn. Great technologies recorded the largest sequential increase among our reporting segments. Most of the improved performance came from Canrig, especially in capital equipment sales and aftermarket services. Results were also slightly better in the two technologies development operations, which are reported in rig tech. We achieved several notable highlights during the quarter. First, our lower 48 operation deployed five upgraded rigs in the second quarter. These deployments consisted of five pace and 750 rigs for two customers in two basins. At this point, we have completed and successfully deployed all of the plan lower 48 upgrades for this year. We are encouraged by the field performance of these rigs and customer interest for additional units remain strong.

During the second quarter, we increased the penetration of ROCKit pilot and navigator. We doubled the job count in the second quarter. Currently, we are running automated directional drilling jobs with our pilot system for seven customers spread over four basins. More than 40% of our current jobs are remotely operated. We are in discussions with customers to increase that proportion. These products are delivering meaningful improvements in performance. Customer interest is strong and growing.

Finally, PetroMar successfully field tested and commercialized the new version of its FracView LWD imager and caliper tool. This version is targeted at slim boreholes, which account for as much as half of the market.

Now, let me discuss our segments in more detail. First, the US. US drilling, we currently have 112 rigs working in the lower 48. This compares to an average of 114.6 for the second quarter and 114 at the end of the second quarter. During the second quarter, average rig count increased by three rigs versus the first quarter. Our second quarter lower 48 margin of $10,223 [Phonetic] increased by $53 [Phonetic] sequentially.

International drilling. Our international rig count for the second quarter averaged 89 rigs down one versus the first quarter. That decline reflects long term renewals on two rigs with increased pricing in Argentina. The new contracts require some refurbishments and upgrades to be completed between contractual periods. Despite the lower rig count, adjusted EBITDA for the quarter improved. We are just beginning to realize the benefit of the performance improvement plans implemented in Latin America. The rest of our international operating geographies were mixed and on balance, essentially flat.

Now let's turn to Canadian drilling. In Canada, the market environment was weaker than expected. This together with seasonal activity drop, resulted in significantly lower EBITDA with daily margins falling considerably. Drilling solutions, drilling solutions may progress in several product areas, most notably in performance software. During the quarter, performance software continue to increase penetration within Nabors and on third-party rigs, even as the market declines. Rig technologies. Results in our rig technology segment improved sharply. This segment includes Canrig, 2TD and robotic technologies. All three contributed to the better segment results. Canrig sales of new equipment relatively stable following the strong first quarter. The margins on these equipment sales improved with a higher proportion from third-party sales. Canrig's repair business reported better results, reflecting our focus on expanding the aftermarket opportunity. We also captured significant milestone payments for our robotic tool floor project in the North Sea.

Now, let me discuss our outlook by segment. First, US drilling. In US drilling for the third quarter, we believe our lower 48 rig count could slip by three to four rigs from the second quarter level. Given our most recent contracting results, we expect another modest uptick in lower 48 daily margin. Our US offshore and Alaska businesses should be essentially flat with the second quarter, where the full year we expect to maintain our average lower 48 daily gross margin above the $10,000 mark. Our exit rig count target of about 120 rigs is now unlikely. We expect more visibility in another quarter.

International. In the international segment, we expect steady improvement beginning toward the end of the third quarter, which should have a three rig impact on our fourth quarter activity. We have eight rigs scheduled to deploy over the next three quarters. Two of which are in the first quarter of 2020. Furthermore, we expect additional improvements in operational costs and downtime, both of which have been higher than normal in recent quarters.

In Venezuela, we have been operating three rigs under our customers sanctions exemption. This waiver was recently extended for 90 days until October 25, 2019. All in, we expect international adjusted EBITDA to increase by $5 million to $7 million in the third quarter, mainly due to improved performance in Argentina, Colombia and Saudi Arabia.

Drilling solutions. In drilling solutions, we expect third quarter to show further improvement despite the softening rig count. This improvement is forecast across most of the major service lines and most notably in tubular services. We still expect the fourth quarter annualized adjusted EBITDA run rate of $125 million.

Rig technologies. Looking forward, we expect third quarter adjusted EBITDA for rig technologies to be in the low-single-digit level, though some up below this quarter's results. In the fourth quarter, we expect to capture additional revenue related to the rig floor automation project in the segments robotics operation.

That concludes my remarks on the second quarter results and our outlook.

Now I will turn the call over to William for a discussion of financial results. After his comments, I will follow up with some closing remarks.

William Restrepo -- Chief Financial Officer

Good morning. The net loss from continuing operations attributable to Nabors of $208 million represented a loss of $0.61 per share. The second quarter results compared to a loss of $122 million or $0.36 per share in the prior quarter. Results in the second quarter included $99 million or $0.29 per share in net impairments to intangible assets. These were partially offset by a non-recurring tax gain of $31 million or $0.09 per share.

Revenue from operations for the second quarter was $771 million versus $800 million in the first quarter at $29 million reduction. Seasonal declines in Canada, Alaska and the Gulf of Mexico, as well as a one rig reduction in international, more than offset another strong quarter in the lower 48, with better rig count and margins. The combined reductions of Canada, Alaska and the Gulf of Mexico, totaled almost $21 million. US drilling revenue of $323 million grew by $3 million, driven by a $10 million increase in the lower 48 that was largely offset by lower activity in Alaska and the US offshore.

International drilling revenue at $327 million declined by $10 million or 3%, reflecting a one rig reduction in Argentina and lower revenue in Saudi Arabia, primarily due to higher unplanned downtime. The lower rig count in Argentina, reflected the award of higher priced in multi-year extensions for two rigs. The renewals required refurbishments and upgrades with no revenue between contractual periods. Canada drilling revenue at $11.4 million, fell by $14 million or 55%. Rig count fell by 9 rigs to 7.4.

Drilling solutions revenue of $64.6 million was essentially flat versus the previous quarter. A strong performance software sales, offset lower casing running activity. Revenue in our rig technology segment was $1 million higher at $72.7 million. The increased revenue came primarily from robotics milestone revenue and Canrig aftermarket sales.

Adjusted EBITDA improved to $198.4 million compared to $197 million in the first quarter. The quarter was impacted by sharp seasonal declines in several North American markets, which were more than offset by improvements in all of our other product lines. The combined reductions in EBITDA in Canada, Alaska and the Gulf of Mexico, totaled $11 million. The lower results in these drilling markets were compensated by increases in the lower 48 and international drilling of $4.5 million and $1 million respectively, coupled with a $5.5 million improvement in rig technologies, and a $1.4 million increase in Nabors Drilling Solutions. US drilling adjusted EBITDA of $124.9 million was flat sequentially, as increased rig activity and margin improvement in the lower 48 were offset by the seasonal declines in Alaska and offshore. Lower 48 adjusted EBITDA rose by $4.5 million to $98.4 million.

Average rig count increased by 3.1 rigs to $114.6. Daily rig margins improved by $52 to $10222. We expect daily rig margin to progress somewhat higher in the coming quarters. This expectation assumes slightly higher average day rigs for the fleet, based on leading edge day-rate stability and some remaining repricing of older contracts. Our current rig count is a 112 in the lower 48. Rig count should average between 110 and 111 in the third quarter. As a couple of legacy rigs drop and we experience a higher level of idle time between contracts for high specification rigs.

International adjusted EBITDA increased by $1 million to $86.8 million in the second quarter. This improvement primarily reflects better operating performance across most of our international markets, despite the one rig decline in Argentina and high unplanned downtime in Saudi Arabia. We benefited during the quarter from cost improvement initiatives in Argentina and Colombia. Rig count should remain flat with the second quarter, with several deployments coming near the end of the third quarter and increasing our fourth quarter rig count by about three rigs. We currently expect our international Q3 EBITDA to improve from $5 million to $7 million as compared to the second quarter, reflecting continued cost improvements in Latin America and more normal downtime in Saudi Arabia.

Our third quarter forecast assumes stable rig count in Venezuela. Based on the recent expansion of our US waivers for that country until late October. Canada adjusted EBITDA decrease by $6.4 million to $1.1 million. Rig count at 7.4 was 9 rigs lower and daily margin decreased more than expected to $3764 from $6055 in the prior quarter. After the sharp seasonal decline in activity in the second quarter, we expect a five rig improvement in the third quarter with margins approaching the $5,000 mark.

Drilling Solutions posted adjusted EBITDA of $22.5 million, up from $21 million in the first quarter. Among product lines, the largest growth was in performance software followed by the PetroMar business. Wellbore placement also improved despite the lower overall drilling activity in the lower 48 market, but casing running deteriorated significantly with the lower industry rig count in this large market.

For the third quarter, we are targeting an increase for NDS of $3 million to $4 million, as our product lines are expected to improve. Rig technologies reported adjusted EBITDA of $3.2 million in the second quarter versus a loss of $2.3 million in the first quarter. EBITDA improving the core Canrig business as well as in our [Indecipherable] region technology development projects. At Canrig EBITDA increasing capital equipment due to a better mix and lower costs. After market sales, repairs and certifications also contributed. The third quarter should be positive, albeit at a slightly lower level, reflecting the absence of the robotics milestone revenue in the second quarter. Our Nabors as a whole, we would expect EBITDA to be in the range of $210 million to $240 million in the third quarter.

Now, let me review our liquidity and cash generation. In the second quarter, free cash flow defined as net cash from operations, this cash from investments was $82 million after a common and preferred dividend payments. This result represents a significant improvement over the first quarter in which we consume over a $100 million in free cash flow after dividends. The prior quarter included semiannual interest payments of approximately $80 million, which fall in the first and third quarters, as well as significantly higher dividends and common stock.

In addition, the prior quarter included some $50 million of annual payments, which regularly affect our first quarter results, such as property taxes and annual bonuses for our global employee force, among others. Offsetting those improvements was a $7 million outflow on the buyback of our 2020 mid [Phonetic] senior notes, representing payments for premiums, transaction fees and accrued interest payments brought forward from the third quarter. Capital expenditures of $131 million in the second quarter were somewhat higher than we anticipated as we completed the rig upgrades for the lower 48 ahead of schedule. With the completion of our US rig upgrade program for this year and the winding down of our international deployments we expect significant declines in capex in the second half of 2019. We are still targeting $400 million for the full year. Despite semiannual interest expense payments in the third quarter of approximately $70 million, our free cash flow should remain positive after dividends even if at a significantly lower level than in the second quarter. In addition to the absence of the prior quarters outflows for the bond buyback, capex should decrease materially. We also expect further reductions in our working capital, as we continue our push in collections and other initiatives. We remain focused on improving our cash generation, while addressing our leverage. We maintain our commitment to reduce net debt in excess of $200 million this year and to a reduction of $600 million to $700 million through 2020.

With that, I'll turn the call back to Tony for his concluding remarks.

Anthony G. Petrello -- Chairman, President and Chief Executive Officer

Thank you, William. I will conclude my remarks this morning with the following. During the second quarter, volatility increased in the energy markets. Notwithstanding this environment, our drilling business in the US, once again performed well. We gained share in the lower 48 market, while improving profitability. These results confirm that we are running the industry's most capable rigs for its most demanding customers.

Internationally, our financial performance is starting to improve. We expect to show additional progress through the balance of 2019. Our performance initiatives are yielding the expected results on the existing fleet. And we have additional rig deployments scheduled as we move to 2019 and it's 2020. In drilling solutions, our technology suite is gaining traction. Our robotics business should make impactful contributions to the growth we expect for the balance of 2019.

I am very encouraged by the widening acceptance of our leading edge, navigator and pilot directional drilling automation systems. The drilling solutions platform is fundamental to our vision to integrate services with the rig, while providing real value to our customers. We remain committed to growing the penetration and profitability of this portfolio and ultimately enhancing returns for Nabors shareholders and creating value for our customers.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Corner [Phonetic] Lineg [Phonetic] of Morgan Stanley. Please go ahead.

Analyst

Thanks. Good morning guys.

William Restrepo -- Chief Financial Officer

Good morning.

Analyst

So, good to see the free cash flow and the commentary around that. I'm wondering if you could help us understand how things look. Maybe -- sort of an early framework for next year with capex rolling off as much as it is in the back half. Is that a good run rate to start with for 2020? How should we think about that?

William Restrepo -- Chief Financial Officer

I think a roughly you have to anticipate somewhere in the range of $250 million for maintenance capex. So that would be like the minimum minimum. And then we are planning for next year to have a similar level to this year. But that, of course, would assume doing some more upgrades in the US and so forth. So that would depend on the market and what the environment looks like. So we do have some ability to cut capex from the 400 range if we choose to.

Analyst

Got it. And then and then you've obviously been pretty proactive on the balance sheet. Can you just discuss how you're thinking about the'20 and '21 notes and broadly what your preference is for paying down outright versus refinancing and what would cause you to come to the market to -- to refinance?

William Restrepo -- Chief Financial Officer

So we have about $290 million today left of our 2020s which mature in September of next year. So we have brought that down from somewhere in the $650 million range at the beginning of the year. We expect to generate cash from now to year end or from the end of the second quarter to year end, somewhere in the range of $250 million. All of that cash will be allocated to bringing down our 2020s. If we --of course if we do have a favorable window during the next couple quarters, we will go to the markets and issue bonds somewhere in the range of $600 million. That has always been in the plan. So obviously the market is not exactly accommodating right now to go into a capital markets transaction. But, we expect to have a good window sometime in the future. In the meantime, we will continue to bring down the debt for 2020. We expect to be to have bought back the whole $290 million left well before those bonds mature.

Analyst

Got it. Thanks for the clarification there.

Operator

Our next question comes from Praveen Narra of Raymond James. Please go ahead.

Praveen Narra -- Raymond James & Associates, Inc. -- Analyst

Hi, good morning, guys. I guess it was positive to hear kind of the pricing stability you're seeing in the U.S., but I guess, could you expand more on what you're seeing from a competitive dynamic standpoint? When we think about super-spec [Indecipherable], are you seeing any pressures or do you expect to see we go through the remainder of 2019.

Anthony G. Petrello -- Chairman, President and Chief Executive Officer

Sure. Well, let's just talk --- about the pricing at [Indecipherable] which has basically been holding steady. We've not lowered prices and don't see it in the high specs here in the market, where we're focused. Let's look for a moment at the portion of the market. Industry utilization is high, hovering around 90%. There are many units available from many driller. And the high spec market, as you know, is very consolidated. The top four drillers account for a large share of it. The new bill, -- new bills will require a big outlay. And so debate [Phonetic] and margin to support that is not existing right now. So we think that this all adds up to a supportive environment for the current high spec market.

As we said on the call, we think we will see a modest improvement in our margin next quarter. That results from the fact that about a third of our rigs are on term and there is a bunch of rigs about 20 of them in our portfolio that are priced under market. We've had great success about moving those market -- those renewing contracts to market rates. And so we do see a possibility of improved -- continued improved margin during the third quarter. Well, any other comments?

William Restrepo -- Chief Financial Officer

No. No, I think what we've seen is since December of last year, we've seen stability in our pricing. It has -- we have consistently renewed and deployed rigs above the mid-20 range. And we continue to do so. I think there has been a little bit more pressure maybe on the legacy rigs. Today we have about 10, well nine legacy rigs deployed of the 112. And those are mainly in markets that require those types of rigs. So we haven't had an enormous amount of pressure, but we have heard anecdotes of some declines in those particular markets as utilization in those particular segments of the industry remain low. But in the super spec, where everybody is close to the 90% range, there's no really incentive -- no real incentive to reduce pricing. So we continue to see that. We continue to see demand for those rigs. In fact, we're getting requests for some clients for incremental upgrades to be deployed early, early 2020. And we are getting incoming requests from clients for a pickup in activity in the fourth quarter. So the super spec or the high spec market is remaining firm for now. And we see all the indications we have today continue to be positive.

Praveen Narra -- Raymond James & Associates, Inc. -- Analyst

That's great to hear and then I guess if we could kind of take the same question on the international front, obviously international is getting better with supply demand balance. And you guys talked about testing, pricing. Can you help us understand? Are you seeing this broadly across the fleet? Are there pockets of strength? And I guess if you could kind of talk about terms on contracts, you're starting to see that is starting to lengthen out?

Anthony G. Petrello -- Chairman, President and Chief Executive Officer

Sure, so international. As we signaled the third quarter, we expect basically a flat rig count with increasing EBITDA as part of its really to cost improvement, getting rid of a bunch of costs and better performance downtime, things like that. So that growth we see there. We also said in our slide deck, you saw about eight rigs that we have committed in international of next three quarters, two of them are probably going to be in the first quarter of next year. But that's great visibility in terms of what we have in the pipeline. In terms of the market, we do see a pretty broad base of increased tendering activity. It includes Latin America, the Middle East, Russia and Kazakhstan are all pretty active right now. So overall, I think we said as well as several major service companies said that international seems never hit a bottom in the first quarter. And I think we're setting ourselves up for a second year upturn going into next year. That's the the way we see it.

Praveen Narra -- Raymond James & Associates, Inc. -- Analyst

Okay, perfect, thank you very much, guys.

Operator

Our next question comes from Taylor Zurcher of Tudor, Pickering & Holt. Please go ahead.

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

Hi, thanks. Good morning, Tony. I just want to follow up on some of the comments you made about more increase for lower 48 drilling activity in the back half of the year. And yes, part of the question is what -- what sort of operators, is the one group of operators that's mainly driving that uptick and increase. And secondarily, I mean, do you think that's just a function of near-term budget management or these operators of dropping rigs in the near term, but probably [Phonetic] plan to pick up the same rigs and a lot, of course, in the year 2020? Is there some sort of other dynamic at play?

Anthony G. Petrello -- Chairman, President and Chief Executive Officer

I think you hit on both things. I think, first of all, as you know our customer base is heavily with [Indecipherable] majors and large independents. And so they take a slightly different view of the market. And you can see in our survey how [Indecipherable] drops compared to the market as a whole. That's point one. Point two is I think if you look at our churn of our fleet today, the churn that happened in our high spec is basically all budget related, not price related or other competitors taking off rates. It's basically all budget related. So that has set up discussions with some of these guys. We're looking at next year and that's the [Indecipherable] of the discussion and is with that kind -- that kind of client base.

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

Okay, that's helpful. Follow up probably for William, is on the cash flow guidance for the back half of the year. And I think you'll be pleasantly [Phonetic] guiding to $250 million of incremental net debt reduction over the next few quarters. I suspect most of that or a large portion out of coming Q4 just given the timing of interest payments. But do you have any sort of guidance or framework for -- how to think about net debt reduction in Q3? Basically, just how that $250 million stair stepped over the back of the year?

William Restrepo -- Chief Financial Officer

Listen, I'm hoping to surprise in the third quarter with a nice absolute narration. Yes, it won't be a surprise anymore. But we do think that although interest expense will be roughly for the senior notes in the $70 million range, that keeps falling as we go forward and buy back debt. But the number now is roughly $70 million for the third quarter. But, we expected that capex by at least $40 million in the third quarter. We won't have this $7 [Phonetic] million we have to pay for the buyback of our senior notes. And if we start from a base of roughly in the $80 million that we generated in the second quarter, you can do the math. But, you get to a pretty good number.

In addition to that, we are pushing very hard, our whole team and our clients to improve our working capital. And that is -- and, you know, we see that paying dividends somewhat already in the second quarter. But, we have some initiatives that should bring in significant cash flow in the second half of the year with respect to our working capital. So we are -- we think we're in a very good place. We're very pleased with the results of the second quarter in terms of cash flow generation. And we want to make sure that our investors are very pleased thus well in the third quarter when they see our cash generation numbers.

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

Understood. Thanks, I'll turn back.

Operator

Our next question comes from Lee Cooperman of Omega. Please go ahead.

Leon Cooperman -- Omega -- Analyst

Thank you. I have five questions. [Indecipherable] I can just put him out there. You can handle it anywhere that you want. And then more big picture questions. Firstly, what price, say, Brent, crude would be best for us? Minimum price to some degree, I guess you could argue higher the better, but I realize it becomes destructive at some point. But what's your sweet spot for oil prices for the benefit of our business. Secondly, do you guys keep a track of the replacement value of your fleet compared to the enterprise value of the company, which is now a little bit under $4 billion? Those are insured value, replacement value, etc. Third, if you had to make a guess and if [Indecipherable] to be guess how many years you think it would take before you have positive earnings per share, where we [Indecipherable] talk about EBITDA but we we talk about EPS. Fourth you talk about total capex of near $400 million, maintenance capex of 250. I understand the maintenance. What is the hurdle rate on your additional capex when you spend a dollar [Phonetic] capex, what kind of returns do you anticipate in that capex? And finally, Tony and Bill. It was nice to see you guys have been purchasing stock personally recently. How do you kind of conceptualize your decision? How do you look at it? If you want to share your thinking with the group at an open mike. But those questions, if you don't mind. Thank you very much.

William Restrepo -- Chief Financial Officer

Sure. First of all, on the price, I think constructively, your $65 price would be constructive Brent. Second question was the value of -- replace and values. Yeah. I think our MVV [Phonetic] today is a good proxy for replacement value of those rigs. Lee, I think we tried to work -- to actively make sure that we impair when appropriate and sell assets that are no longer viable or get stranded. So we feel that our MVV fairly reflects the value of those -- replacing those rigs. Obviously not new rigs, but at the same age of the rigs.

And as far as positive earnings per share, we think we'll be talking about positive earnings per share next year as well [Phonetic]. And finally, our hurdle rate right now for any investment is in the -- at minimum 12% IRR, which is roughly what we think our cost of capital is right now. It's a bit higher than it's been in the past. So, we have -- we're being much more selective. And by the way, even if we reach 4%, that doesn't mean we're going to do all the projects. We have lots of projects with the hurdle rates -- our way that returns that are above that hurdle rate, that are not being given the green light because we are restricting our capex to the levels that are consistent with our cash flow commitments.

And finally, I'll -- I'll talk about the purchasing stock. I mean, I just thought that the current prices are basically a steal.

Leon Cooperman -- Omega -- Analyst

That's good. Hi, thank you for your responses. I appreciate and good luck.

William Restrepo -- Chief Financial Officer

Thank you, Lee.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Denny Smith -- Senior Vice President of Corporate Development & Investor Relations

Anthony G. Petrello -- Chairman, President and Chief Executive Officer

William Restrepo -- Chief Financial Officer

Analyst

Praveen Narra -- Raymond James & Associates, Inc. -- Analyst

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

Leon Cooperman -- Omega -- Analyst


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