Nabors Industries Ltd. (NBR) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Nabors Industries, First Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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, Director of Corporate Development and Investor Relations. Please go ahead.

Good morning everyone and thank you for joining Nabors earnings teleconference. Today we will follow our customary format with Chairman, President and Chief Executive Officer, Tony Petrello; and William Restrepo, our Chief Financial Officer, providing our perspectives on the quarter's results along with some insight into what we are seeing in 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 are participating by webcast, they are available to download within the webcast. Alternatively, you can download the slides from within the Investor Relations section at nabors.com under the Events Calendar Submenu, where you will find them listed in supporting materials under the conference call listing. Instructions for the replay are posted on the website. With us today in addition to Tony, William myself, William are Laura Doerre, our General Counsel; and the heads of our various business units. Since much of our commentary today will concern our expectations of the future, 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 risk and uncertainties, as disclosed by Nabors from time to time in its 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. Now, I'll turn the call over to Tony to begin.

Good morning everyone. Welcome to the Nabors Industries conference call to review results for the first quarter of 2015. We appreciate your participation. As Denny mentioned, we have posted the accompanying presentation slides on our website. I will begin with some opening remarks. William will follow with a financial review of the first quarter. I will then wrap up to take some questions. A lot has happened since our fourth quarter earnings announcement, which was just last month. There have been three developments which I want to call particular attention to. First, on March 24 we closed the transaction with C&J Energy Services. The transaction is transformative for both companies. For the Nabors shareholders we significantly enhanced our balance sheet liquidity. At the same time Nabors retained just over half the equity ownership in the new C&J. Now that the deal has closed, we are looking forward to a long and mutual beneficial relationship with the team at C&J. Second, we have been awarded a contract to deploy six new built PACE-X rigs with a customer in Colombia. These rigs constitute six of the eight on contracted X rigs which we previously indicated we intended to build in 2015. This contract illustrates the appeal of our advanced rigs and markets beyond the Lower 48. These six rigs will be the first X rigs to work outside the U.S. Third, the Big Foot platform was floated out with our rig installed to the Gulf of Mexico in late March. This 4,600 horsepower rig on that platform is one of the largest drilling rigs in use today. It represents very significant capital investment on our part. This milestone enables us to begin generating a return on the investment. Now, I will comment on the performance in the first quarter. Our overall results were approximately in line with expectations when we spoke last March. Measured against our internal forecast, the strongest performance was in our International businesses followed by our rig services segment. The U.S. drilling business also outperformed our expectations. I will address these factors that influence their performance shortly. Our Canadian drilling segment was challenged by the contraction in commodity prices exacerbated by the arrival of warm weather in January. Our consolidated results for the quarter included the completion of production services business through the closing date I mentioned earlier. For those twelve weeks both portions underperformed our expectations, particularly Completion Services. Before I begin my detailed comments on the quarter’s results, I would like to highlight the improvement in our balance sheet during the quarter. We reduced net debt by over $600 million. At the end of the quarter our net debt was approximately $3.2 billion. That amount does not reflect the value of our equity in C&J, which totals approximately $950 million today. Now to some specifics on the first quarter results. Revenue for the quarter totaled $1.42 billion, including $367 million for completion of Production Services through the closing. The sequential drop reflects steep declines in activities across most of our business lines. During the quarter our International business had an exceptionally strong performance with minimal impact from lower commodity prices. True to form, the International business is typically less volatile in our North American business lines. It tends to lag trends that started in the U.S. We believe this segment will be negatively impacted in future quarters and I will address that in my outlook comments. First quarter operating income declined to $93 million from $152 million in the fourth quarter. EBITDA was $374 million versus $446 million in the previous quarter. The improvement in our international U.S. and rig services businesses was more than offset by the declines in Canada and in Completion & Production Services. I will wrap-up this summary with the recap of our new build activity. We planned to deploy 17 PACE-X rigs in total during 2015. As of today we have deployed seven in the field. Of the 10 remaining to deploy as of today, eight have term contracts. We are also making progress on our new rigs destined for Saudi Arabia, Kazakhstan and Alaska. We expect them to deploy on schedule. Now let me turn to our detailed results. Our first quarter earnings were driven primarily by, first, reductions in U.S. drilling activity, particularly in the Lower 48, which had a material impact on our results as our rig count declined throughout the quarter. Second, an abrupt and early end to the drilling season in Canada; it was breathtaking actually; and third, reduced demand, stiff pricing pressure and seasonal issues in our Completion & Production Services business. These were partially offset by improved performance in the international segment as new rig deployments and fourth quarter impacts from startups in the fourth quarter lifted margins. International results also benefited from the fact that once again many things went right. There was strong execution across the operation and a few favorable swings in revenue. Let me now turn to our outlook. The steep drop in oil prices and uncertain prospects for global drilling activity led us to a cautious outlook for the near term. As of last week, the Baker Hughes Lower 48 land rig count is approximately half of the number of rigs that were working at the peak in the fourth quarter. Our Lower 48 rig count in down approximately 45% from our peak. It currently stands at 111 rigs, including 18 stacked on rate. We see operators continuing to reduce their drilling programs as they align their fuel spending with their cash flow expectations. We are seeing more deterioration in our smaller and older rig counts. This decline reflects shorter remaining contract duration in those rigs as we enter the downturn. Utilization of our U.S. Lower 48 AC rigs has declined to 57% currently from 94% at our peak rig count in October of last year. Among our AC rigs are 1,000 horsepower M-class rigs have experienced the largest decline in utilization, while our 1,500-horsepower rigs have held up better. Utilization of our X rigs remains the highest at 98%. Legacy rig utilization has dropped to 15% from 40% in the same time period. By geography, the Rockies as expected, including the Bakken and the Mid-Con have seen the greatest slowdown in the number of rigs working. Going forward, for the second quarter we expect our rig count to decline further from today’s level. This quarter should see the idling of some of our more capable rigs as their contracts expire. Yearly rig margins will be under pressure and could decline by over $1,000 per day, due partially to mix. As we attempt to market our gigs, we are increasingly competing with operators trying to subcontract rigs for which they have term contract obligations. This is putting additional downward pressure on rates. We are beginning to have success replacing competitor rigs as some operators try to upgrade their rigs as their drilling programs start to stabilize. We are seeing generally more innovative rate and contract structures than we saw at the peak of the market last year. You are no doubt hearing anecdotes of very low day rates. In our experience, these do not reflect all the gives and takes in the new rate structures. At Canrig, the second quarter should reflect the dramatic slowdown in new build activity for the U.S. market. Reflecting the reduction in Nabors own rig build plans, the reduction in Canrig’s backlog is more severe for intercompany equipment. The global drilling industries new rig building activity is decelerating rapidly and most acutely in North America. Services and rental activity will also be impacted by the declining North American rig count. During this time Canrig is expanding the footprint of its repairs business and it’s been perusing services and rentals in new international markets. In Canada, activity in the first quarter was down versus the year ago level. Illustrating the severity of the downturn, activity was also down sequentially in what is normally an up quarter. We expect a steep drop in activity in daily rig margins in the second quarter. We also expect the seasonal pickup in activity beginning in the third quarter, but at this point we do not see margins improving materially for the foreseeable future. Changing to Alaska, our current outlook calls for year-over-year increases in both activity and financial results through 2015. That does not include the new rig which we planned to deploy in 2016. I will finish with the outlook for the International business. The first quarter’s financial performance illustrates the potential earnings power in our International fleet. Our activity level, 130 rig years, matched the multi-year high set in last year’s third quarter. Daily rig margins approached $19,000 per day, which is an all time high. International markets generally react more slowly than North American markets to changes in commodity prices. Accordingly, our first quarter results do not reflect the impact of the downturn. Virtually every international operator has asked for relief on rig rates. We are currently in negotiations with the goal of reaching a combination that provide economic benefits to our customers and to us. Beginning in the currency quarter, we expect our daily rig margins to reflect lower day rats as agreed upon rate reductions begin. In addition, we are seeing reduced activity in several markets, most notably in Mexico, but in others as well. Finally our two rig multi-year project in Papua, New Guinea is widening down. The two rigs involved met the objectives set by the customer and our sales. We are now actively marketing them in other markets. In light of these factors, we expect international rig years to decline by more than 10% sequentially in the second quarter. Looking ahead, in light of the negotiations I just mentioned, we expect margins to decline more significantly beginning in the third quarter. I will now discuss our strategy to manage through the downturn. The key elements include the following: One, consolidate our footprint in the field by combining or closing field offices. Two, reduce our field staffing linearly with a decline in operating assets. Three, lower cost across our supply chain in corporation with vendors; four, implement innovate pricing structures for services; and five, reduce G&A company wide by $70 million versus the fourth quarter run rate. Now let me outline our specific plans and the actions we have taken. They are divided into two main categories. First, we are implementing tactical plans to limit the impact of the downturn. Since the end of 2014 our employee count, excluding the completion of Production Services segment has declined 18%. As you might expect staffing into our international segment are largest has barely budged considering the new rigs we have recently started. Employee account in our North American businesses is down 34%. We remain committed to scaling the businesses to the current volume of activity. In addition to staffing levels, we have reduced our daily direct cost per rate by approximately 6% versus our 2014 base line. Our efforts to resize the companies G&A footprint are making real progress. Excluding the completion of production services segment, we have already achieved our targeted G&A workforce reduced for 2015. The dollar impact is also significant. We are on track to reach our annualized target savings of $70 million and we anticipate further progress through the year. In the second mitigation category we continued to make progress on our strategic vision to integrate downhole technology with our advanced rigs. During the quarter we completed our first _job for a customer using our own new proprietary tool. We are running our first unmanned remotely controlled directional drilling jobs this quarter, as well as fuel testing our new rotary steerable tool. Finally downhole measurement is taken during the successful amount of our Accu Steer tool lead the operator to reengineer his well design, with the ultimate goals of realizing quicker time to drill, higher rates of penetration and higher well productivity. It’s still early, but we are excited to be at the leading edge to buying real time downhole intelligence with advanced rig performance. On the balance sheet we have taken steps to right-out the downturn. Most notably the cash proceeds from the C&J transaction materially improved our liquidity. Together with the expanded borrowing capacity under our revolver, which I mentioned on our last call. We now have liquidity approaching $2 billion available. To summaries several specific factors could further impact our results in coming quarters. The domestic E&P industry continues to reduce budgets and release rigs at a high rate. Give our term contract coverage we expect our financial results to continue to be supportive a few quarters after the rig count bottoms. The drilling market in Canada after a subdued drilling season remains depressed. We expect seasonal improvement later this year, however we expect negative year over year comparisons through 2015. The rig build for the Big Foot platform in the U.S. Gulf of Mexico floated out of March. We currently assumed the rig will commence operations and go our full day rate before the end of 2015. This product will materially increase the operating profile of the off shore business. In our international business, as we account for all the moving parts, we still expect an improvement and full year results over the prior year. However the full effects of lower oil prices are not reflecting in the international market. Physical stress in certain markets could drive activity levels lower. Finally we remain committed to scaling our cost structure to the size of our operations. We have made progress improving our cost structure and we will implement additional steps as necessary. These should dampen the impact of the activity downturn and better position the company for an eventual upturn. This concludes my comments. Now, I will turn the call over to William who will detail our financial results.

Thank you Tony and good morning everyone. Net income from continuing operations as reported for the first quarter was $124.4 million or $0.43 per diluted share, on revenue of $1.42 billion. Consolidated revenue for the quarter decreased by 20% as compared to the fourth quarter of last year. Revenue for the businesses remaining in Nabors following the C&J transaction fell by 11%, while the completions in production business fell by 39%. I would like to point out though that as a result of the effective date of the transaction, these product lines have 9% fewer days available in the first quarter. Therefore the sequential reduction in Completion & Production activity on a comparable basis was similar to the one experienced in our U.S. Lower 48 land drilling business. The company’s first quarter results included several items whose net impact somewhat obscured the operational trends of the company. These included first, capital gains related to the C&J transaction for the total impact after taxes of $61.9 million or $0.22 per share. Second, various benefits from prior year taxes related to settlements on existing contingent exposures and the filing of tax returns in several jurisdictions for a total of $10.5 million or $0.03 per share. And third, after tax severance cost incurred in adjusting the company’s structure to the current market situation totaling $6.3 million or $0.02 per share. Adjusting for the above items, first quarter net income was $58.3 million or $0.20 per share as compared to an adjusted $96.3 million or $0.33 per share in the fourth quarter of 2014. The above first quarter still included Completion & Production financial results that will be replaced from the second quarter onwards by 53% of the C&J Energy Services net income. This item will be reported as earnings from affiliates below the operating income line. Excluding transaction costs, these businesses locked in the first quarter a combined $44.2 million after tax or $0.15 per share as compared to positive operating income of approximately $0.04 per share in the fourth quarter of last year. I would like to conclude this section with some general comments on the initiatives in place that have allowed us to mitigate the impact of the North American downturn and drilling activity. Although we cannot fully control our number of active rigs or the day rates paid by our clients, we can certainly manage our overhead structure, our direct costs and our capital expenditures and we can work with our suppliers to reduce the costs of our consumables and services. We can also ensure that we continue to incentivize our commercial structure to accelerate technology introduction and cross selling efforts. Initiatives in all of these areas have already started to bear fruit in the first quarter as my discussion in the segments will highlight. So the main cost initiatives we launched so far are first, reductions in capital expenditures to a level consistent with positive free cash flow. We have reduced our planned capital expenditures to $900 million and our drilling related businesses, less than half are initial expectations. Second, we are targeting reductions in SG&A in line with both the reduced revenues from completions in production and at increased drilling activity level. Our objective is to cut SG&A with at least $70 million on an annualized basis. This is in addition to the $120 million of SG&A within the NCPS organization that will depart with the C&J transaction. These cuts are translating to approximately 17% of the 2014 levels for a drilling and corporate SG&A structure. Our SG&A in the first quarter has already fallen by $12 million versus Q4. I’ll point out that these SG&A costs in the first quarter included approximately $5 million in severance costs. Third, focus management of our direct operating cost including fuel support groups to ensure we adjust these expenses in line with the reduced activity levels. From the last week of 2014 through early April, as part of these initiatives, we have reduced our total workforce by 5,500, which translates into an 18% reduction. U.S. drilling in Canada have fallen by 41% and 26% respectively. And fourth, multiple rounds of discussions with our vendors to find ways to cut our costs, including but not limited to price concessions. This initiative also includes more centralized management of our spares inventories and our maintenance CapEx, now feasible on the new organizational structure. We will continue to look aggressively for ways to reduce our addressable spend as the year progresses. I would now like to focus on the key metrics for our segments. U.S. drilling; the U.S. drilling business experienced a reduction in revenue of 17%, but operating margins excluding severance improved to 17.5% with 12% incremental margins on the revenue reduction. This performance reflected strong revenue and operating income improvements in Alaska and a slight increase in the offshore operating income, as well as effective cost management in the Lower 48 operations. This latter unit experienced a 27% reduction in revenue, but held its operating margin excluding severance at 12.7% translating into decremental margins of 27%. Within the U.S. drilling segment, our Lower 48 daily operating margin increased by $676 to $11,134 per rig. That amount includes $105 per rig in lump sum early termination payments for revenue that would have been earned subsequent to the first quarter. Cash margins benefited from a more favorable mix of assets and for active direct cost management. Active rigs in the Lower 48 averaged 149, down from 198 in the previous quarter. Currently we have 111 rigs on revenue. During the first quarter contracts on 33 of our rigs expired. Seven of those received extensions or no contracts averaging 5.2 months. Of the remaining rigs, four converted throughout the well. Although the pace of drilling activity decline has slowed down considerably, we don’t believe we have hit bottom and expect further declines in a number of rigs on revenue as more contracts expire and clients continue to reduce drilling activity. Given our current revenue rig count and expected further declines, we expect a sharp reduction in our average number of rigs during the second quarter versus the first, approximately in line with the decline in the total Lower 48 rig count. International: In our International drilling business, the improved performance was driven by a 610 basis point margin expansion and increased rig years that were up nine to 130. Operating margins for the quarter were 23.6% and daily rig margins increased by $1,062 to approximately $18,900. These improvements reflected rig start ups in Saudi Arabia, partially offset by a decline in Mexico. The reductions in SG&A and closures of lost countries also contributed to the 39% increase in operating income and a 3% revenue increase. The quarter’s results continue to demonstrate the improved financial performance that our international operation has been working on for some time. Additional mode of deployments should bolster results in 2015 and partially offset the dollar pressure on international day rates. In Canada, activity decreased by more than 11 rig years to an average of 26 rig years for the quarter, while daily margins remain essentially flat versus the fourth quarter. We did not experience the normal seasonal upturn in revenue as drilling activity continues to fall sharply in the markets we serve. Canada drilling revenue fell by 34% with operating margins decreasing to 13.2%. This translated into decremental margins of 23%. The margin resiliency reflected early action on adjusting the direct cost and overhead structures to the anticipated activity reductions. The Canadian market remains severely challenged as we head into the seasonal break up. In the second quarter we expect activity to decline significantly into single digit rig years. The rig services segments revenue fell materially as land drilling activity slowed in the Lower 48. Canrig and Ryan revenue decreased by 22% and 35% respectively; however Canrig operating margins excluding severance expanded by 630 basis points, reflecting a significant shift in product and customer mix, as well as reductions in overhead cost. Despite losing over a third of its revenue, Ryan’s operating income improved slightly as a result of early and meaningful actions in anticipation of their sharp downturn in drilling activity. Completion & Production services: We are clearly further ahead in our litigation efforts in the Drilling business than in the Completion & Production business. Our U.S. operation has lagged in its reaction to the downturn. The pending C&J transaction and the need for optimizing synergy capture in the combined entity post transaction has resulted in a more measured approach to cost cuts, which is reflected in the Q1 result for NCPS. The Completion & Production business line recorded an operating loss of $58.5 million, due mainly to sharp declines in utilization of the Completions business with pricing reductions also contributing to the deterioration. Activity for the year started slowly with clients generally delaying well completions and with weather affecting operations in west Texas and Milwaukee’s. Pricing concessions in most businesses were active at the end of last year and at the beginning of 2015 affected quarterly results. The revenue started to rebound towards the third week of March with fracturing work recovering over the last 10 days of the quarter. Cost reduction and actions taken during the month of March started to yield results late in the first quarter. Looking forward, for Nabors as a whole I would like to share our expectations for some of the important metrics and operating income outlook. We expect full year 2015 capital spending of approximately $900 million for our drilling operations. We estimate full year depreciation, amortization of approximately $1 billion. Our full year effective income tax rate is now estimated at low to mid single digits and normalized pretax earnings as our profitability has dropped in high tax locations and improved in lower tax jurisdictions. Given the commodity environment, as well as the continuing decline in drilling rigs in the Lower 48 and Canada, providing precise guidance and results remains difficult, nonetheless I still want to make some comments on our operating income for the second quarter. These comments are based on the underlying assumption that oil prices will stabilize at slightly higher levels from the second quarter onwards and that drilling rigs in the Lower 48 will also bottom out during this quarter. Further we assume a moderate level of drilling activity increase during the fourth quarter of 2015. Day rates should weaken incrementally during the second and third quarters under this activity scenario, but should stabilize by year end. Nonetheless I do want to clarify that there are many factors that could affect these assumptions and they could certainly be a significant downside to our expectations. We expect operating income for all our business to reflect the decrease in industry activity and pricing and to decline sequentially. Our North American drilling businesses are particularly impacted by the market decline. I expect the Lower 48 rig count to bottom at significantly below 50% of its peak level, though I anticipate a somewhat low reduction in their own number of rigs on revenue given our term contracts. I also expect operating income for the Lower 48 to remain at close to breakeven during the remainder of the year. Canada and Ryan are anticipated to show operating losses during the second and third quarters with a recovery in the fourth quarter for our Canadian operations as seasonally driven activity returns. Our international business will start to feel the impact of price concessions in various countries, as well as the end of several high margin projects, but should remain at strong levels during the second quarter. Sharp declines are anticipated in the second half. Canrig will stay above water during the remaining of the year, but at levels at a fraction of the Q1 results. In concluding, I would like to stress that through this severe downturn we will remain extremely focused on managing our costs and on generating free cash flow. I know that we have worked hard to ensure that we will come out of this downturn with a more modern and capable fleet; our focused, streamlined, low cost effective organization; additional drilling related products and services that will be leveraged onto a drilling rig platform and a stronger balance sheet with more financial flexibility. We are excited to show our shareholders these enhancements to our company over the quarters to come. Now, we’ll turn the call back to Tony for his concluding remarks.

Thank you, William. Let me finish with a summary of our overview and outlook. First, the U.S. drilling market continues to contract and that is rippling through other markets globally. We are responding with focused efforts to balance current market pricing and utilization and adjust our cost structure and capital budget as necessary. Second, we continue to pursue opportunities to add rigs and high-spec drilling markets around the globe at attractive risk-adjusted rates of return. Third, in this environment, the importance of financial flexibility becomes paramount. With the proceeds from the C&J transaction we have significantly improved the company’s financial position and we are well positioned to withstand the current market downturn. Fourth, we are committed to our vision of the future drilling market, one where technology enables improved well productivity and a meaningfully lower cost structure for our customers. We continue to invest through this downturn. We intend to emerge from the downturn with drilling solutions that position Nabors as the clear driller of choice. That concludes my remarks this morning. Thank you for your time. With that, I will take your questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ole Slorer of Morgan Stanley.

Thanks a lot and congrats with a very robust performance in a difficult backdrop. I wonder whether you could maybe first of all just give us a little bit of a sense of a stand in terms of streamlining the organization, not just from a cost standpoint, but previously you’ve been talking about changing the way you are marketing the rigs in North America and making other structural changes to the organization. So Tony, where do you think you stand now in terms of achieving some of these structural objectives for the company?

Actually we’re in the process of a consolidation of our historical business unit structure of kind of combining it. So we’re going to a more unified management structure where the U.S. operation, Canada and International would all have a common management structure and common goals and objectives, etcetera. So we’re in the process of doing that and we’re going to be announcing something on that very shortly and that’s a continuation of the change that we’ve made so far in terms of consolidating certain corporate staff functions like engineering, etcetera, so we think that’s the first step. The second thing is we are looking at changes to market, taking the benefits of Canrig's Technology in terms of making it more paramount in the marketing of our rigs, which we think really differentiates Nabors rigs. So part of this re-org that’s going on right now, it’s going to do that as well. So that’s a clear priority for us right now.

And when do you think we get some more color on that? And you said there is an imminent announcement, but is this an initiative that will last for the next 18 months or is this something that you will carry out with the full benefit of the current down cycle and see a more completion of it in 2015.

This is happening now. It’s going to happen this quarter.

Okay, thank you. As a follow-up, on the PACE-X rigs who you have mentioned 9% to 7% utilization, but also that the current, for the rest of this down cycle, I think you suggested that your own decline in rig count would be in line with the industry. So could you talk a little bit about the resilience of PACE-X rigs into this, you highlighted that some of your end equipment will now start going down. So could you just shed a little bit more color on how this decline really impacts the various segments of your fleets?

Ole, we didn’t quite understand the question. Could you say that again?

Yes, I mean you highlighted that there will be a continued slowdown in the overall industry rig count into the second quarter and that you owned, if I understood correctly, that a drop in your own rig count would mirror that of the overall U.S. rig count. Did I misunderstand or could you just shed some more light on that?

No, I think that’s correct. I don’t think we expect to do as good as the industry frankly and obviously the drops should be tempered by the existence of the term contracts. So almost 90% of our rigs are on term contracts, so that provides some additional protection compared to the market as a whole. So I think given that, the market as a whole doesn’t 90% on term. I think we should do better at the market as being shipped out to the bottom here, that’s the way I look at it. Of course the other thing is that it’s hard to say where the bottom is. I think what’s clear is that the rate of decreases has slowed, but I think we are still not ready to call the bottom.

And in the context of that, your PACE-X rigs, how do you see rigs rolling off contract? Do you think you’ll get them back to work and displace competitor rigs or do you see that the PACE-X rigs will also lose utilization in line with your overall reductions?

I think the PACE-X rigs are still the preferred rigs. To accept the operators plays in today’s market with the economics and closed pad drilling, the X rig is still a preferred rig and frankly the X rig is – weakly we’re out performing everything. In fact we’re moving the X rig where most people would have looked at the X rig as rated moves slower than some of the fast moving 1,500 horsepower rigs that don’t have the same pad capability, but we now can actually move the X rig and we’ve had to move it for three days. So for the rig that tries to move in three days, less than three days I’m told, the guys are telling me. So I think the X-rig is really differentiating itself. So I expect as long as the economics for the operator include pad drilling, the X rig is going to be the favored rig.

Okay, thanks a lot for clarifying that for me. I’ll hand it back.

Thank you.

And our next question will come from Angie Sedita of UBS.

Thanks. I echo the sentiment. Congratulations on that solid quarter, particularly in the U.S. given current conditions.

Thank you.

So Tony, it was mentioned a little bit there by William, but if you think about 2009 right, clearly a very different cycle, but one that we did start to see a recovery in the fourth quarter of the year and I think you guys touched on a possibility of seeing a recovery in Q4 of this year, which was an interesting comment. So can you talk a little bit about your thoughts about the pace and the timing of the recovery in 2016 in a $60 to $70 oil world?

So, as I said before in conference calls, if I could predict oil prices I wouldn’t be doing this job Angie. I’d be creating it for my own account, so that’s pretty clear. So in terms of – I don’t subscribe to the V [ph] theory and I think I’ve said that previous to everyone. I don’t see the V recovery here. I view it more as an elongated, slightly increasing loan bathtub. In other words, we got a decline and over the next 18 months it’s going to be a slow climbing up with gigs and jags [ph]. I think those, number one, uncompleted wells are about – I’ve heard estimates now close to 4,000 is the estimate I’ve heard. Once we see some kind of rebound in pricing you’ll see some production response to that. I think it’s going to make everything a little bit of a jag at return. So our strategy frankly is, we’re hunkering down for planning the 2016 is not a great year and we’re acting accordingly. So we have certain priorities, I have articulated on the call here today that are guiding us. Obviously the first thing is our cost control. Things within our control to do the best of lowering our cost structure, not just SG&A but our direct expense and you saw our merge that improved. In part we’ve gotten some corporation from vendors, helping us lower our cost as well, that’s been helpful. We also have a priority here of extracting more out of our asset base. I think Nabors has a terrific global asset base and to accept that that’s fully utilized or optimally utilized, that’s a real priority. We actually have an internal metric that we’re imposing on the business units to make them have incentives to do that and learn things. I think with the success this past year in terms of moving rigs to the international markets is a good chunk of that capital came out of existing assets that was not on the payroll. So that’s a real objective for us. The third thing is to look at content or content with our customers and aligning ourselves better. I think Nabors has always been viewed as a smart company for an operator. I think say we want to really be viewed as a guide that helps them with the value proposition and so we’re having a lot of tools that we’re making available to operators to help them understand the costs, understand the performance of the well and work together to improve the economics. And then the last thing of course is the technology aspect. So it’s interesting at this time today and I would say anecdotally a number of operators, even with the little cut backs, they seem to be holding on to some of that looking at different ways to doing things, because I think everyone realizes the only way you’re going to get to a different kind of cost structure today is for a change – I mean there is only so much you can extract from just brute forced reductions. There’s not much more to give by the service companies. So long as you get there some technology and I think today we’re finding that operators are more willing to think about new ideas when things are really – the market is tightened everyone’s blowing and going, they really into execution. But today I think they are willing to think about different things outside the box and so one thing we want to do is take advantage of Nabors size, the things that we have underneath to help us prepare for that. So those are the things today that we’re looking at and as I said, I think we’re acting as if this thing is going to go on into wells in 2016.

No, that’s fair and we would think the same that it’s very shallow at that exit point of the year at a lower than where we entered in that year and so therefore if you think about the world that way in 2015 and obviously we will see some resumption of activity and the pace that and clearly are showing their medal. Do you think it’s the industry as a whole or do you have your PACE-X rigs all back to work and your peers have their “pad capable of rigs” back to work. Do you think you could actually see a raising or rising stay rate environment for those rigs even if we have idle SDR mechanical rigs or….

Yes, we’re rising from today, yes I could see that. I mean I think – I don’t see us getting back quickly to numbers that we were 10 months ago, but we’ll see as 2016 unfolds how rapid that increase occurs, so.

Great, thanks. I’ll turn it over.

Okay.

And the next question is from Douglas Becker of Bank of America.

Thanks. Tony, you highlight the value proposition that you’re focusing on for customers. The PACE-X rigs are getting very high utilization. Normally finally we do see activity improving. How do you see market share among the four larger players playing out. Just really given the differences in the fleets and the fact that everyone had now a pretty valuable pad capable and drilling rig.

Well I think there is a role for the four and I think the four as a group frankly should – if you look at other industries I think this thing should consolidate more and more to your larger percentage of your total pie, that’s what I think is going to happen over time. I think the natural thing to happen and as the operators expectations change in terms of what they demand for safety and performance, etcetera, I think the 10 rig operation is just not going to be competitive. So I see over time and especially in this market right now, all those others players will be driven out and its going to be something like the Big Three or the Big Four left of course we want to one of them, so…

On an organic basis would you expect to be taking share as well?

That’s our mission, obviously. Our missions is we think we have the best, the best arsenal and we are going to – I think you’ve seen the new Nabors in the past 12 months and I think you can see hopeful the next 12 months some other steps will be taken to make sure that we can differentiate ourselves and show something to grow disproportionate to the market; that’s our mission.

That makes sense. And then just briefly on the operating cost, very impressive in the first quarter. If we think about it for Lower 48 on a per day basis, do those continue to trend down over the course of the year even though activity might be turning lower or is that just too much to offset.

You mean the cost themselves are your saying.

Yes, on a per day basis.

Yes, I would say they are going to continue to tend down. So that’s obviously the goal. There is obviously a fixed element of cost here that doesn’t get a certain number and they will be plateaus reached. So I think there is going to staggered levels where at certain points where you can’t get to the next level at a certain rig count. So you are stuck with a kind of fixed overhead in the field somewhere. But generally I think we’ve been pretty good about adjusting as quickly as we can our rig counts or our infrastructure, including fixed cost and that’s one of the missions for the guys here that they are really very focused on. And we will try to do our best on that.

The first quarter bears to that. Thank you.

And next we have a question from Kurt Hallead of RBC Capital.

Hey, good morning.

Good morning.

I’m kind of curious as we’re going to go through this cycle downturn and as we come out the other size of this cycle. You think that there is going be a structural shift back to how business used to be down in the context of well-to-well drilling activity and is this hole fervor and about manufacturing style drilling and pad style drilling and the need for three year contracts is – is that kind of like – is that going to change in this next phase. What’s your take on that?

I think the underlying motivation is still going to be the same. In other words, if the shales are here to stay and you’re committed to a manufacturing environment, the only way you really get there is consistency and repeatability. And so whether the actually same kind of term contract is the vehicle to make sure that happens or not, I can’t be sure to say, but I think there is going to have to be something that makes that become a priority with the customer. And frankly even in this market today as things are being jockeyed about, one of the things that we are finding is customers are recognizing that building the lions relationship with one or two people is core to them for those reasons. So I do think that’s going to be made a priority. As I said, whether that means that when we continue new building against term contracts and I think that will be to spend at frankly bigger macro issues like supply and demand, availability of rigs. But I think operators and contractors, it’s in their collective interests to not go through this gig jag with was characteristics of years ago. I think one of the reasons why you see this growth productivity and performance frankly is because a large portion, we are on term contracts and it’s like a baseball team, right. If you put a good bunch of guys on the field that never worked together and they are only there for a couple of innings, they don’t perform, but if they get the time to work together over time, that improves the team performance and I think those kinds of dynamic supply in our business and I think small operators are realizing that and its up for us to make that clear to them an give them a reason to go down that path.

Okay and then secondarily I know that there’s been some subletting of land rigs out there by your customers. Kind of an interesting dynamic that’s usually been reserved for the offshore drilling space. What’s your take on that and how exposed is Nabors from sublet?

It’s not a big exposure, I mean but frankly it does affect operators in terms of the availability of operators for us to put back rigs to work because they are filling other customers needs by transferring term contracts. So I think it is a factor in terms of the resistance point for us, but not a big factor in terms of our problem ourselves.

Okay, great, that’s it from me. Thanks.

The next question comes from Marshall Adkins of Raymond James.

Bravo gentlemen, good work. Let’s hone in on the international side. We haven’t delved into that in too much detail. Obviously your mark will turn around from a few years ago. The new rigs that you have going into the International market, could you give us a field for number one, geographically where those are going for; number two, I assume some of them will be going to Saudi. Are those replacing – since you have a dominate position, are they replacing some the rigs that were there, are they incremental, just highlight us on the overall geographic outlook.

I’m going to let [inaudible] take the call, okay.

So, thanks for your nice comments regarding the management. So the...

It’s been a while, it’s hitting $100 million quarter operating number and frankly I was really pleased that it would happen this quarter. I actually didn’t expect it myself. So I think what it does show Marshall is the real depth of international, which we’ve been talking about for a while and we know we had disappoints in prior years and I can’t say that as we said in our remarks this thing is going to continue at this rate right now. But I think it does demonstrate what we have as really an operation with a lot of potential, so Siggy [ph].

So regarding the question, the rigs that go to Middle East they are clearly incremental rigs while the other rigs that Tony talked about that are going to South America. It’s a mix of incremental and existing fleet. So it’s a mix of replacing existing rigs and its – we are replacing for the legacy rigs basically inputs 16 new rigs.

Okay and then the follow-up on that, just stick on the same subject is, obviously that is likely to slow, we all know it lags. Any thoughts on looking after ‘16 and beyond? Do we see it stabilize in ’16 and move up or is this going to be a multi-year battle or fight on the international side?

Well, to be honest with you, it’s still yet to be determined. I think the battle – as we mentioned before, there is a battle on pricing right now, but the interesting thing Marshall is bid activity is still ongoing in both South America and Middle East. So that gives me some expectation that things could be okay in 2016, but we’ll have to see. But we do have – actually we do have current bid activity in both locations right now. So that’s the only visibility I have to answer your question.

All right, that’s where I’m getting at. It sounds like things, it didn’t just shut down, we are going to keep going there. Right, thanks.

People haven’t just got it and closed the door basically, that hasn’t happened internationally, like in some quarts in the U.S. that hasn’t happen at least in some of our core markets, so...

Great job. Thank you all.

Thank you.

Laura, this is Danny. We are getting close to the top of the hour. Why don’t we just take one more question please.

Sure. That final question will come from Robin Shoemaker of KeyBanc Capital Markets.

Yes, thank you. On the international activity in these pricing concessions that you’re mentioning, how does that work. I mean you’re customers are asking for pricing concessions and your giving them. Is there any tradeoff there with regard to contract term or is it kind of like at this point mainly a unilateral type of move on your part.

Well, I think you can assume that that’s obviously one of our objectives and we try to make it work both sides and that’s one of the things we pitch to the operator and more term or you will be picking up additional legacy rigs that someone else – that they are laying down on somebody else to add more share to us. Those and some of the things that we had, and then also we also tried to get more content. For example, selling them off some performance tools which will also hit margins. So there’s a bunch of things like that. That’s why I said in today’s environment it’s hard to figure out when you hit pricing, you can’t read too much into it, because one of these other things are going into effect in these new deals, but extension of term is clearly one of them.

Okay good. So you are getting something in return there. And so then you are expecting the international activity to be down in the second half of the year. I believe you said along with reflecting the pricing concessions that you made, and it’s down 10% in the second quarter in terms of your rig years. I assume it goes down from there?

We said for the full year, 10% reduction in rigs. We did say the second quarter would be affected already by some pricing concessions that are in the pipeline. But we still expect a strong quarter in the second quarter for international. The sharp decline would be in the second half of the year.

Okay, and if I may ask just on your domestic rigs, the 18 that are stacked on rate, and your including those in your active or your rigs on rate. So is the margin on those rigs stack on rate comparable to working rig.

I would say comparable is a good phrase. I mean obviously there’s pluses and minuses and maybe a little bit more pluses but comparables is probable the beast way to say it.

Okay and assume that those are unlikely to go back to work, but are more likely to be just stacked for the duration of their term.

Maybe likely stacked for the duration of the term, but depending on what happens in the market our historical experience has been things that gets back to our rate. A lot of times we’ve had operators once they changed their mind, they quickly come back and say they want to reactivate it. So the question is, how soon does anything turn around over there, prompt in thinking those terms. But we have had situations where nothing’s stacked on rate, but things where the operator actually gave us a full payout and came back to us within six months and said we want the rig back, so both have happened to us.

Okay, all right. Thank you very much.

Thank you. Thanks very much.

Laura that will wind up the call today, and thank everybody for participating and if your question didn’t get answered, feel free to give us a call.

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