Nabors Industries Ltd. (NBR) Q4 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Nabors Fourth Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Denny Smith. Please go ahead. Dennis A. Smith - Vice President, Corporate Development & Investor Relations: Good morning, everyone, and thank you for joining Nabors' earnings teleconference to review our fourth quarter results and full year. 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 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're participating by webcast, they are available as a download within the webcast. Alternatively, you can download the slides from within the Investor Relations section of our website, 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, myself and William, are Laura Doerre, our General Counsel; Siggi Meissner, our Head of Global Drilling operations; and Chris Papouras, President of Nabors Drilling Solutions. Since much of the commentary today will concern our expectation 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. Also, during the call, we may discuss certain non-GAAP financial measures such as EBITDA, adjusted EBITDA, operating income/loss, and free cash flow. We have posted to the Investor Relations section of our website at www.nabors.com a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. Now, let me turn the call over to Tony to begin. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Good morning, everyone. Welcome to the call. We appreciate your participation as we review our results for the fourth quarter and full year of 2015. As Denny mentioned, we have posted the accompanying presentation slides on our website. I will first begin with a brief summary and then comment on our performance. William will follow with a review of the quarter's financials. I will then wrap up and take some questions. The fourth quarter was marked by the steady decline in oil prices, beginning in November. The downward trajectory, which has continued, has caused nearly all of our global customers to curtail their spending plans. We saw our own Lower 48 rig count erode as we approached the end of the year. While the fourth quarter was certainly challenging, our results demonstrated the value of our global drilling franchise. For the fourth quarter, Nabors generated EBITDA of $223 million. Revenue was $739 million. Despite these market headwinds, our operations generated free cash flow, including working capital and after capital spending and dividends, in excess of $100 million. Results in our Lower 48 drilling business improved sequentially. That increase was due to a shift in mix towards higher margin rigs, the impact from customary year-end workers' comp and health insurance true-ups, and lumpsum early termination revenue. Results in our International business declined. Primarily, this was due to a modest reduction in rig years and some negative items after several positive items which occurred in the third quarter. Total revenues for the quarter were down 13% sequentially. Nabors' worldwide rig activity declined to 223 rig years from 242 rig years in the third quarter. Adjusted EBITDA was down 10% sequentially. Given the current market conditions and our outlook, we impaired the value of several assets in the fourth quarter. The most significant of these were the International and U.S. Drilling segments. William will discuss these items in more detail shortly. For the full year, EBITDA totaled $1.1 billion. Revenue was $3.9 billion. These totals represent significant declines versus last year. Results were most impacted in our Rig Services, Canada and Lower 48 operations. These declines were partially offset by EBITDA increases in our Alaska and International businesses. During 2015, we achieved the best safety record in the company's history. Our safety incident rate was 0.82. That accomplishment is a credit to our rig crews around the world. 91 of our rigs operated in 2015 without an incident. 52 of those units have completed two years incident free. We are justifiably proud of this record and we continue to pursue Mission Zero, our ultimate goal of zero recordable incidents. In addition to the safety record, during 2015, we had several other noteworthy accomplishments. First, we completed the merger of our Completion and Production Services operation with C&J Energy Services. Second, with the proceeds from the transaction, internally generated cash flow and the new term loan, we decreased total debt by more than $675 million, and returned nearly $170 million to shareholders in dividends and share repurchases. Third, we deployed eight PACE-X rigs in the Lower 48 market, six X rigs to a customer in Latin America, and three very large rigs to Saudi Arabia. Finally, we were free cash flow positive in 2015. I would now like to share our view of the market, our strategies to manage in the current market and the near-term outlook. From the start of the quarter and through November, the price of WTI ranged roughly between $40 and $50. December saw the price drop below $40. Since the New Year, the price has ranged between $27 and $35. The downward trend since the beginning of November has caused our global customer base to rethink spending plans. The Baker Hughes Lower 48 rig count has already responded. Operators dropped rigs for the last eight weeks, including a 47-rig plunge in the first week of February. The Baker Hughes International rig count outside of North America is down approximately 8% since September. With that backdrop, let me next outline our view of the future. Rig activity and pricing will remain pressured as long as global oil production exceeds demand. Given the decrease in rig count and cancellation of large offshore projects, declines in existing production are inevitable. The timing of these trends is uncertain, but we believe they are coming. Offsetting these reductions in supply are concerns about global oil demand as well as the strength of the U.S. dollar. These factors could push rebounding oil prices further out. On our earnings call in October, I mentioned the impact of commodity prices on operator cash flows and the potential for decelerating drilling activity going into 2016. The recent drop in oil prices below $30 makes economics more challenging worldwide. This deterioration will likely continue through the second quarter, given the prospect of borrowing base redeterminations. Reductions in available capital will pressure the rig count further. The only good news is that cuts in spending by operators reinforce our confidence in the eventual rebalancing of the market. Now, I will discuss the outlook. Our near-term visibility in this market remains severely limited. We remain focused on customer objectives. We recently surveyed approximately 25 Lower 48 customers, representing 35% of the rig count. In the next six months, one customer expects to increase activity, five are flat, and the rest are down. The survey indicated approximately a 25% drop in rig count over the next six months. In international markets, customers are challenged by the current environment. The number of customers expressing interest in increasing rigs is negligible. Others are reducing activity. We see pricing pressure across all markets. With that backdrop, I will now make a few more specific comments for our larger businesses. In the Lower 48, our rig count today stands at 57 rigs, including six rigs on rate. We exited the fourth quarter at 68 rigs total, including six stacked on rate. Of the 68 at the end of the quarter, 40 rigs were working on term contracts. For the first quarter, our rig count could average in the mid-50s and exit the quarter somewhat below that range. We also expect the first quarter average daily margin to decline below the $7,000 level. For our International segment, rig years totaled 117 in the fourth quarter. Given current trends and our outlook, we could drop by as many as 10 rigs in the first quarter. However, our daily rig margin should improve by as much as $2,000 per day. Primarily, this results from a positive shift in rig mix. Bear in mind, we enter 2016 with nearly $3 billion of total contractual revenue backlog in our International segment. 2016 constitutes over 40% of that amount. To summarize, several factors could further impact our results in the coming quarters. First, lower commodity prices are impacting activity and pricing in all markets. We expect activity declines in our largest segments, as well as continued pressure on pricing. Second, the drilling market in Canada remains depressed. Break up has arrived early. We expect only a modest increase in rig activity in the first quarter versus the fourth quarter. Third, in our International segment, activity is likely to decline sequentially. A positive shift in mix could support rig margins and EBITDA in the first quarter. Next, I will discuss the strategies we have adopted to navigate through this environment. First, for the full year 2015, we reduced G&A spending in our existing businesses by approximately $85 million. The annualized run rate in the fourth quarter was approximately $280 million. In the fourth quarter alone, our aggressive actions achieved an annualized reduction of over $40 million versus the $30 million target we laid out last quarter. Based on the annualized fourth quarter run rate, we should be more than $50 million better in 2016 than in 2015. We are targeting even lower spending than that in 2016. In the fourth quarter at the rig level, we realized daily cost reductions on our AC rigs of approximately $300 million, and we continue to work with our vendors to further optimize our supply chain, targeting an additional $100 million annually. Second, we have constructed a portfolio of additional revenue opportunities which we are mobilizing in the Lower 48 market. Our objective is to realize incremental revenue on our Lower 48 rigs as well as an advantage in the market. We are in the process of full scale marketing of these services on Nabors' rigs with the goal of enhanced penetration. Even in this market, customer response to our enhanced portfolio has been favorable. Third, our investment in new technology continues at prudent levels. We have completed construction of a new generation rig. The rig is designed to be both fast moving and pad capable. It targets both the U.S. and international markets. This rig incorporates several new features, including a new control system, which includes an integrated PVT instrumentation system, normally provided by third-parties such as Pason and NOV. Sensors, decoding and display is integrated into the rig to make the rig MWD ready, using Nabors' tools. And finally, the rig is designed to move in two days or less. We anticipate a formal unveiling shortly. Particularly given the downturn, our strategy to improve technology is even more important in our view. Fourth, we remain dedicated to our stewardship of the company's capital. Our target is to remain free cash flow positive. During 2015, free cash flow defined as EBITDA less interest, less CapEx, less dividends, was positive. For 2015, capital spending for our current portfolio of businesses finished below $800 million and $100 million below the forecast we made from the first quarter. At this point, our targeted CapEx for 2016 is less than $500 million, at approximately $475 million. This should be accomplished through both lower maintenance spending and less newbuild activity. In 2016, our planned newbuild programs scaled down significantly. Apart from contractual CapEx, we currently plan to build approximately two PACE-X rigs and three of our new design rigs, which total approximately $40 million. Finally, we are committed to operational excellence. We have invested in a state-of-the-art, 24/7 Remote Operations Center to support rig operations, performance tools and Canrig products. We have used the downturn as an opportunity to high-grade field staff. Improved safety and operational performance are ongoing focuses for us. This concludes my outlook comments. Before I turn the call over to William for his comments, I will address one other topic. We are focused on our balance sheet, financial strength and liquidity. We took several steps during 2015 to bolster our financial position, most notable were the extension up and upsizing of the revolver and the addition of the term loan. Capacity on our revolver is $2.25 billion. The rate is LIBOR plus 125 basis points. The maturity date is July 2020. The only financial covenant on the revolver is a 60% net debt to total cap ratio. As I said, we had a goal in 2015 for the drilling operations to generate free cash flow. That's after the payments for interest, cash taxes, CapEx and dividends. On this basis, we achieved positive cash flow. Our near-term debt maturities include $350 million later this year and our next maturities are in 2018. We currently have no balance on our revolver credit line. Of all our debt, the revolver and term loan are subject to, as I said, a 60% net debt to cap covenant. This is the only financial covenant in our entire debt structure. It is our intention to maintain free cash flow neutral or better performance in 2016. We have several levers, which we can utilize to help us achieve this goal, while we advance the state of drilling technology. We believe we have adequately prepared the company for this market and have sufficient sources of liquidity in place. This concludes my comments. William will now review the quarter's financial results in more detail and provide additional thoughts on the outlook.

Thank you, Tony. And thanks everybody for joining us today. The net loss from continuing operations attributable to Nabors for the fourth quarter was $161.9 million, or $0.57 per share. Excluding asset impairments related to the current market downturn equal to $101.2 million after tax, the net loss from continuing operations was $60.8 million, or $0.22 per share. This compares to an adjusted net loss of $40.8 million, or $0.14 in the third quarter. Included in the fourth quarter loss was our share of C&J's earnings with a one quarter lag. In effect, a loss of $45.4 million, or $0.16 per share, as compared to the C&J loss we recorded in the third quarter of $35.1 million, or $0.12. Our core businesses excluding impairments and the impact of C&J delivered a loss of $0.06 per share as compared to $0.02 in the third quarter. The industry environment continued to deteriorate in the U.S. market beyond what we had anticipated at the end of the third quarter. This deterioration affected the marketability of our assets and required additional impairments in certain categories. These impairments of $123.6 million pre-tax, affected predominantly our SCR rigs in the Lower 48, certain jack-ups in our Canadian rigs and Canrig's inventories. Continuing with our results, revenue for the quarter of $739 million decreased by $109 million, or 13% sequentially. Revenue in our International segment decreased sequentially by 13%. During the fourth quarter, two of our platform rigs in Mexico went off rate as previously anticipated. Our revenue in the North American drilling market fell by 15%, driven primarily by the 13% fall in rig count, and weaker pricing in the Lower 48, although the revenue per day held up well as a result of a more favorable mix in our working rigs. The Canadian high season which normally builds up following the seasonal break up has generally been disappointing. Our drilling activity improved seasonally during the last two quarters. However, that increases were muted and certainly without the strength we have seen in more normal years. In fact, we have experienced a sequential reduction in drilling rigs during the fourth quarter. Consolidated operating income dropped sequentially by $15 million to a loss of $8 million. Despite the current market conditions, we reduced costs significantly in the North America land drilling markets. Our operating income improved materially. As a result of our sustained efforts on cost reduction in SG&A, as well as in North American direct costs, our sequential detrimental margins at the operating income level were 13.6%. And a $109 million quarterly decrease in revenue will reduce direct costs by $73 million and SG&A was cut by $11 million. Our EBITDA for the quarter of $223 million fell by $24 million or 10% as the reduction of $26 million in international was partially offset by improvements of $2.5 million in Canada. U.S. EBITDA was essentially flat. I will now cover the key performance metrics from the fourth quarter. First, the U.S. Drilling business. The quarterly average Baker Hughes land rig count declined by 109 rigs or 13%. Our own Lower 48 rig years declined to 78, also a 13% decrease. Daily gross margin in the Lower 48 increased to $10,277 from $8,609 in Q3. However, the 4Q figure includes a small amount of early termination of revenue for an approximate impact of $200 per day. Further, the 4Q figure includes year-end savings related to worker comp and vendor rebates. Adjusting for these categories, the comparable daily margin was approximately $90 to $100. The normalized sequential increase of about $600 per day was attributable to direct cost reductions and to a shift in the revenue mix toward higher margin rigs, namely our PACE-X and PACE-B units. Average rigs tacked on rate during quarter declined sequentially by just under two rigs. Although rig mix continued to shift in a positive direction, term contract rollover across classes will compress margins. In the first quarter, we anticipate a reduction in drilling margins of up to $2,500 per day versus the normalized 4Q margins. Utilization in the Lower 48 continues to vary significantly by rig type, with the highest utilization in our most capable rigs. At the end of the fourth quarter, 75% of our PACE-X rigs were in revenue, the highest utilization rate for any of the rig categories. In Canada, the normal seasonal ramp was dampened by the severe contraction in drilling overall. The end of the year shutdown in activity commenced much earlier than usual, and our rig count declined sequentially by almost three rigs, with our daily margin improving by $3,100 to $9,400 per day, as a result of cost actions and some short fall payments in the fourth quarter. In our international segment, fourth quarter rig count totaled 117.5 rig years, down from 121.3 rig years in the third quarter, translating to a 3% decrease, less than the decline we anticipated a quarter ago. Average daily cash margin in the international business narrowed by almost $2,300 to $16,300, principally reflecting the absence of several positive revenue items. We expect the first quarter margin to increase somewhat as rig count continues to decrease. Rigs coming off tend to generate lower than average margins. In terms of cash generation, as planned, we remained cash flow positive during the fourth quarter. Our net debt fell by $65 million to just under $3.4 billion. We've reduced total debt by approximately $67 million during the quarter and ended the year with no utilization on our $2.25 billion revolving credit facility. Despite a difficult operating environment in the U.S., we continue to focus on our initiatives to remain free cash flow neutral. First, we retained strict control over our capital spending. For the fourth quarter, capital spending totaled $132 million. For the full year, we spent $782 million in our drilling businesses plus our corporate investment. For 2016, we are targeting capital spending of just south of $500 million. Half of that amount is for maintenance CapEx and the remainder for contractual newbuild commitments on international awards, a commitment to deliver a newbuild rig in Alaska, and the completion of newbuilds for the U.S. market. Second, during 2015, as we promised our investors, we reduced our G&A by $90 million year-on-year and by more than $100 million as compared to the annualized run rate of the fourth quarter of 2014. Both comparisons exclude the favorable impact of the divestiture of the C&P business. These reductions comfortably exceeded the targeted cuts we had promised our investors. We are now deep into the second run of G&A expense reduction. In the fourth quarter alone, G&A expenses declined by $11 million and we are targeting a further $20 million annualized reduction from the current level. Third, the largest reduction in activity has taken place in our Lower 48 operations. We remain focused on aligning direct operating costs with activity levels, and we continue to reduce field staffing in line with activity. Also, during the fourth quarter, we bought back debt with over $27 million of face value. We intend to continue buying back predominantly our near-dated senior notes, particularly if prices continue to weaken. Looking forward, with prospects for a continued unfavorable environment, we remain focused on generating free cash flow through 2016. We have not underestimated the severity of the downturn in the U.S. and we remain vigilant. Our current rig count in the Lower 48 is already down nearly 20% from the 4Q exit rate. We expect further decreases for the remainder of the quarter. Although we cannot control the most significant driver of demand for drilling rigs, namely oil prices, we have multiple levers we can apply to stay free cash flow positive during 2016. We have already reduced our planned CapEx by over $300 million versus 2015. We will continue to align our overhead to the new reality by implementing additional reductions if needed. We'll continue to work with our vendors to further reduce our costs. And we will remain vigilant on our activity levels to ensure we keep the direct costs on our rigs in line with the anticipated activity levels. With that, I will turn the call back to Tony for his concluding remarks. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Thank you, William. I want to conclude my remarks this morning by restating the four elements which comprise the backbone of our operational strategy. As this downturn intensifies, they become increasingly important. First, capitalize on the existing asset base. Nabors has a worldwide fleet of over 400 rigs. One of our goals is to leverage that fleet and our expertise into revenue and ultimately earnings. Second, differentiate our service offering. We are adding complementary services to our traditional rig offering. In many cases, we are replacing third parties on the rig. As I mentioned, we have completed the first unit of an innovative new model rig and we are continuing to develop advanced rig components. Third, improve operational excellence. The metric I am most proud of is our safety record. We are working diligently to improve on the safety record set in 2015. In addition, operationally, we're tracking a number of key performance indicators, or KPIs, with our customers through our remote operations center to improve operational performance. Finally, enhance our financial flexibility. In the current market, our focus is to preserve capital and liquidity. We're taking effective steps to do that. That concludes my remarks this morning. Thank you for your time. With that, I will take your questions.

The first question comes from Marshall Adkins of Raymond James. Please go ahead. J. Marshall Adkins - Raymond James & Associates, Inc.: Good morning, guys. First of all, thank you for the frank comments about the industry outlook, and my first question is just a little clarification. I believe you had mentioned all the stuff leads you to roughly a guess of a 25% reduction in rigs from here. Just curious, what base are you going off of? Like the most recent week where we're at 540, or is it a higher average? Or maybe easier to answer is, how low do you think we get on the rig count, given what you know today? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yeah. I mean, when we did the survey of the customers, everyone has a slightly different starting point. So I would say people, the numbers – conversations were had in the latter weeks of January, so that kind of number is where I started from. So from today's count, it would imply something, at least another 10%. But also bear in mind that 35% of the people we surveyed are probably amongst the stronger people in the marketplace, and if borrowing base redeterminations occur, it could get worse. So that should give you some sense of where we are. J. Marshall Adkins - Raymond James & Associates, Inc.: Makes sense and I would agree. Second question I have is really the broader issue of labor, This is as bad as I've seen it in this industry, and I've been doing it a long time; obviously wages are getting whacked, people are getting whacked across the board. How hard is it going to be to re-attract those people to the business, and are you going to need a pricing increase before you put more rigs to work and more people to work? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Well, as you know, this is our – probably at least my fourth or fifth rodeo, and one of the things we pride ourselves on in Nabors is the ability to actually deal with this on the ramp-up. I would say it's progressively harder, given the advent of other industries and us being so out of sync now with other industries where people are leaving, it's really hard actually on office staff, where everybody from IT to accountants all have other alternatives in other industries. In the field, I think we have been able to manage it and one of the things we've done here, we've been real careful about how we've gone through all this contraction. So we really have high-graded. So our crews, our rig crews are really staffed by the best of what we had. We've pushed down people, which actually has affected unfortunately their compensation, but they have jobs and on an upturn basically those people will form the core of new crews and then they'll have to be supplemented by newcomers into the industry. I think we'll have to do a lot more effort on how to bring people up on a training scheme. Nabors I think is amongst the leaders in terms of training centers. We have several training centers in the country, throughout the country, staff with actual drilling rigs in the actual yards. And so we have an infrastructure, we have all the training material, ready to turn that all on if the upturn occurs. But it will be hard and – but I think we are well prepared for it. J. Marshall Adkins - Raymond James & Associates, Inc.: Any guess on what rig count level that becomes an issue on the way back up. Is it 800 rigs or 1,100 rigs? Anthony G. Petrello - Chairman, President & Chief Executive Officer: I wouldn't want to guess right now. J. Marshall Adkins - Raymond James & Associates, Inc.: Okay. Thank you. It's been very helpful. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Thank you, Marshall.

The next question is from Jim Wicklund of Credit Suisse. Please go ahead. Jacob A. Lundberg - Credit Suisse Securities (USA) LLC (Broker): Hey guys. This is Jake on for Jim. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Hi. Jacob A. Lundberg - Credit Suisse Securities (USA) LLC (Broker): I Guess first is to start off, could we get some color around what spot market day rates look like today? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Sure. Let's see here. So, obviously they vary by class. I would say that the super premium rates are in the mid to upper teens and rates range below $15 for older legacy rigs. And as for pricing pressure, if the industry rig count declines, the market clearing price will follow suit. I will describe the prices as steady but certainly not in freefall and so that's probably how I'd characterize it right now. Jacob A. Lundberg - Credit Suisse Securities (USA) LLC (Broker): Okay. And then continuing on that, what sort of spot market day rate would you need to see to consider building, starting a newbuild against a term contract? And then kind of along the same lines, maybe premature to think about already, but what metrics do you look at or how do you guys think about pricing power in a recovery? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Well, I think in the mid-20s basically would be a rate we'd like to see for newbuilds against the contract that would ensure us an adequate payout. We'd like to build with a target of three-and-a-half year to four year cash payout on investment that translates into a high-teen return. If everything works out the right way, so that's kind of our metric. And what was the other part of the question? Jacob A. Lundberg - Credit Suisse Securities (USA) LLC (Broker): Just what do you guys look at to trying to get a sense of pricing power in a recovery? Is there a certain number that you would look to see, say, okay, we'd probably be able to go out and get some price at this point? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yeah, sure. Typically, I would say, if you look back historically when utilization in a class of rigs starts to hit 75%, 80%, that's when the pricing starts to accelerate. So, we'd look for base utilization and certain classes hit that level then you'll start to see pricing power. Jacob A. Lundberg - Credit Suisse Securities (USA) LLC (Broker): Okay, great. And then if I could for follow-up. In the U.S. business, what percent of utilization days or years in the fourth quarter were on term versus in the spot? And then if you could provide any color on the cadence of rigs rolling off contract in the U.S. over the next year or two? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yeah. I think that kind of detail you need to follow-up afterwards. On the term, I would say that by the end of the first quarter, we'll be in the low 30s in terms of contracts on term and we declined by about 6 rigs per quarter through the end of the year. So we'll finish at about sub-20. At January 1, the count was 40 rigs on term. Jacob A. Lundberg - Credit Suisse Securities (USA) LLC (Broker): All right. Dennis A. Smith - Vice President, Corporate Development & Investor Relations: Assuming we don't sign any term contracts... Anthony G. Petrello - Chairman, President & Chief Executive Officer: It assumes nothing gets signed. It's in the pipeline right now. Jacob A. Lundberg - Credit Suisse Securities (USA) LLC (Broker): Okay. Great. Thanks, guys.

The next question comes from Chase Mulvehill of SunTrust. Please go ahead.

Hey, a couple of real very quick questions. I guess on the first one, follow-up on the Lower 48 term coverage. So if I do the math right and you got roughly mid-30s contract coverage for 1Q. And you know assuming that you're getting $11,000 or so a day on your term contracts, that implies about a breakeven contribution margin for the spot rigs. Is that what you're assuming to get your sub $7,000 per day gross margin? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yeah. I think what we're assuming is that, first of all, when we roll from the fourth quarter, there's certain adjustments you have to make out of the box like taxes and the FICA as well as some workers' comp benefits in the first quarter. And that alone out of the box is about $1,500 a day. And then the question really is, how much deterioration is there in the gap between the term coverage and the spot rates going forward. So, that number we talked about represents – the conservative guess is how much that decline is going to result as the spot rates continue as a portion of the overall mix of rigs. Dennis A. Smith - Vice President, Corporate Development & Investor Relations: The spot rigs are not at zero margin. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yes.

Okay. All right. I will have to run back, do the calculation. And then – so thinking about your commentary around positive free cash flow, can you confirm that this does not include any benefit from working capital or taxes? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yes, sir I can.

Okay. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Taxes, when I say free cash flow, I'm including cash taxes as a cash outflow. So, in other words, I want my free cash flow to cover basically my CapEx, my interest expense, and my cash taxes, and my dividend.

Right. And so, doing the math on that implies – am I getting this number right, a targeted EBITDA of roughly $750 million for this year? Anthony G. Petrello - Chairman, President & Chief Executive Officer: That's the range. You can do the math.

Okay. All right. I just wanted to confirm that, make sure I wouldn't miss anything. All righty, I'll turn it back over. Thanks, Tony. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Thank you.

The next question comes from Ole Slorer of Morgan Stanley. Please go ahead. Ole H. Slorer - Morgan Stanley & Co. LLC: Hi. Thanks a lot. And, yeah, so much focus is clearly on the balance sheet at the moment. So, just to clarify. So, you have $1.2 billion of maturities through 2018, which should be no problem in context of your $2.25 billion availability on your revolver. You said there are no covenants on that revolver other than 60% debt to cap. So, if you get downgraded from the current BBB minus, there's no impact on availability of the revolver. Is that correct? Anthony G. Petrello - Chairman, President & Chief Executive Officer: It's correct. That is correct, sir. Ole H. Slorer - Morgan Stanley & Co. LLC: Okay. Thanks. Just wanted to clarify. So, there should be quite a big financial safety net if the interest rates should turn out a little bit worse than what you're modeling here in your base case for 2016? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Well, I'm modeling a case where hopefully I won't have to use the safety net at all in 2015, that's my mission. So, I guess, what I'm trying to emphasize is even if I do need it I have a pretty large safety net. Just anecdotally, I'd tell you that all the colleagues in every investment bank have been walking around interviewing people about how to shore up balance sheets and I cannot say that everyone that's coming to see us, they're struck by the amount of liquidity we have relative to the size of company we have. No one frankly can believe the amount we actually have. So to their chagrin, because that makes the opportunity for them to enhance is pretty difficult. So we're pretty pleased to go back. Last year when we're commenting on what we're trying to do, we took those steps to shore it at a time when we clearly didn't it and it was well received and we have pretty supportive bank group behind it. Ole H. Slorer - Morgan Stanley & Co. LLC: I'm glad, really did a good job then, Tony. On the new generation rig, could you talk a little bit about what exactly it is that you are trying to achieve? Sounds like you're trying to bundle more of your technology to be sold in parallel with the rigs. A little bit more about what's the CapEx, what is the improvement, and what goal do you have in terms of the technology upsale? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Well, let me – this is not the time to do the unveiling. So it's going to be – there'll be a rather significant unveiling during the next couple of months sometimes we're getting ready for it. The points I mentioned, by the way, were not really the – actually killer aspects of the thing. They were more meant to illustrate three concepts. The first concept is that new rig will integrate more services around the well site and there'll be a delivery platform for that. That was a reference to the PVT. The second concept is the new rig will integrate down hole technology into the surface for optimizing drilling. That was the comment referring to the fact that directional drilling equipment – those conventional directional drilling brings out to a site is already integrated into the rig including the coding for our own tools. And the third thing, which is the move time is meant to say that we still have as an overall driver to create a cost value proposition for the operator that actually improves its cost curve. So that's the thinking that's going into the rig. When the rig comes out of the market, I think you'll see a whole bunch of pretty exciting features and that they will be part during the next three months I think. Ole H. Slorer - Morgan Stanley & Co. LLC: Thanks for that. Look forward to that. I'll get back in queue. Anthony G. Petrello - Chairman, President & Chief Executive Officer: We're not unveiling all the other tweaks yet, Ole. Ole H. Slorer - Morgan Stanley & Co. LLC: It sounds like somebody else out there is trying to do it at the moment. I look forward to comparing. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Okay. Thanks.

The next question is from Jud Bailey of Wells Fargo. Please go ahead.

Thank you. Good morning. Wanted to ask about the international market commentary. I guess, first of all, the increase in margin per rig day from 4Q to 1Q, does that include any type of renegotiation for lower rates like you did earlier in 2015, or is that assuming all your contracts under current terms stay in place? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Well, we had a fair amount of ups and downs in the fourth quarter, which I think account for some of the margin deterioration you saw. Just to give you an idea. I think we had 11 rigs go down and four rigs come up. And our current view for the estimate of the first quarter is a result of post that, the margin mix, and what we have left are pretty good margin, returning us back to the pre-fourth quarter level. That's basically the thinking. And it accounts for what we see right now. As we look out – obviously, the visibility is low. On the other hand, we do have a very substantial contract backlog and we have a pretty good market position here. So we're pretty comfortable, at least looking at the first quarter that that's going to be where we end up.

Okay. Thank you for that. And then, I guess, just looking beyond the first quarter in terms of – for the international markets for both your rig count and margin per rig day, as contracts roll, can you at least help us think about contract mix in the context of how to think about your margin per rig day for the balance of the year as more rigs come off contract and others presumably may start up? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yeah. Well, I think we've said – we've indicated we thought there's about a 10% drop in rig count going into next year and maybe over the course of the year. It really depends on how much more this macro climate continues. Obviously, the lines of communication are open to all the NOCs, they know what's going on in the U.S. and they're feeling their own pressure and there's constant price pressure, et cetera. I don't see the kind of clear scenario that you have in North America occurring international, so there could be some gradual further deterioration, but we don't see anything at the moment falling off the cliff anywhere.

Okay. And does margin in that scenario, does margin per rig day then start to trend down in the back half of the year? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Well, I think, like I said, the current visibility is at the level that we talked about and maybe over the course of the year depending on how the macro effects and what the success is, there could be some pressure. But again, there's nothing in stock right now that materially takes that off of cliff either.

Okay, great. Thank you.

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

Good morning. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Good morning.

I want to stay on the international side, just following up the last line of inquiry. If you can provide any additional color on the levers that you can pull on the international side, help offset potential rate deflation, either via the concessions or contract roll? I know you guys have exited some countries and are relooking at your footprint. I'm sure you're looking at things at the rig level. But what levers are out there that you can pull to try to offset the rate deflation? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yeah. Well, the kind of effort that you see we've put into our corporate infrastructure, that's one of our targets in this year to do the same thing internationally. Internationally, it's orders of magnitude more complicated because you have operations in more than 20 countries and to optimize – there's only so much you can optimize in each individual country, so you have to look at other ways to optimize across a region, et cetera, but taking more costs out of that system is high priority. The other issue is with our new reorganization, we have much more clear visibility as to our global asset base. And so reductions in maintenance costs and sustaining capital is a high priority for us. That's in part reflected in the numbers we've now quoted you for our CapEx objectives for the year. And similarly, the same thing on inventory, is to consume as much for what we have in our pipeline, floor (46:11) down as much as that, again with the view of saving cash. The vendors we've hit pretty hard in North America. I think we're also trying to figure out which vendors internationally we can make participate in the pain. And so there are a bunch of things in the process that we're focusing on, all with the goal of trying to ameliorate any further deterioration that we think could happen.

Got it. And then turning to CapEx, I think you mentioned that half of the CapEx this year is maintenance. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yes, sir.

As we think about next year, and I know it's a little early to do so, but when you think about 2017, do you have any International CapEx commitments above and beyond maintenance, or can we think about the other half of CapEx, anything beyond maintenance next year being at your discretion? Anthony G. Petrello - Chairman, President & Chief Executive Officer: I think there's just – yeah, just one project in Kazakhstan...

Unfinished in Kazakhstan. Anthony G. Petrello - Chairman, President & Chief Executive Officer: But we kind of stopped, maybe by some read of (47:08) Kazakhstan into the – early next year, but other than that there's nothing really committed.

Any color on the size of that impact?

It's a rounding error. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Perfect.

For 2017?

Yeah.

It's sub $10 million (47:26). Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yeah.

It's exact by the way. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yeah.

If we finish on time, it should be zero. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yeah.

Got it. Thank you.

The next question comes from Marc Bianchi of Cowen. Please go ahead. Marc Bianchi - Cowen & Co. LLC: Hey, guys. On the International side, you've got, it sounds like, a few rigs rolling off, perhaps mix improving there, but can you talk about sort of where the mix will be once everything sort of resets for what you can see right now in terms of geographic exposure? I think also, you've mentioned in the past that a large portion of what's working in the Middle East is going after natural gas. Just curious to hear some mix exposure there, if you can. Anthony G. Petrello - Chairman, President & Chief Executive Officer: I think the basic mix continues, but Siggi, you want to add some color on your... Siegfried Meissner - President, Global Drilling Operations & Engineering, Nabors Industries, Ltd.: Yeah, I think the stronghold is parts in the Middle East and again gas, a lot of gas drilling is the dominant part. That's, I think, we're going to see the ongoing activity... Algeria, North Africa of course. So we continue in those strong markets. The markets we have good stronghold right now is where we continue. Marc Bianchi - Cowen & Co. LLC: Okay. So then is it fair to assume that the rigs that are rolling off are South America? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Well, there are oil rigs in the Middle East as well. So I think the higher margin ones are gas rigs, but we do have some oil rigs. And so some of those are at risk (48:56). But yes, in South America, probably percentage-wise, the strain is greater in... Siegfried Meissner - President, Global Drilling Operations & Engineering, Nabors Industries, Ltd.: There are some small rigs coming off in South America. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yeah. Siegfried Meissner - President, Global Drilling Operations & Engineering, Nabors Industries, Ltd.: And then some of these project rigs like Kyrgyzstan, things are coming to an the end, right? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yes. Siegfried Meissner - President, Global Drilling Operations & Engineering, Nabors Industries, Ltd.: So that's where you see the drops. But in the core markets, we really don't see a big change. Marc Bianchi - Cowen & Co. LLC: Okay. Okay, great. Maybe just back over to the U.S. and the cost decrease that you mentioned, the direct cost decrease, have you guys been able to reduce labor costs at this point? And that's something, talking to a lot of the other companies in the industry, they were really reluctant to address that because of concerns of losing their crew, but just curious if maybe this is the beginning of starting to address that cost bucket?

So what we meant by reductions in costs, we tweaked our accruals on some of the burden, where we realized we were over-accruing. And also, versus the third quarter where we were actually expecting an increase in activity that then disappeared when the oil prices headed back south, we had some excess labor that we addressed in the fourth quarter. So that's what we meant by reductions. We have, again, looked at things like overtime and some of the 401(k) benefits. We have not touched the salaries of employees at this point. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yeah, I mean, we have touched – in certain segments, specific segments, there has been some salaries touched, but generally there's been no total wage scale reduction for the people on the rigs. As we have said, the rotation schedule, we play with rotation schedule which does affect over time, and we've also played with the add-ons. There's a bunch of add-ons that's these guys earn. Siegfried Meissner - President, Global Drilling Operations & Engineering, Nabors Industries, Ltd.: Really focused on head count management (50:50). Anthony G. Petrello - Chairman, President & Chief Executive Officer: So we've focused on that as well. So yes, we're chipping away at it, but we haven't – a lot of these guys, a lot of the best guys have already taken pay cuts because we've taken them and pushed their position down. So a specific guy has lost some income, if he was a driller and he got pushed down to another position; or a tool pusher, he got pushed down to a driller. And with the term contracts, I think a lot of people have been reluctant to make direct wage adjustments because that would just – it'd say you're neutral because it's all attached with the operator. So that's why no one's attacked it that way, so you're attacking from all of these different angles instead. Marc Bianchi - Cowen & Co. LLC: Sure. Understood. Thanks, Tony. I'll turn it back.

The next question comes from Waqar Syed of Goldman Sachs. Please go ahead. Waqar Syed - Goldman Sachs & Co.: Thank you for taking my question. William, you mentioned $1,500 a day or so pick-up in OpEx for beginning of the year kind of causes. In second quarter, does that cost $1,500 per day go down?

So that was – again, that was Tony's comment. No, it bleeds down over the year as people max out in some of those, for instance, Social Security, taxes and things of that nature, and health costs. A lot of those things bleed out as the year goes by. So that's why we do expect a fourth quarter to first quarter increase. That increase continues during the second quarter, Waqar. Waqar Syed - Goldman Sachs & Co.: Okay. And Tony, sorry about that, I didn't attribute the question to you, but could you highlight – provide us with some color on outlook for the offshore business and the Alaska business? Anthony G. Petrello - Chairman, President & Chief Executive Officer: I'll let Denny respond about Alaska. Dennis A. Smith - Vice President, Corporate Development & Investor Relations: Yeah. Alaska, we've seen, with the oil price drop a lot of cessation of some of the exploration projects and we've had a few contracts that were up for renewal in the field that are going down because of cost constraints. So we look for the rig count to get a little softer, probably down to about five rigs for the year. And rates will probably hold in pretty steady I think as most of the rigs are on contract. Waqar Syed - Goldman Sachs & Co.: Okay. And you do have one... Dennis A. Smith - Vice President, Corporate Development & Investor Relations: Sorry. Waqar Syed - Goldman Sachs & Co.: You also have one rig coming up, right, adding to the fleet? Dennis A. Smith - Vice President, Corporate Development & Investor Relations: Yeah. It won't be in effect till fourth quarter. Waqar Syed - Goldman Sachs & Co.: Okay. Dennis A. Smith - Vice President, Corporate Development & Investor Relations: It'll deploy during the third quarter via the barge to sealift, and then start up maybe September or October probably.

That will be a meaningful addition... Dennis A. Smith - Vice President, Corporate Development & Investor Relations: Yeah.

...by the way, very meaningful. Dennis A. Smith - Vice President, Corporate Development & Investor Relations: A very high spec rig, it's one of our arctic coil tubing drilling units. Waqar Syed - Goldman Sachs & Co.: Okay. And then for offshore? Dennis A. Smith - Vice President, Corporate Development & Investor Relations: Offshore, same story, it's pretty soft. Rates are now under pressure a little bit. I think probably this quarter things are probably pretty steady from where we're at, wouldn't you say, Siggi? And we're still working with the customer on exactly the resolution that they put, and so that may have some upside in the year, but it's not in our immediate forecast. Waqar Syed - Goldman Sachs & Co.: Okay. And then Tony, your investment in C&J, I see at the end of December based on the stock price was $300. Is it the book value of the investment as well?

The book value is based on historical costs and we have taken some impairments on that value. I think we're roughly around $400 million or so right now. Waqar Syed - Goldman Sachs & Co.: $400 million.

On the book. Waqar Syed - Goldman Sachs & Co.: Okay. And then do you have any view on how to protect your investment and how do you think about your investment in C&J?

No, we have – you need to keep in mind, we have two distinct management teams. We have to first of all focus on Nabors first, and I think the management team in C&J is quite capable and quite capable of protecting that investment. We will, of course, give them all the support – logistical, operational and marketing support that they want, but each team has to take care of their own house. Maybe Tony, do you want to comment? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Yeah. I think the only thing I would say is obviously we have a significant investment here and we're motivated to see C&J succeed. And as within any investment, we'll act in concert with them to see what's in the best interest of Nabors' shareholders to protect that investment. But beyond that, I don't really have anything else to say right now. Waqar Syed - Goldman Sachs & Co.: All right. Thank you very much. Thanks for the color. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Thank you. Dennis A. Smith - Vice President, Corporate Development & Investor Relations: Kate, given that we're approaching the one-hour mark, let's make this the last question please.

Okay. The final question will come from Robin Shoemaker of KeyBanc Capital Markets. Please go ahead.

Thank you. So I just wanted to follow up. You indicated that you had some small amount of revenue from early termination of contracts in the fourth quarter. Could you give us an update, and others of your competitors have reported more early termination notifications in the first quarter, either – and could you just update us on where you stand with regard to that on your U.S. and International contract early terminations? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Okay. We received approximately $1.5 million in the fourth quarter. We're only $200 per rig day. So it really wasn't significant in the delta you saw. That really didn't account for a lot of the increase. And at this point, we're not forecasting any lumpsum early termination payments in the first quarter. Our customers have chosen to stack rigs on rate rather than pay out lumpsum early terminations right now.

I see. So could you remind me how many do you have on stacked on rate currently? Anthony G. Petrello - Chairman, President & Chief Executive Officer: Six, that's six.

Okay, all right. That was my question. Thank you. Anthony G. Petrello - Chairman, President & Chief Executive Officer: Thank you, sir. Dennis A. Smith - Vice President, Corporate Development & Investor Relations: Kate, you want to wind up and close out the call? And ladies and gentlemen, thanks for participating. And then if we didn't get to your questions, feel free to call us any time or email us.

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