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

Good morning, everyone. Thank you for joining Nabors' fourth quarter 2018 earnings conference call. Today, we will follow our customary format with Tony Petrello, our Chairman, President and Chief Executive Officer; and William Restrepo, our Chief Financial Officer, providing their perspectives on the quarter's results, along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks, a slide deck is available, both as a download within the webcast and in the Investor Relations section of nabors.com. Instructions for the replay of this call are posted on the website as well. With us today in addition to Tony, William and myself are Siggi Meissner, President of our Global Drilling organization, and other members of the senior management team. Since much of our commentary today will include our forward expectations, they may constitute forward-looking statements within the meaning of the Securities and Exchange Act of 1933 and 1934. Such forward-looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time-to-time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may differ materially from those indicated or implied by such forward-looking statements. Also, during the call, we may discuss certain non-GAAP financial measures, such as adjusted operating income, EBITDA, and adjusted EBITDA. All references to EBITDA made by either Tony or William during their presentations whether qualified by the word adjusted or otherwise, mean adjusted EBITDA, as that term is defined on our website and in our earnings release. We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. Now, I'll turn the call over to Tony to begin.

Good morning. Thank you for joining us, as we review our fourth quarter and full year results for 2018. Before discussing the results, I would like to comment that 2018 was the year in which Nabors continued to make significant progress towards its longer term goal. We strengthened our U.S. fleet, which now counts about 100 superspec rigs operating at peak efficiency and attracting the most demanding customers. About 35% of our U.S. fleet has been contracted by majors. Our daily margins in the Lower 48 reached 9,400 in the fourth quarter with year-end exit rate approaching the $10,000 mark. In addition, the U.S. offshore and Alaska markets have started to recover with additional rigs working. In the Gulf of Mexico, the MODS 400 rig, the largest rig in our global fleet, commenced operations on its initial five-year contract. NDS delivered excellent results. We closed the year with $23 million in EBITDA, a $92 million annualized run rate, almost matching our goal of $25 million for the quarter. This run rate represents 83% growth as compared to the prior year’s fourth quarter. We are particularly encouraged by the successful integration of Tesco’s casing running business, the acceleration and the growth of our performance software, and the additions to our wellbore placement suite of downhole tools. In wellbore placement, we have established our AccuLine [ph] suite as a high-quality fit for purpose offering in the market, and we have had multiple successful commercial runs with our rotary steerable tool. And in the fourth quarter, we added logging while drilling capabilities with the targeted acquisition of PetroMar. Our automation initiatives have also made significant progress, specifically in tubular services and pipe handling. In addition, our Canrig robotic system delivered its first automated product to an offshore driller. International continues to meaningfully contribute…

Good morning. The net loss from continuing operations attributable to Nabors of $188 million represented a loss per share $0.55. Results from the quarter included $54 million or $0.12 per share after tax in net impairments and other charges, primarily related to our legacy rig fleet and other obsolete assets. Results also included a $52 million or $0.15 per share tax charge related to the establishment of a non-cash deferred income tax valuation allowance in Canada. The fourth quarter results compared to a loss of $105 million or $0.31 per share in the third quarter. The third quarter results included a $10 million charge after taxes or $0.02 per share under redemption of our 9.25% notes. Revenue from operations for the fourth quarter was $782 million, up $2.7 million from the third quarter. Our Global Drilling business was in line with the prior quarter as strong growth in the U.S. and a seasonal uptick in Canada fully offset the decrease in our international segment. U.S. Drilling revenue of $304 million, gained $30 million, an 11% increase, driven by strong expansion in the Lower 48 and offshore markets. International Drilling fell by $32 million or 8%, reflecting the expected reduction in Aramco high margin revenue following the expiration of Nabors rig contracts and subsequent renewal at lower day rates. Also, uncertainty about Venezuelan sanctions resulted in a temporary idling of three of our rigs. Drilling Solutions revenue of $66.8 million increased by almost $6 million, up 10% sequentially on higher activity in all product lines and cost reductions in our wellbore placement business. This increase was partially offset by an anticipated weak result in our Rig Technologies segment. Although revenue of $61.4 million was only $2.3 million below the third quarter, deliveries of rig components and aftermarket sales were materially short…

Thank you, William. I will conclude my remarks this morning with the following. Even as the energy markets endured a period of extraordinary volatility, Nabors business was stable. Our financial performance in the fourth quarter enabled us to make progress on our debt reduction goal. We remain focused on expense control and extracting the maximum value from our existing asset base. In the U.S. Drilling business, our Lower 48 fleet is top notch and second to none. We still have contracted upgrade deployments pending and the value we bring to the market is evidenced in growing demand from the industry's most exacting customers. Internationally, we have the best land rig franchise in the industry. We are capitalizing on our marketing success in 2018 with more deployments scheduled in 2019. There are discussions for additional rigs under way. We are well positioned for an upturn in pricing when the market further tightens. Our technology portfolio of performance software, downhole tools and automation is the most robust in the industry and offers a unique value proposition for customers. We are gaining momentum to fulfill our vision of the rig as the logical platform for drilling and drilling services necessary to deliver a successful well. Automation and true integration of both the surface and downhole from the core of our vision. At the same time, we continue to drive improvement in our current operations, which we expect to make progress on this year. That concludes my remarks this morning. Thank you for your time and attention. With that, we will take your questions.

[Operator Instructions] The first question comes from Ken Sill with SunTrust Robinson and Humphrey. Please go ahead.

Thank you. Good morning, guys.

Good morning.

So, the guidance on international is kind of flattish to better over time. What is the magnitude of the opportunities you guys are seeing in Argentina, Russia, and Middle East, and Kazakhstan, I mean how many rigs we are talking?

Well, in hand, today, as we said, we have six rigs. Those rigs were spread for Argentina, Algeria, Kazakhstan, two in Mexico and one in Saudi. In Argentina, the unconventional plays are very active and we have a number of customers looking at one to bring down Smart Tier 1 rigs down there. So the appetite I think is growing down there. Similarly, in Colombia, the market there is turning to exploration and for reserves and there is potential rigs as well required in there. So, I think both of those markets are looking pretty attractive. Russia, Siggi, you got the Russia?

Russia is really, I think the rigs that we have bring them back to work, the utilization.

And then, follow-up question. The $400 million of CapEx guidance for 2019, how much of that is going towards your traditional rig business and how much or kind of what's the magnitude of the spending for tools related to your drilling solutions business?

So, the way that breaks down is about $200 million to $225 million is sustaining and then the balance, 55% would go to U.S., 35% to international and the remainder to MDS and other things in Nabors, that's the way. So still relatively minor.

Okay. So that is going to start being additive, but it's not going to be a huge ramp this year though, given the current capital spend plan?

It will be similar to what we had last year, somewhere in the range of $30 million plus in that range all of that includes casing running, managed pressure drilling and of course well replacement.

Yes. On the rotary steerable tool, which we mentioned is now we've had some successful run. The goal is to build out a small tool there yet some more practice there and with the goal toward by the end of the year then ramping it up, but we don't envision spending a lot of capital this year to do that, but we want to prove the concept the gross margin the business case out and as I said, we've had really very good run so far.

The next question comes from Marshall Adkins with Raymond James. Please go ahead.

A quick first one, you mentioned that you intend to pay down $250 million of debt this year. Is it fair to assume that all free cash flow generation or is there something else going on there?

That's all free cash flow, Marshall. And if we can pay more, we will pay more, but we're going to be using generated cash flow and from time to time we use the revolver as well.

And then, on the survey you did. I'm just curious, I think most of us are modeling a further decline in the rig count going into the second quarter and it sounds like your survey suggests overall in the U.S. directionally we are still may be headed lower for a little while, but you expect your activity to hold up. Did I understand that correctly or could you just parse it out a little bit better?

We survey our top 20 customers Marshall, which is about 36% Lower 48 rig count and of that group, in terms of what they're saying for the year, they're looking at it a downward trend of maybe 2% to 3% on the rig count. If you parse the data on the top 20, there's two guys that have significant downturn, but actually there is a bunch of the guys planning increases. So when we look at that core of our customer base, that's it. Now obviously, our customer base, it's much more skewed to the large independents and majors. And so I don't think it's representative what's going to happen in the market as a whole, but it gives us some confidence and why we think our outlook our Lower 48 is very good for this year still.

One last quick one. Tony, the Venezuela thing, you were pretty clear on. I'm just curious. It looks like more and more every day where you are going to have regime change down there. How quickly do you think the industry can respond. You're one of the few countries that's still active down there. How quickly can the industry respond if indeed we have regime change to change Venezuelan production trajectory?

Well, I think speaking for Nabors, we're poised to jump in. So, as you know, we have a long history there. In the '90s we were, I think the largest, rig player in the in the country and it's been hampered for the past 10 years. So I think speaking for our point of view, we're able and ready to really scale quickly there. And I think the other -- I think it's a well established oil market. There's a lot of good people there. So I think if they get their act together and the government steps away and let the business people really focus, actually things can respond pretty quickly Marshall. I think that's the advantage Venezuela actually has. So it's an untapped potential right now.

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

William, how are you thinking about the potential to refinance the 2020s at this point, high yield rates are down, they are down to a level that's appealing to you. Do you think there is sufficient appetite in the market to pull the trigger on the refi?

I think we're always open to the possibility of refi. It's a matter of having the right windows. So I think in 2019, we will have several good windows to try to refinance 2020 and potentially in 2021. So we will be looking, we'll be watching monitoring the markets and we think we'll get some good pictures kind of heading our way over the next nine months or so.

And then, as you think about managing the CapEx budget, but also striving to enhance free cash generation, can you talk about how you think about CapEx going into the international market, how you think about what return or payback is needed on the international new build opportunities and major upgrade projects on the rigs operating abroad? Has that shifted here, how you think about balancing that?

That's a Tony question, but I can tell you -- what I can tell you is that we, in today's environment because we are being careful about our cash, we probably passed up on opportunities that we would have done in the past but that require a significant upfront investment from our part. So unless there's some attractive return on capital and upfront pre-funding for the time being, we're staying away.

I think, the point is within Nabors, we have all the business units now competing for capital and we're giving them as a target to try to subsidize as much as possible upfront capital as part of that decision process. So the hurdle is high, not only from an IRR or payback point of view, but also from an outlay of cash point of view and that's the pressure all the business units have and that's what we're kind of committing to right now to get us where we need to go.

Are you going to cap the CapEx essentially on a multi-year basis, I mean obviously maybe fluctuate a bit based on market conditions, but it sounds like you are really make the segments compete under our CapEx cap.

That's correct. I mean I think I was pretty clear in the press release, we have a target for this year and the target is to reduce net debt, you got to work backwards from that that puts the -- that creates the cap for the CapEx and we're pretty committed to make the try to fix. Obviously, if there is something, yeah. Go ahead.

Obviously we had a bit of multi-year it sounds like it's a multi-year philosophy now for Nabors, is that fair?

At least until we get to our leverage target.

Yes.

We're going to continue putting the screws on our every single cost in the organization including CapEx.

And you can see this past year's performance in terms of what we said when we do CapEx and where we ended up. So we're not just talking about it. We actually did it this past year. We actually came down quite a bit from where the Street thought we were going to be on a CapEx basis, which reflects what we have been doing this past year.

Okay. The next question comes from Chase Mulvehill with Bank of America Merrill Lynch. Please go ahead.

I guess first question if we can kind of come back to international and think about the daily gross margin. Can you maybe talk about where true cash daily gross margin is, it was in the fourth quarter and kind of compare that to GAAP and then how you expect that to unfold as we go forward?

So, in the fourth quarter, a lot of our pre-funded amortizing revenue is gone, we still have some pockets in Kazakhstan and other places, but it's the last -- the environment in last couple of years and the fact that we're being more cautious on our CapEx means that we haven't really taken on a lot of projects for large new builds that come with a lot of pre-funding associated with those contracts. So what you'll continue to see through 2019, absent some huge change in the environment where somehow clients allow us to take on more of those new build contracts with significant prefunding, you will see a little bit of continuing reduction in that amortizing revenue. What that means is that our conversion of EBITDA to cash flow is going to be improving through 2019. We already saw some of that in the fourth quarter, but we'll see an even more market trend next year. So, I think, the number is - really in 2019 is not really comparable to what we saw in the prior years, as the Saudi contracts in particular expired.

And then, kind of coming back to Lower 48 and just kind of thinking about your overall strategy here. How do you think about M&A versus kind of potential partnerships when you think about accelerating your fully automated and integrated approach to drilling, are you -- do you -- especially given your balance sheet, do you think about potential partnerships as we look forward?

I think, you can assume we're looking at all possibilities. I think, we believe we have probably the most robust portfolio of technology now to use the rig as a platform for services and anyway we can exploit that. We're not assuming we have a lock on the know-how work, obviously the financial resources to make that happen and therefore, we are looking at all kinds of ways to exploit that.

And the next question comes from Marc Bianchi with Cowen. Please go ahead.

Just back to the international side and appreciate that there was a little bit of a mismatch of EBITDA and cash flow on the margin there, but for what you're guiding to here in the first quarter as we progress throughout the year, would you say that that's the low-end on the reported EBITDA margin that we should see or do you see some further downside as more contracts kind of roll to where leading edges?

Are you referring to daily margin?

Yes.

On a per day. So I mean we are trying, there's a lot of moving pieces margin. We're trying to move a little bit more toward EBITDA. I think Tony commented…

Curious on EBITDA.

Yes. Tony and I are comfortable in saying that we think at least $400 million is the reasonable expectation for 2019 International EBITDA. And then when exactly does the margin per day bottom or not which month, it all depends on when the new rigs come in and some of those rigs are heavy hitters, so they can move the needle and so it's difficult to give you a specific number, but I think a good working number for EBITDA for 2019 is somewhere in the range of $400 million.

Okay. That's very helpful. That does show some nice improvement from what it looks like here in the first quarter. As over on the Lower 48 side, the commentary on high-end rigs sounds very good and pricing being stable with the high-end that it was that in the fourth quarter and it also sounds like you still have a number of rigs yet to kind of roll to that leading edge. So I was little bit surprised that it doesn't seem like there's a lot of upside to your outlook for margin over the course of the year. So I'm wondering if that's maybe related to risk to the lower end rigs that you're running having some pricing downside or perhaps it's just conservatism, maybe Tony, if you could talk through the outlook.

I think, actually you have both touched on two things a little bit of conservatism and in particular, but about we have rigs today about 60% of the rigs -- hold on one second. Yes, 60% have six months or less remaining term.

Six month and less and about 23 of those rigs had the potential for rolling up into higher day rates of couple of thousand dollars than where we are today, 23 superspec rigs have that potential. So there is that potential for further improvement in the system that does exist. So we're being cautious about the cost side. That's probably a reason that you're not seeing a more aggressive forecast. We are very -- we feel good about the pricing side of things, but at this point it's too early to take a guess on what costs are going to be doing through throughout the year, it's going to be some cost inflation and particularly in the second half of the year.

Okay. Well, thanks for that. I'll turn it back.

I feel that we are going to close to the top of the hour. We will go ahead and take one more question. And then, we'll wrap up the call, please.

Okay. Thank you, sir. The next question comes from Gregg Brody with Bank of America.

Thanks for the time, guys. Do you happen to have a SANAD cash balance for us?

A what?

The cash balance at the JV.

It's a moving target. We haven't disclosed that yet, but we are considering giving more information this coming year on the specifics of SANAD.

Got it.

But it goes up and down quite a bit. I mean, there's lot of inter-company transactions between our JV and remember that a lot of the rigs that are being used by SANAD today are leased back to Nabors. So that number changes quite a bit. It can go up and down by $100 million in a month.

So, when you're talking about your net debt reduction targets, are you including the cash from the JV when you talk about that. And how would we think about getting access to that cash over the next couple of years?

Well, the cash, the cash is it's going to be when we have excess within SANAD, there is a mechanism to clear it and but we also are clearing that for leasing contracts and other intercompany arrangements that we have. So, that cash can be clearly needed and we don't really need to clear at this point there, Gregg. So the cash that we are generating in the rest of Nabors is what we're using right now to pay down debt. If we need to clear cash from SANAD, we will do so.

Got it. But is that -- that's helpful. But, is the net debt reduction targets true, is that should debt reduction or is there a possibility that that includes cash that’s accumulating the JV?

No. It will be to that reduction, and we don't expect cash to accumulate within SANAD from the levels they are today.

Ladies and gentlemen, thank you for participating. And if we didn't get to your questions, feel free to just email us or call us with any questions you might have yet. Phil, if you want to wrap up the call?

Okay. Thank you, sir. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.