Good morning, and welcome to the Nabors' 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. Please note this event is being recorded. I would now like to turn the conference over to Denny Smith, Senior Vice President of Corporate Development. Please go ahead.

Good morning, everyone. Thank you for joining Nabors' Fourth Quarter and Full Year 2019 Earnings Conference Call. Today, we will follow our customary format, with Tony Petrello, our Chairman, President and Chief Executive Officer; and William Restrepo, our Chief Financial Officer, providing their 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 Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may vary materially from those indicated or implied by such forward-looking statements. Also, during the call, we may discuss certain non-GAAP financial measures such as net debt, adjusted operating income, adjusted EBITDA and free cash flow. All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA as that term is defined on our website and in our earnings release. Likewise, unless the context clearly indicates otherwise, reference to cash flow means free cash flow as that non-GAAP measure is defined in our earnings release. We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. Now, I will turn the call over to Tony to begin.

Good morning. Thank you for joining us as we review our results for the fourth quarter and full year 2019. Our remarks will follow the usual format. I will begin with comments on the market, our results and the outlook. William will follow with details and I will then wrap up. Now to the macro. During the fourth quarter, the price of near-month WTI averaged just under $57. This was essentially flat with the third quarter average. During the fourth quarter, the trend in pricing was solidly upward. The quarter began sub $54 and then did above $61. Natural gas prices were essentially flat averaging just over $2.40 per Mcf during the fourth quarter. In the most recent quarterly Dallas Fed Energy Survey, half of E&P respondent reported using WTI in the $53 to $56 range for the 2020 capital planning. Since the beginning of 2020, the price of near month WTI has declined from $61 to $51. Oil prices are reacting to fears of reduced economic growth and crude oil demand in China and elsewhere. These fears have been triggered by the recent coronavirus outbreak in China. The impact to global oil demand is uncertain. The reports estimate consumption in China has declined by as much as 3 million barrels per day. At the same time, OPEC has proposed temporary production cut to mitigate the lower demand. As I anticipated on our prior earnings call, industrywide drilling activity in the Lower 48 declined through the end of the year. This reduction resulted from the combination of limited access to capital as well as investor pressure to generate free cash flow. During the fourth quarter, the average US Lower 48 land industry rig count declined by 97 rigs, and a 11% reduction from the third quarter average. I will have…

Good morning. The net loss from continuing operations attributable to Nabors of $267 million in the fourth quarter represented a loss of $0.77 per share. Results from the quarter included $186 million or $0.53 per share, in impairments and other charges. These charges were primarily related to impairments of goodwill and other assets as well as the writedowns of receivables, reflecting increased political risk and the shutdown of certain countries. The fourth quarter results compared to a loss of $123 million or $0.37 per share in the prior quarter. Results in the third quarter included $23.2 million or $0.06 per share, in exceptional charges related to an income tax settlement in a foreign jurisdiction and after-tax currency losses. Revenue from operations for the fourth quarter was $714 million, a sequential reduction of $44 million or 5.8%. US drilling fell by $18.3 million or 5.9% driven primarily by reduced rig count in the Lower 48. Rig Technologies revenue decreased by $10.5 million reflecting reductions in equipment and parts sales. Our average rig count in the Lower 48 of 97.5 declined by just over ten rigs. Some 1.5 rigs more than we had anticipated. Daily rig revenue in the Lower 48 at 26,455 increased by slightly more than $500. I would like to clarify that our drilling revenue per day includes only revenue strictly related to our drilling rig services business, plus certain reimbursable items rebuild to our customers. It does not include any of our performance software, sometimes called App, it does not include drilling automation revenue and it does not include revenue related to casing running, managed pressure drilling, and BOP testing. All of these are included in the results of our Nabors Drilling Solutions segment. International drilling revenue at $332 million increased by $3.4 million primarily due to improved…

Thank you, William. I will now conclude my remarks this morning with the following. I would like to say that I'm very proud of what our team accomplished during 2019 in a tough industry environment. First, during the past several years, we have transformed our fleet in Lower 48 from predominantly legacy assets to what we believe is the most capable, modern fleet in the market. Our customer base recognizes the quality of our assets, the competency of our crews, our industry-leading operational performance and the value-added for our performance software and our services integration. And, they have rewarded us with increased market share and premium pricing. We believe our utilization of high-spec rigs is the highest of our peers. This has helped us outperform our competitors in this important market. We were the only major land contractor to grow average Lower 48 rig count in 2019. Second, our Nabors Drilling Solutions segment has continued to grow despite the steep drop in Lower 48 rig count. Year-on-year, adjusted EBITDA growth was 34%. Our drilling automation software offerings have made significant strides. The high, margin-low capital intensity software business accounts for a significant portion of our NDS adjusted EBITDA. It contributes strongly to our cash flow. You may find the depth and breadth of our downhole tool portfolio surprising, and it will continue to grow. When we started NDS, we used our rigs to pull through incremental NDS activity. Today, our innovative NDS offerings are also helping us to improve our drilling rig market share. Third, our balanced global presence and diversified offerings have provided us with stability in our results. As our competitors dropped off in the third and fourth quarters, Nabors continued to grow in the third quarter and sustained those levels in the final quarter of the year.…

We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Waqar Syed of AltaCorp Capital. Please go ahead.

Thank you for taking my call. First of all, Denny, I want to join Tony and William in thanking you for your service to the industry and to your friendship for over the last 20 years. You've really enlightened me, I've learned a lot from you, and I believe that a generation of sell-side analysts have learned from you about the industry. So thank you again. Thank you for your service, and congratulations on your retirement, I hope you're able to take some rest now. Thank you.

Thank you, Waqar.

My question, first of all, Tony, just a clarification, you mentioned that in your rig survey, your customers, half of them said that maybe activity could be flattish. Is it flattish to -- from current levels, is that what you said?

From current levels, yes.

Okay. I just wanted to clarify that. Secondly, on the capex for 2020. Could you provide some breakdown on how that would shake out between maintenance and growth and maybe the -- domestic versus international, and also what would be the -- how much of that would be within SANAD?

Sure. I think about -- roughly about $250 million or so range would be sustaining and the rest growth, and I'd say of the growth capital, most of it would be international, some in NDS and some in Rig Tech. It does not assume a lot for SANAD. I'll let William speak to that.

Well, of the $250 million that Tony mentioned, really the sustaining capex, which is really ongoing is about $200 million and there is another $40 million or so that comes from renewals of international contracts which vary from year to year, how many of those renewals we have. But we are forecasting about $40 million for next year. And SANAD -- it does have a big piece, which is a facility and which is about $40 million. But outside that, we're still not deploying any of the new builds in Saudi Arabia. So the levels there are not much higher than elsewhere.

And when do you expect to start investing into the new builds?

Well, it all depends on when NOV is ready, I mean we haven't really gotten a good fix on that, but I don't -- wouldn't expect to start investing in 2020 and no deployments be for the end of 2021, I don't believe at this point.

Okay. And then just one last question, what is the -- what was the cash in the balance sheet of SANAD at the end of the quarter?

It's somewhere around $270 million, $280 million somewhere in that range.

Our next question comes from Chris Voie of Wells Fargo. Please go ahead.

Good morning. Thanks. I just wanted to check, I think the commentary on NDS was that it should be a little bit lower in the first quarter. Curious if you could give a little more color on that. And then, at what point do you expect it to recover to 4Q level?

Sure. Well, about a third of NDS is -- it's focused on third-party rigs and therefore given what's happened with rig count, although we think the offering is gaining traction in the broader market, there is some churn going on and therefore it's going to, it will affect our growth in the -- in the first quarter. But for the year, we do believe we're going to keep going. I think there's a couple of bright spots here. The first one is, the casing running portion of NDS, I think you probably not realized it at this point, but TRS has gained market share in both the Gulf of Mexico and it is now the second biggest international tubular operation going on and we have a strong emphasis on execution and I think our margins are actually best in class when measured against the public people available. So that's really been a good story. As you know, back about a year ago, we had a pause on this because we were waiting to improve our value proposition with integration. We now have it. We're moving more and more of our jobs to the integrated approach away from conventional and that's accounting for some of the margin gain you're seeing, even on the same job count, it's increasing margin. So we think that story is going to continue, because the value of proposition with the customers is compelling. On directional drilling, there the story is also kind of interesting, if you think about the marketplace in general, we actually believe that if you think about the drilling -- directional drilling services, I think it's in a -- in a seismic shift arena right now. I think four or five years now, it's tough to look at anything like it is today. I think what's going to happen is the use of what they should combined which is downhole -- who's going to -- sorry for the interruption. The use of the automation combined with the downhole, I think is making a different value proposition available to the operator. I think also that the historical stronghold that the big four had on directional drilling, both in the US and international is being challenged. If you look at the US, for example, the Big four used to count maybe five years ago for 50% of the Lower 48 MWD market, now it's a -- It's down more than half of that number today. And so, I think the kind of offering that we now have in place is an offering that has substantial growth opportunity. So with all that, I think looking forward throughout the year, I think we're looking at fourth quarter to fourth quarter -- Q4 2019 versus Q4 2020 growth of about 20% or so.

In the 20%s

In the 20%s.

Okay, that's helpful. Thank you. And then my follow-up. So granted your customer base is suggesting that the rig count might be flattish going forward, you guys have some of the best rigs. Do you expect market share gains and therefore some kind of upward momentum for the second quarter for the US land rig count? I'm just curious to what extent you have any visibility or your thoughts around that?

I think what we're saying is, I guess right now in terms of this quarter we'll be about the current level or slightly higher, we do anticipate as we go through the year, our rig count will be higher. We do expect that. Margin improvement will depend of course on the trajectory of any such path. But yes, we do expect that there will be an increase. Just for your information today, when you look at our fleet in terms of basins, there is a wide disparity between oily basins and gas basins. In North Dakota, just to give you an idea, all 25 of our high-spec rigs are busy 100% utilization. In South Texas, 18 -- 17 of 18 rigs are busy. Only -- we only have one of the rig stacked. And in West Texas of our rigs here, we only have one of our ex-rig stacked. So that gives you an idea of the high utilization that we're enjoying. So we think we do have the premier rigs in the marketplace and we think the rigs that are stacked are going to find homes.

So, I'll make a comment on that also. I think part of what we're trying to do is to balance pricing against market share and in the gas basins, we have decided not to chase market share at any cost and preferred to start moving some equipment to other locations and even stacking some rigs. And by the way, we've also stacked, a lot of our legacy rigs. Those are the ones that have suffered the brunt of our rig count drop. The bigger companies should be stewards of pricing and we're trying to behave responsibly by trying to optimize how much of EBITDA we can squeeze out of the fleet rather than focusing on purely market share.

Our next question comes from Kurt Hallead of RBC. Please go ahead.

Well, good morning. Denny, going to miss you, Denn. I wish you all the best. You've been a great partner for all this time. So really, really appreciate everything you've done. Thank you.

Thank you.

Tony, I got a question for you. We're now going on, I guess the fourth year since that great presentation you guys did back in the fall of '16 and kind of outlined this movement toward rig automation and these directional drilling services and the software and apps and so on and maybe if you take a moment to kind of reflect upon the game plan that was laid out back in '16 and kind of where we stand now. You called out -- some of the, some of the things that have gone better than you thought, you might have expected and what maybe been some of the speed bumps along the way?

Sure. I appreciate the question. If you go back and at the time in 2016, I think what we've talked about was something without being talked about in the marketplace. I think first of all, it was at that Analyst Day that we actually spoke about the pad-optimal rig, and talked about the special features, the X-rig as well as the new rigs that we are planning in the pipeline. If you remember, the debate back then, we were discussing the view that there was a difference between the walking rig and a skid rig and other people were saying there was no different et cetera, and people are got caught up in that. But you also know that -- at that conference, we identified what everyone now is calling super-spec when we outlined the pad-optimal rig in terms of all the functionality. At the same conference, we said, and it turned out to be -- I guess, warrants that we said, the industry needs a different model to adjust to growing in a market that's going sideways or potentially down and that's why we create the NDS strategy, and the NDS strategy was focused on not bundling services, but integrating them into the rig and that gave rise to or getting into the casing business as well as the directional business and the software business. All three of those, I think today advances at -- what at -- that was a pretty precipitous move on our part, it's worked out reasonably well. I think I'll be disappointed in the progress of the penetration to be honest with you, a lot of operators during the course of the past three or four years they didn't quite understand what we're talking about, our marketing was probably -- if there was one…

And Kurt, I'll comment on the financial part of it. I think we're very, very happy with the results, up to now. We are very encouraged by what we're seeing today. About 12% of our EBITDA is coming from Nabors Drilling Solutions, right. And we wanted to drive that number to 20% of our total results. And I'll tell you why, because we mentioned the margins at 41%, those are the highest margins we have in our whole portfolio and, but the second thing even more importantly of the $100 million or so that we expect or we had last year about $25 million was the capex, right, so the conversion of that EBITDA into cash flow is huge as compared to a drilling rig business and the margins are much higher. So we think as we move forward into a more NDS world, we are changing the nature of our cash generation and you're seeing it in the results of 2019, and what we expect to see in 2020.

That's great summary. And then maybe for you William on a follow-up, the $300 million of free cash flow target for 2020 I was wondering if you give us some insights as to what kind of net -- what kind of working capital contribution you expect to help drive -- drive that free cash flow?

So, so I did say at least, right, I didn't say it $300 million, but, yeah, the working capital is helping us, but it's helping us just to stay in place in the sense that we expect to reduce our DSO by about five days during this coming year, which will offset most of the increase in revenue that we expect to see in 2020. So from the working capital, you're not seeing, what you're seeing -- the biggest increases really are from the reduction in capex, which is quite significant, and the second one is the $45 million or so. So we expect to have higher EBITDA in 2020 than in 2019. And of that, higher EBITDA, $45 million reduction in amortizing revenue, so that just goes straight down to the -- to the free cash flow. So those two numbers are pretty significant, if you add them up.

Okay. And then the goal, is it what, reduce debt by that amount of free cash flow?

Well, we have some dividends to take account of, so not quite that amount, but I did say at least $300 million. So…

Our next question comes from Jon Hunter of Cowen. Please go ahead.

Hey, good morning and Denny, congratulations.

Thank you.

So first one I wanted to ask is just on the Lower 48. So you all did a great job outperforming the market in 2019. Your guidance for the first quarter implies a decline a little bit below market and it appears that these drops are mostly from private operators. So I'm wondering how you see things playing out as we move into the second and the third quarter, and if you have visibility to picking up some of that activity that was lost from some of the privates?

The 2020 is still little premature for visibility. I would say in our core market, we're comfortable with the level and we also have some green shoots to pick up some rigs. So away from -- and that core market that's just the super majors with the large independents, and that's 65% of our count. But yes, you're right, there is some focus now on the other segment, and we're going to probably be redoing our efforts there to attack that as well. One thing that we struggled with a little bit is how much of the impact of the health crisis in China is going to impact oil prices. So a lot of our guidance, you have to take it with that in mind. We thought it would be appropriate to put a little bit wider range in our expectations for the first quarter and that widening was to the downside. Absent that health crisis, I think we would have been more aggressive in our forecast. It's really, it's very difficult at this point to see what the impact of that crisis will be on our results. We do think that, I do think however that I would expect us to land closer to the upper end of the range than to the lower.

Yeah, I just would reiterate that. Looking at the whole thing from above, there's really pretty good things going on in all of our segments, International, although we mentioned here that there is some planned downtime, that's just operational. The earnings power of International is in force and we have these rigs coming on and the looking forward, we think these incremental rigs will be margin enhancing as well. So there is good fundamentals there, NDS, we're -- as we said, we're pretty comfortable there offshore, we have a strong position there as well, and even Canada is looking up for next year as well. And you've heard that from other people. So with US, I guess we're a little more cautious, as William said, with all the macro going on, we thought we'd guide a little more cautiously here in light of everything that's happening.

Understood. And then just a follow-up on the Lower 48 on the margin side guiding down only about $200 a day, I'm curious if you mark the whole fleet to where the market rate is today, how much lower would your margin be and how many quarters would it take to kind of get to that level?

I don't really want to get into that, but I wouldn't say there is a big disparity here.

Between regions.

Yeah.

So today we only have about 13% of our fleet in those affected regions and our strategy has been not to chase and that's why you're seeing some stability in our -- in our margin overall and our EBITDA. And going forward, we don't think it's appropriate to lower significantly our pricing on our fleet. We have seen a lot of stability in places like Bakken, West Texas, South Texas. So, with 87% of our fleet in those markets, we feel pretty good on our -- with our strategy right now.

Great. Thanks for taking my questions. I will turn it back.

Andrea, we're getting close to an hour, if you could just take one more question, please.

Our next question comes from Sean Meakim of J.P. Morgan. Please go ahead.

Thank you. Good morning. So I appreciate the comments with respect to some of the moving pieces on free cash flow. If we're on this call, a year from now, the 4Q '20 call, if you end up coming short on the $300 million or beating it materially, just I'm curious what are the major flex points in either direction that you'd highlight and thinking about in the context of the things that are within your control versus things that are outside of your control.

I don't think we have time left to answer that question.

I think on the free cash flow, obviously the biggest influencer really would be the actual EBITDA that we generate for next year. Now, we are assuming based on what's going on, on our international business and Nabors Drilling Solutions, Canada and some other places that all of that is going to offset whatever happens in the US and -- but that is, that is really, the market is really out of our control, we can mitigate by being smart about our strategy, on pricing and you know, some -- focusing on certain clients and geographies, which is what we've been doing. What we can do, we can cut capex further if we need to. And we can get more aggressive on our DSO collections and some of those issues there. So those are some of the things we can work with, working capital initiatives, more aggressive on selling idle assets. So those are some of the comp -- the compensating issues that we could do. But I think if we exceed the $300 million, we'll just pay down more debt. If we're a bit short, we'll try to compensate with all the items that we mentioned, which again capex reductions, working capital initiatives and so forth.

Yeah, I would just reiterate that -- the numbers, the targets that we've said, does target a full year of EBITDA above last year's 2019 number and we have confidence in that as a target, and of course everybody in this Company is going to be measured against that this year as well as the free cash flow target that's pretentious speech of information for your information. At the whole thousand SG&A employee base, that's one of the financial metrics for this year, both of those numbers.

So three quarters of our incentives for this year are coming from basically cash flow.

Yeah, cash flow. So, but the point I'd like to make that -- where Nabors is different in this market is, when we look at the composition of our EBITDA, look at your question with having International and the offshore, and even NDS as mainstays that gives a pretty solid foundation base there that unlike what most of our competitors have, and that we think is really distinguishing feature of what we have, because those things don't move as much against a volatile rig count.

Well, I think that was pretty specific. So Tony, I think you outperformed your own expectations there. Just the last thing I would say, so just to clarify, when you talk about free cash you're saying cash from operations less cash from investing.

That's correct.

Do you have an estimate of how much asset sales or other items within CFI that are being baked into that free cash number?

We have some somewhere in the range of $40 million. But you know, that happens every year we sell somewhere between $40 million and $60 million of assets that remains stranded, real estate, close facilities. That's pretty much the number that we do every year. So that's obviously part of the calculation.

Andrea, if you will go ahead and wind up the call and thank you ladies and gentlemen for participating, and if you have a question or you want to discuss anything, feel free to call us or email us as always. Thank you.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.