Good day, and welcome to the Nabors' Second Quarter 2020 Conference Call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to William Conroy, vice president, investor relation, and corporate development. Please go ahead.

Good afternoon, everyone. Thank you for joining Nabors' second-quarter 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 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, references to cash flow mean 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. Furthermore, the results discussed during the call are preliminary and unaudited and are subject to change and finalization based on the completion of the company's normal quarter-end procedures, particularly as it relates to impairments and valuations or reserves around the carrying value of various assets on our balance sheet. As a result, these preliminary results may be materially different than the actual results reflected on the company's Form 10-Q when it is filed. We do not expect there to be any differences in revenues, adjusted EBITDA, adjusted operating income, free cash flow, or net debt, or any of the rig activity or daily rig financial information, but there could be material differences to net loss from continuing operations attributable to Nabors' common shareholders and earnings per share. Before I turn the call over to Tony, I would like to mention that we have attempted to incorporate your suggestions to improve this call's usefulness to you. As such, we are streamlining our prepared remarks, which should permit more time for your questions. With that, now I will turn the call over to Tony.

Good afternoon. Thank you for joining this review of our results for the second quarter of 2020. I will begin with comments on our actions in light of the current environment, then I will follow with a discussion of the markets and highlights from the quarter. William will follow with the financial results. My wrap-up comments today will focus on three timely and key subjects: First, Nabors' positioning to capitalize on several emerging themes in the industry; second, our advantaged position in the market as the industry navigates the downturn; and third, Nabors' standing as a technology leader in our industry. Let me first lead off by commending each member of the Nabors' global team on their management of the impact of the pandemic. The health and safety of our worldwide staff are paramount. Nabors remains committed to ensuring the well-being of our workforce at each location around the globe. As well, we are dedicated to maintaining our focus on safety and our industry-leading drilling performance. This environment has been a challenging one. I am proud of the team for its innovation and perseverance. These qualities have minimized the virus effects on the Nabors' extended family and on our operations. Nabors has a long-standing commitment to the health and safety of our employees and the broader community in which we operate. The value of this commitment is especially noteworthy in this era. Next, I would like to update you on our actions as we manage the current business environment. This downturn requires swift and decisive actions. The spending reductions, which we announced earlier, have been fully implemented. As those were put in place, I also challenged our team to reevaluate our structure and processes. The team responded, and we are targeting additional savings to those previously announced. These measures to…

Thank you, Tony. And good afternoon, everyone. Revenue from operations for the second quarter was $534 million, a sequential reduction of 26%. All of our segments experienced revenue declines, mainly related to the macroeconomic response to the global pandemic. U.S. Drilling revenue of $174 million decreased by $101.1 million or 37% as our average rig count declined by 34%. Lower 48 rig count of 57.2 fell by 36%. Daily rig revenue in the Lower 48 at $24,744 decreased by $2,455 per day, reflecting lower average day rates and reduced revenue from reimbursable expenses. Average day rate eroded by $2,000, driven by a reduction in average pricing as well as by a higher number of contracted rigs stacked on revenue, but at a rate lower than the operational day rate. International drilling revenue at $301 million decreased by $36 million or 11%, primarily due to a 5% reduction in rig count, pricing concessions and COVID-related standby periods in Latin America and negotiated day rate discounts across certain markets. These deteriorations were partly offset by early termination revenue. Canada drilling revenue was $3.6 million, down 86% as rig count fell by a similar percentage. The normal impact of seasonality was exacerbated by the weak drilling market. Drilling solutions revenue of $33.1 million declined by 40% from the previous quarter. All of our product lines decreased sharply with our casing running business holding up the best, driven by a strong international franchise. This deterioration was driven by pricing pressure and by a reduction in the Lower 48 industry rig count which was significantly higher than the decline in Nabors' rig count. U.S. revenue for the segment fell by 46%. The revenue in our Rig Technologies segment was $8.6 million or 20% lower at $33.6 million. The decrease in revenue came primarily from lower…

Thank you, William. I will now conclude my remarks this afternoon with the following. We are witnessing several transformations across our industry. Even in the current environment, we see accelerating interest from our stakeholders and several themes: First, integration, specifically of services around the well-site. Nabors has led this revolution. Our services and wellbore placement and tubular running are designed to run seamlessly with our rigs. An important benefit in the current market is reduced staffing of services at the well-site. Second, digitalization. Our systems collect comprehensive data in real-time while drilling. This portfolio includes drilling data and high-velocity diagnostic data is generated by equipment. Using our RigCloud platform, we offer cloud to edge digital workflows, which facilitate real-time optimized decision-making. Third, automation, which improves speed, performance ,and safety. Nabors offers a broad range of task automating services. Our suite is industry-leading. It includes the ROCKit and REVit performance tools. Our portfolio also includes more recent additions. SmartNAV, formerly named Navigator; and SmartSLIDE, which is formerly made ROCKit pilot. Finally, ESG. Our current focus is to set baselines for our ESG criteria. This effort incorporates the initiatives already under way and completed. These include our dual fuel capable rigs, engine emissions, our low-noise Canrig Sigma top drive, and our leading safety performance. The breadth of our initiatives in these areas is comprehensive. The obvious benefit is to improve operators' economics. Beyond that, they improve well-site safety, produce higher quality wellbores, increase total well production, and drive positive change across the value chain and in society broadly. The current market is forcing an extraordinary selection process in the service industry and among E&P operators. In the Lower 48, operators who survive this process are likely those with financial strength and advantaged cost structures. This is a group, we think, most likely…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Connor Lynagh of Morgan Stanley. Please go ahead.

Yeah, thanks. Afternoon. I think you had brought up, in the prepared remarks, some degree of pricing pressure in international markets. I was wondering if you could quantify or at least directionally speak to the magnitude where it was worse, where it was better. Any color you could provide there would be great.

Sure. It's a good question, Connor, and it has multiple answer to it, unfortunately. We have a piece of the pricing pressure really was related to the COVID lockdowns. So basically, the discussion was raised on the contract on standby revenue, but, you know, because of the situation our customers were facing, what kind of day rate were we going to get for those periods. And actually, that has been the biggest factor, I would say we were to estimate how our revenue -- our pricing was affected overall in the second quarter. I think it would be like a 12% hit based on those -- on significant reductions in those markets, which were mainly in Latin America, by the way. Then if we look at more of the demand-supply situation that our clients are facing and some of the pressures they are putting both on volume and pricing, I would say that that particular impact is, you know, between zero and mid-single digits. That would be the more sustaining reductions that we will face going forward. That's what we're seeing today.

That's helpful. Thank you. You raised the issue of the covenant on the credit facility, which certainly seems like, thus far, banks have generally been willing to work with lender still on that front. But could you just sort of speak more holistically, how should we think about maturity management over the next few years? Is your intention to continue to repurchase near-term maturities? What's just sort of the high-level view of what your plan is there?

So, yeah, obviously, we have to -- part of our job is to look forward and identify potential problems in the future, you know. So, we don't have any near-term covenant issues. But, you know, the facility still has three more years remaining. So obviously, we discussed so early on rather than wait for problems to occur. So that -- we're currently in discussions with our banks. We expect to have an amendment pretty shortly. That would allow us to not have any covenant issues through the remainder of the facility in October 2023. We -- yes, we have been purchasing some near-term maturities. I must say that the volumes we have managed to purchase more recently have fallen off. I mean, people are holding on for -- to our bonds a bit more than maybe a few months ago. So, you know, for now, we think we'll pay down our 2020s with our cash generation and existing cash. And 2021 is still a bit far off to be guessing on what we'll do. But if we have opportunities to buy the 2021s off the market, we'll continue to do so.

Got it. Appreciate the color. I'll turn it back.

The next question is from Taylor Zurcher of Tudor, Pickering, Holt. Please go ahead.

Hey. Good afternoon, and thank you. I wanted to start by asking about some of your comments in Saudi. It sounds like at least a handful of your rigs are going to be suspended through year-end. And I'm curious if you could frame how many rigs are going to be affected by this, at least in 2020? And then if it really is a suspension period, do you expect those rigs to go back to work at some point in 2021? Or is that -- is it too early to call that right now?

So, in the Saudi market, in general, I think, the rig count in terms of specific is up to about 28% since last quarter. So, it's pretty significant. I think, given our market position, as well as a great support from our customer partner, I don't think we're going to be impacted to the same extent, but we will be impacted. And that's kind of the situation right now.

So, we estimate an impact of some six rigs from the 43 that we have today.

Okay, got it. And second question also internationally. It sounds like working capital was a headwind in Q2 and you went through the reasons for that. And part of that's the pandemic that's ongoing. But curious, at least in July or through the first month of Q3, have collections internationally improved at all? And is there any way to frame for us how we should think about working capital, hopefully tailwinds, in the back half of 2020?

Yes, you did mention that. And I want to clarify that it's a relative headwind. I mean, obviously, our revenue went down quite a bit and the working capital did help a little bit, but not nearly as much as we expected because our DSO went up by about four days. And yes, it was mainly in Latin America. I mean, it was more issues of if you're discussing what the day rate is going to be during the lockdown period, obviously, you can't invoice. And until those negotiations are finalized, you have to wait to invoice. So, we do expect to recover a lot of that slowdown during the third quarter. You know, some negotiations may take longer and would extend maybe into the fourth quarter. But in general, we do expect most of that slowdown when we sign collections to correct itself into the third quarter.

The next question comes from Waqar Syed of ATB Capital Markets. Please go ahead.

So, the 74 rigs that you have working internationally, could you provide a breakdown of where geographically they're working right now?

You know, obviously, the biggest piece is Saudi Arabia where we have 43 rigs. And next will be Latin America, Waqar. We have some 20 rigs-or-so that are operating. And then the rest is just drips and drabs, I mean, Kazakhstan, Russia. We have one remaining rig in Algeria. And then Kuwait, Oman. So that's more or less the distribution. I don't think we have any other country that I didn't cover. In Latin America, it's Mexico, Colombia, and Argentina, now that Venezuela has closed down.

Sure. So, the 74 rigs that you have working does not still include the eight rigs that may come off in Saudi Arabia?

I think I said six before, but...

Six. Yes, sorry. Six rigs, yes. So, six...

Couple of them are already down.

Okay. So, a couple of them are already...

By the way, Aramco was doing this very smartly. Rather than suspending rigs permanently, what they're doing is alternating to keep the rigs active and keep the rigs from being stacked fully and lose on the certification periods and so forth. What they're doing is alternating the rigs and rigs are taking turns to go down. So, I think that's very beneficial, both, I think, for Aramco, but also for the drilling contractors because of always having to shut a rig down fully and then try to bring it back down the road. So, I think that I haven't seen this done by other clients, but I think that's a very smart way of doing it.

Absolutely, yes. And then you have a contract to build five rigs a year. Do you expect to start that program next year in Saudi Arabia?

Well, the triggering point is the Aramco sells out to issue a work order with a term contract to initiate a process. That has not happened yet. And -- but we are prepared. The joint venture is prepared to accept that and move forward. But so far, that hasn't happened. And given what we just talked about in rigs, the timing is uncertain when in fact they will issue the first work order.

So, we don't think any rig will be delivered in 2021, by the way.

Okay. Fair enough. And then I know people have tried to come in different ways, but do you think margins in international could be in that 11,000, you know, level in third quarter? Or you think better or worse?

Waqar, you keep going to the margins. I've said many times that the margin in international is really an average of a very widely dispersed number of rigs. So, it's very little relevance except for modeling, I guess, if -- but what I can say is that we expect, in the second half of the year, to recover some of the erosion we saw in the second quarter through the COVID discounts. Now, the extension of the COVID discounts and the activity shutdowns that we're seeing in these various countries is still uncertain when it will stop or how much or in which hotspots that a client decides to shut down. But -- so -- but we do expect to recover that. On the other hand, we expect a lesser impact from more permanent discounts in various select markets. So, I think the erosion that we will see in margins could be more related to having fewer rigs operating and us being unable to fully reduce the direct overhead as much as the rig counts fall, but we're certainly going to try our best. So we think we're going to be able to sustain our margins fairly well. Of course, in the second, we did have early termination which impacted our margins. And so, we are -- real normalized margins were only $13,000 per day. But, you know, what I can say, given all the moving pieces, it's very difficult for me to give you a number for the third quarter. So, we'll say something similar to what we said in the second is that, at this point, we're not really ready to provide guidance on international because there are several moving pieces that are being negotiated and some timing issues that can give us a wide range. So, I'll give you an example in the second quarter. The international market, we had a range of outcomes somewhere in the $30 million range. So, it could have been higher or lower. Fortunately, we were very close to the upper end of our outcomes. In the third quarter, we do have a couple of, I would say, $10 million to $20 million difference in potential outcomes, depending on how negotiations and some discussions we're having with the clients go. So, we're not ready to give guidance. But all we can say is that our rigs will most probably go down by 11 rigs. We will have a little bit of improvement in pricing, I think, in the third quarter versus the second. And we also believe that, you know, pricing will continue to be a little bit under pressure in the fourth quarter and potentially a couple more rigs could go down.

Hope we had answered that, Waqar, is that international as a portfolio, you know, just looking out a little bit past the next two quarters, I mean, our average duration of our contract is more than two years. And of course, the countries that William recited to you are all developed countries with long-term markets where there's no question that they're long-term developed market. So, I think, position-wise, you know, in terms of a rebound, we're very well positioned, and we have some underlying strength given our contract position and market position today.

Absolutely. Thanks. Appreciate the answer.

Sorry I couldn't give you a number on the margin, Waqar, but I'll try harder next time.

The next question today comes from Sean Meakim of JP Morgan. Please go ahead.

Tony, Williams, so constructive progress on the cost reduction program, but just -- it's not clear how much of this is variable versus -- and tied to lower activity versus making your fixed cost structure more competitive when activity improves. Total cost out seems to align with the revenue decline give or take for the year. Can you maybe just elaborate a bit on how much of the costs you've taken out, you'd characterize as fixed versus variable and the implications?

Sure. About -- I would say, about half is SG&A and engineering and the other half, a little bit more than half is field support. And I would say that probably 70% of the cost structures, hopefully, are structural, and the rest are related to lowering of compensation given this environment, so it has some bounce-back potential. That's roughly the numbers where it seems right now. I'm going to let William answer that.

No, I think that's exactly right.

Yeah. Very helpful. I appreciate it. And so then thinking about the U.S. specifically, day margins in the quarter, the guide for third quarter, you were able to offset some of the lower activity and some – the initial decline in rates with cost out. I didn't hear any comments about the impact of rig mix. So, meaning there are a handful of rigs you have outside of the Lower 48 being a bigger piece of the overall. Does that have any impact on the guidance that you gave? And then just thinking about the outlook for Alaska and Gulf of Mexico, how that's influencing the numbers 2Q to 3Q.

So, we did give specific guidance for the Lower 48, Sean, you're right. I mean, there's some mix impact there. You know, some of the rigs we lost are some of the weaker margin ones. But also, I think something that is impacting several of the contractors' margins in a favorable way is that the rigs that are stacked overall, I mean, it's not for all -- it doesn't hold for all customers. But overall, we lose less in revenue than the potential for reducing costs. So, the margins for those rigs, on the average, are better than our average for the whole fleet. So that -- if we want to speak of a mix, then it probably was the biggest -- the largest impact. And yes, I mean, we have more our M1000s, M800s, and our highest-quality X rigs working as a proportion of the fleet today than maybe two months ago. So that does have an impact on the average margins.

And then just on Alaska and Gulf of Mexico, any change there?

And in the Gulf of Mexico, I think, we -- hurricane season comes, one rig goes out. And then hurricane season ends and it comes back, or maybe a couple come back. So not a lot of changes. We had a very, very strong second quarter, I think, we expect one rig maybe to go down in the third.

Yeah, one or two, maybe.

One or two, maybe. And then come back in the fourth quarter. Alaska pretty stable. I mean -- yes, I mean we have the seasonal downtick that we usually see in this quarter, same as in Canada. But general activity stays more or less the same from what we saw in the first quarter, underlying activity.

The next question comes from Karl Blunden of Goldman Sachs. Please go ahead.

Thanks for the time. And good to see the progress on the cost-cutting. Just a question on the balance sheet and the bond buyback activity. It seems to slow quite markedly since May. And I was curious if you could provide a little bit of context on the trade-offs that you're looking at when doing those bond buybacks? Because, you know, it feels like at least the '22s still trading well below par would make some way to create a little bit of value by going after those a bit more aggressively?

You mean the '23s? We don't have any '22s. So, we have '21s and '23s. And, you know, anything within the next couple of years is pretty fungible in terms of cash flow and obligations that we have, what I would define as near term. So being able to buy some of those bonds on the market at a discount is certainly attractive. Obviously, we try to do it within the constraints of our cash flow generation to make sure we don't -- you know, we don't go too big on our revolving credit facilities. So that's what we've been doing. I mean, we're taking a measured approach, trying to take advantage of the market, but not going crazy in terms of trying to buy too much. So just living within our cash generation means actually is what we're trying to do.

Got it. That makes sense. That was the focus of the '21. And then just on the bank lender discussion, maybe there's not much you can share at this point in time. But what are some of the things that are giving them, you and the bank's comfort with providing the waivers that you require, certainly a better cash flow outlook, I'd say, than many had expected. But what else is part of that discussion at this point?

I mean, I think a discussion that's ongoing is, by its nature, confidential, and that's something we'd like to talk about. But it's just -- I mean, if you look -- if you know what banks do, and if you've seen what Nabors has done in the past, I think, we -- it's just the normal kind of discussions to get some covenant relief.

Our next question comes from Jason [Indiscernible] of Millennium. Please go ahead.

Thanks for the call. I just had a question on Saudi Arabia. If you could provide an update on the amount of cash that was there, that would be great. Thank you.

So somewhere in the $300 million plus range.

And are there any plans or avenues for you to access that cash?

Yes. I mean, we have more cash than we need for future expansion of the fleet. So right now, you know, given the current environment, I mean, obviously, there's too much cash, and we will continue probably to build up some cash over the next two years if we don't use it for the new builds. So, we do have some mechanisms to get the cash out, but we haven't engaged in those discussions with our partner because up to now we haven't really needed that cash outside of Sanaa.

Understood. And then any way to kind of bracket the amount of excess cash out of that $300 million?

Well, if you think about it, maybe investment in potentially new rigs will be somewhere in the range of a couple of hundred million dollars, maybe hitting -- most of that hitting in 2022. So obviously, we won't be needing those $300 million and change million over the next year and a half or two years.

The last question today comes from Dan Johnedis of Cratus Capital. Please go ahead.

Thank you. I had a question regarding the process for recovery. In other words, once the demand start coming back, what happens to those old contracts from clients? Are those contracts -- if the clients have demand, are those -- do you have to start new contracts? And looking forward, where do you see the process for recovery?

Well, I think right now, we're in the mode where there aren't any new contracts, mainly it's extensions or renewals. And on a rebound, obviously, those customers, our core customers, we would hopefully engage with them, and there would be additional contracts. And pricing would be agreed to at that time reflecting to the end market. So that's why we would see none evolving.

In some cases, we have -- we sort of stacked on rate. So, they're still on revenue. They're still contracted. So those rigs you just turn them off. There's no need to do any new contract. And maybe the countries where we have COVID shutdowns, again we have contracts that are covering those rigs. So, there's no need to do any new contracts. So, I think some of that would be normal contracts. But as Tony mentioned, if clients want more rigs, you know, they have to do new contracts.

They will do new contract, right? Terrific. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to William Conroy for any closing remarks.

Thank you. Let's go ahead and wind up the call there. Thank you, ladies and gentlemen, for joining our call this afternoon. If you have any questions, please give us a call or email us, as always.

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