Good afternoon, and welcome to the Nabors’ Third Quarter 2020 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 William Conroy, Vice President of Investor Relation. Please go ahead.

Good afternoon, everyone. Thank you for joining Nabors' third quarter 2020 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. As you are aware, Nabors currently has a capital markets transaction underway. Accordingly, while we welcome your questions regarding our results, outlook, and view of the markets, we will not field any inquiries regarding this transaction. With that, I will turn the call over to Tony to begin.

Good afternoon. Thank you for joining us as we review our results for the third 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 the evolution of the market for advanced technology and our leadership position driving this progress. I would like to start by recognizing the Nabors staff for their efforts and performance. The twin challenges of the pandemic and the industry environment are unprecedented. Our team has excelled in maintaining the continuity of our global operations, while improving our industry-leading safety record. The health and safety of our employees is paramount. We continue to make progress towards mission-zero with the ultimate goal of zero hurts. On the financial front, our third quarter results illustrate the full impact of the expense reductions implemented earlier this year. I am pleased with the progress to-date. I'm also challenging the team to optimize our business processes and to add focus on cost avoidance. Our outlook on capital spending has also improved and we are now targeting approximately $20 million for the full year 2020. This amount is $40 million lower than our previous target and substantially below last year's spending of $424 million. Our immediate financial priorities remain free cash flow generation and net debt reduction. As a result of our persistent efforts, we continue to make material progress on these goals. Now, I will spend a few moments discussing the macro environment. During the third quarter, near-month WTI traded in a relatively narrow band around $40. This lower volatility is a market change from the extremes we saw in the first half. Also…

Thank you, Tony, and good afternoon, everyone. The net loss from continuing operations of $161 million in the third quarter represented a loss of $23.42 per share. Third quarter results compare to a loss of $152 million or $22.13 per share in the second quarter. The second quarter included total pre-tax charges of $58 million related to asset impairments and severance costs. This compares to charges of $5 million in the third quarter. The third quarter also saw a $22 million pre-tax sequential reduction in gains on debt repurchases. Revenue from operations for the third quarter was $438 million, a sequential reduction of 18%. With the exception of Canada Drilling, which benefited from the usual seasonal recovery, all of our segments experienced revenue decline. In the U.S. and in most international markets, activity in pricing continued to weaken. Lower 48 drilling revenue of $96 million decreased by $32.4 million or 25% as our average rig count declined and pricing deteriorated. In addition, zero margin reimbursable revenue decreased by $8.4 million versus the second quarter, as we negotiated with our suppliers significant reduction in various reimbursable expenses. Although these negotiations reduced the revenue, they also reduced our operating expenses by a similar amount. Lower 48 average rig count at 48.2 fell sequentially by 15.7%. Our average pricing for the fleet deteriorated by approximately 6%. Daily rig revenue in the Lower 48 at $21,760 decreased by just under $3,000 per day. Reductions on daily reimbursable revenue accounted for $1,500, while pricing reductions accounted for another $1,500. Revenue in our other U.S. markets decreased by a combined $11 million due to the release of two offshore rigs, coupled with a temporary idling on standby rate of an Alaska rig. International Drilling revenue of $248 million decreased by $52.7 million or 17%. This decrease…

Thank you, William. I will now conclude my remarks this afternoon with the following: A quarter ago on this call, I highlighted 4 transformation themes, which have gained traction among our stakeholders. These themes include: Integration, specifically of services around the wellsite; second, digitalization, which uses the volumes of available data to facilitate real-time optimized decision-making; third, automation, which improves speed, performance and safety; and finally, ESG, which prioritizes the impact of our operations in company on the wide-ranging set of constituencies in society. The breadth of our initiatives addressing these 4 themes is comprehensive and growing. When we began these initiatives, clear benefit to clients was an improvement in their well costs. These benefits have expanded to now include the following: Advancements in wellsite safety; higher quality wellbores; increased total well production; and positive change across the value chain and in our stakeholder community. Initially, the uptake for these initiatives was driven by the super majors. They recognized the inherent value and had the resources to utilize these products and services. At the same time, their sensitivity around ESG was high. More recently, we see growing demand for our advanced portfolio coming from smaller operators as well. Traditionally, their smaller scale prevented them from utilizing our advanced portfolio. They simply lack the resources to realize its full benefits. As our portfolio has evolved, we have taken the approach to simplify the implementation by customer. Let me offer 2 examples. First, we provide remote wellbore placement co-located in our operations center in Houston. This enables the operator to realize the benefits of remote directional drilling while leveraging the investment Nabors made here in our operational headquarters. The customers’ investment is negligible. The second example is our RigCLOUD platform. On RigCLOUD, we provide the data collection, analytics and streaming that operators need to optimize planning, execution and rig performance. It's an open ecosystem. It's compatible with Nabors and third-party rigs. In short, Nabors consolidates apps and client data from all sources. It then delivers information in the clients’ preferred format to any destination. That kind of infrastructure was beyond the reach of all but the largest operators. Today, we can bring it across the industry. It has been said that the current downturn is like no other. We view this environment as an opportunity for Nabors, to reinforce its position as a technology leader in our market and to drive the adoption of digitalization and automation in the industry. That concludes our remarks this afternoon. Thank you for your time and attention. With that, we will take your questions.

[Operator Instructions] And our first question comes from Kurt Hallead of RBC.

I think what I want to do initially would just kind of start off maybe on the outlook on the international front. That's a little bit more difficult to kind of get our hands around that vis-à-vis the U.S. and Canadian markets, for example. You indicated that you expect to see a significant increase in activity going into the first part of next year and to also see a significant increase in cash margins. So I was wondering if you can kind of provide that -- provide a context to that? And maybe how should we think about it in context relative to, say, third quarter or second quarter of 2020?

Okay. Well, as we indicated with respect to international, the next quarter, we're envisioning a downturn in rig count by about 4 rigs, 3 of 4s in the Middle East and 1 is effectively spread out amongst a bunch of different markets. We also indicated that the margin per rig would go down to the mid -- low to mid $10,000 range. The way to think about that is that there's probably about $1,400 of cost in -- expected in the quarter that consists of COVID-related costs, Saudi friction for all the stuff that's going on up and down in Saudi Arabia and a platform rig move in that quarter. So probably the normalized earnings power in the fourth quarter is going to probably be about $12,000 per rig. So that gives you an idea of where the fourth quarter is. Looking forward out from the fourth quarter to next year, as William signaled, we see about 10 rigs progressively going to work throughout the first quarter in the Middle East. And then in Latin America, probably, right now, we have a line of sight to 1 rig in the first quarter and 3 additional ones in the second quarter. So I wouldn't say -- I don't want to say international is a bottom, but it kind of feels that way right now. We take it all together. Obviously, the big caveat is OPEC and COVID in terms of a second wave. That gives you some feel for the landscape I hope.

Yes. Yes, that's great. That's fantastic. And then, Tony, I want to maybe also touch on the technology dynamics you guys outlined quite a few years ago at your Analyst Day and then clearly, you've gained quite a bit of traction with it. So how do we think about the overall kind of growth dynamics you kind of referenced in your press release that the Drilling Solutions Group kind of will track overall rig count, I kind of see how that can play out. But shouldn't there be an opportunity for that business to kind of differentiate its performance relative to overall rig activity? And just kind of get your sense on how we could think about kind of a growth rate over the next couple of years for that business?

Sure. Well, I think if you go back to Analyst Day, I think we sort of set the landscape for automation out of rig site. In fact, I think the slide that we showed at that initial Analyst Day outlined how a directional drilling well can be done with a push of a button that we had a slide that actually showed that. Today, of course, everybody is interested in doing that, and we were the first to come up with that, I think. And as you can see from our statistics that we reported, there's been increasing adoption and penetration of our SmartSLIDE software package. I think what we've done per -- for the issues we faced just in terms of getting scale on this thing is we've actually spent more time making this platform more available, not just on Nabors' rigs, but everyone's rigs to open up the market for us really worldwide. And as we also indicated, we're actually going to do the same thing for our rig operating system, which we call the intelligent rig operating system, which for your -- the way you might want to think about that, it's Nabors on steroids, okay? In other words, it has everything Nabors could do with a lot more. It has the sequencing engine that allow you to do different optimizations, and it just has total flexibility. So the idea there is to take the stat in the RigCLOUD platform and then enable that in a wider ecosystem and then make the apps available to that. And therefore, that's where we hope we get increased scale of all this technology, but that's the vision. And I'm pretty happy with the progress we've made to-date. I think the bet we made 4 years ago in this space was the right bet. And now we just got to make some bread with it. That's the goal.

Okay. Any thoughts on, like, is it a 20% year -- per year kind of growth rate? Anything along those lines that you can potentially help us calibrate?

Right now, I’m not going to give you a number, but I can tell you it's obviously double-digits growth I'm looking at. I mean, that's for sure. So -- but putting a specific number on it, but it's definitely double-digit growth. 20% would be on the low end.

The next question comes from Connor Lynagh of Morgan Stanley.

I was wondering if we could just discuss these potential rig resumptions in the Middle East. At this point, how confirmed or locked in is that and to the extent it is somewhat fluid. Could you help us think through -- there's been some discussion that there might be incremental OPEC cuts or a delay in the resumption of some production, how should we sensitize our thinking around that based on those potential outcomes in the world?

Connor, we're feeling confident right now that those rigs will return. I think given the rigs that were put in suspension and communications we have with our client in that particular area, we feel fairly confident, very confident actually that those will turn. The actual average for those 10 rigs is in question. We are assuming a 4 to 5 increase in average rig count versus the fourth quarter for those for that market.

That's just in Q1, you're saying that the 4 to 5.

Yes.

Okay. Got it. And then just wanted to get an update. Obviously, the SANAD plan was drawn in far different times than we're in today. So could you just discuss your general expectations on the pace of cash accumulation, if you think that will be sufficient to fund the newbuild program, how you expect the newbuild program to be executed over time? And I guess where this is ultimately driving, as we think about capital expenditures for next year and the year after, how should we think about that portion of the model?

So basically, when this program was arrived at, obviously, it was in an era where Aramco was thinking about the rig count going up by more than 100 rigs over the next 10 years. And the concept was half those -- half that rig count would be allocated to SANAD as part of the deal. That was the objective. And the past couple of years, we probably haven't gotten off to a -- as fast a start as we thought. But that's been a good thing because as you can see, we've actually been building cash from our operations there in the Kingdom. Today, Aramco is studying their needs, and they're assessing whether they want to pull the trigger on issuing the first order for 5 newbuilds. And it's going through their process. And until such time, they actually issue that to SANAD we have no obligation issued appeal to have the rigs built. The rigs only get built if Aramco comes to that decision. And obviously, they have a lot of issues on their own mind. So whether they're reassessing that in the context of other CapEx or moving forward with it, right now, I think the likelihood, it's more likely that they'll probably issue something maybe in the first -- around the 1st of the year, but no in event we see any of those newbuilds hitting until sort of after the late -- very late 2021, probably 2022.

And just to reaffirm what you mean there. Is it….?

Connor, an answer to your question about the funding, I think between the cash we have in SANAD today and what we're accumulating going forward, the first 3 years is probably taken care of. And by then, that's a breakeven point in terms of cash flow. So cash flow being generated from the new rigs versus the new CapEx. So I think we're pretty comfortable with the situation in SANAD right now and the sense that we think it's self-funding.

Yes. Understood. And I just wanted to clarify Tony's comment there. The newbuilds not hitting until very late '21, is that a CapEx comment or an activity comment?

That would be very optimistic, in my opinion, that we’d have a rig delivered by year-end. And I mean, there's, of course, a lot of discussions with our customer, a lot of moving pieces in terms of whether it will be for funding or not. And so there's a lot of stuff that is not yet -- there are too many moving pieces for us to give any feedback. But we think the impact on CapEx in 2021 should be minimum.

The next question comes from Karl Blunden of Goldman Sachs.

A really impressive cash flow performance recently and for the 4Q guide. Yes, maybe it's a little early to jump into '21. But do you think that CapEx can be controlled to a level that can allow you to generate cash or be neutral in 2021, given your assumptions about the market today?

I'll let my task master answer that. But we think that the CapEx, though, should not be any higher than what it was this year, which we're really proud of, but I'll let William amplify.

Yes. Obviously, there's a lot of uncertainty still about what activity levels will be like next year. But what I can tell you is that based on our latest forecast of what we assume for next year, we think that we will deliver cash next year somewhere in the mid-double figures millions of dollars. So again I think part of it is because we are maintaining our CapEx discipline, but we're also very focused on becoming more efficient and keeping our costs overhead under control. And then we do see some rebound from the activity levels that we have today. So all in all, I think that forecast, it's not going to be as good as 2020, but it certainly will be a positive number in our view.

That's helpful. And then just with regard to other levers that you have to help you from a liquidity standpoint and thinking about liquidity relative to near-term maturities, obviously, you've got the exchange that's ongoing. So I won't ask about that. But where do things sit in terms of feasibility of extracting cash from the SANAD JV? And then in addition to that, you have a bit of extra priority guaranteed capacity remaining, about $150 million, is that something that you could look to also just extend maturities or get discount capture?

I'll refer you to the press release in terms of the discount capture and so forth. But I think there is some potential for -- I do think there is some excess cash, at least, on a temporary basis over the next 3 years in SANAD. We haven't really engaged with Aramco in those discussions. So I really can't give you my feel for how those discussions would progress or the success of those discussions. But any reasonable analysis of SANAD today and the obligations we have in the future does imply there's a couple of hundred million dollars sitting there that are excess at least on a temporary basis. So that's all I can say on that. I don't want to say much more. We do think the working capital, including inventories and plus a lot of those negotiations that I discussed with our clients that are ongoing and are finalized, but we haven't yet built. I think those are going to flow into 2022 in terms of collections. And those could be fairly material numbers as well. So we feel good about the working capital. We feel good about the CapEx. We feel good about operating expenses and overhead. And I think our activity will have a little bit more legs than maybe people expect. So all in all, we feel all those issues will be accretive to our cash flow next year.

[Operator Instructions]. And our next question will come from Sean Meakim of JPMorgan.

Tony, in the Lower 48, as you indicated, even if the rig count has bottomed and we're now marginally improving activity, the mix of contracts rolling and rigs being activated, there's a headwind on average dayrates and margins on a quarterly basis. The slope of the recovery matters a lot in this equation, of course. But where do you see that fulcrum point where the addition of new rigs goes from being dilutive to the average to being accretive?

Well, obviously, today, daily rig margins are below our average dayrate. And therefore, anything incremental even at today's rates is going to cause some dilution. And it's up to us and our competitor colleagues to figure out how to manage that. Obviously, if you do want to grow, but you don't want to grow subsidizing at ever lower rates. And so that's the balance and it’s up to us to figure out how to match that on an upturn. I guess the good news is if the upturn prospect does give you the ability over time, obviously, to move those rates back up. And that's what the mission is for everybody, but I'm not maybe on my pricing strategy right now, except that we were aware of it. And that's our mission to try to incrementally add more rigs without taking down that margin below a number that makes sense. So -- but that's the balance, and you hit it right out nail on the head. But as I said, the good news is in this landscape where there is some trajectory of an upside here, I think we're in a better position to make that happen. There's other people, by the way, that have done this, where they traded. They've traded new day rate on new rigs against old contracts. So we haven't done that. We've tended to keep our contracts in place and get the benefit of the cash flow because on a present value basis, we don't like that kind of trade. But some of our other competitors have done that, I guess, to accelerate their upswing. But again, that I think is just playing with NPVs and stuff. So -- what we're more concerned with is just trying to match that upswing right way.

Understood. I appreciate that. And then...

In 2020, Sean, to answer your question. I think we will see what’s here in daily margins through the first half of next year.

Right. Okay. I appreciate that. So I was also hoping just to get a little more of your thoughts around international margins. 4Q sounds pretty tough, but you’re setting yourself up for a better first half of '21. There's always a lot of moving parts on this fleet, just given your own multiple continents, mix issues, different contract durations. There's always a lot to try to get to these margins. But I'm just curious to get your confidence level on 4Q being the trough for the cycle. Maybe you're around 10,000 a day. You peaked a few years back in the high teens. Just thinking about risks around lower lows, but then really more importantly, on a normalized basis, where do you think through cycle international margins can be and will be for this business?

So I think Tony said it best that our underlying margins, excluding the COVID penalty that we're paying, which is revenue leakage and the Mexico platform movement, which is another, that's 500 alone. COVID maybe it's about 400, and then Saudi, we're calculating another 500 of leakage in terms of cost. So all that is being absorbed in the fourth quarter. So it's somewhat typical in that sense. So -- but that indicates that the fourth quarter is really around a 12,000 per day margin. That's where our fleet right now is. The good news is that we do have some significant number of higher-margin rigs that are in suspension and that we expect to be coming back next year. So that will certainly have a positive impact. And I think those -- the COVID penalty is going to -- which I mentioned, is about $400 per day, that's going to go away, we think. So you put that all into perspective, it's difficult to give you a number. But I think if we normalize, we're going to be somewhere between the $13,000, $14,000 per day range next year and hopefully, improve on that as the year progresses. We have absorbed a few blows of Kazakhstan rig count, those have probably some of our highest margins. That has eroded. Colombia also has eroded. So those have been big hits. So getting back to the 17,000 range that we used to see in the past is going to take a lot.

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

We'll wrap up the call there. Thank you, ladies and gentlemen, for joining us this afternoon. If you have any questions, please free to call or email, as always.

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