Nabors Industries Ltd (NBR) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Nabors Industries Limited fourth quarter 2012 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions)

This conference is being recorded today, February 20, 2013.

I would now like to turn the conference over to our host, Dennis Smith, Director of Corporate Development. Please go ahead, sir.

Good morning, everyone, and thank you for joining our second quarter of 2012 earnings -- or fourth-quarter 2012 earnings conference call.

Today we are going to follow the customary format. We will limit the call to about an hour. Tony will give some overview remarks for the quarter, and give you some perspective on how we see the near-term, and the more intermediate term shaping up. And we will try and give time for Q&A at the end of that.

In support of his remarks, we have posted the slides at our website as we usually do. You can access them in two ways. If you are coming through the webcast, they are available as a download within the webcast. Alternatively, you can download them from the Nabors.com, our website under Investor Relations, then the events calendar for that tab, and then you will find them listed as supporting materials for the conference call this morning.

With us today besides Tony and myself, are Laura Doerre, our General Counsel, Clark Wood, our Principal Accounting Officer, and all of the heads of our various business units. Since much of our remarks today will concern our expectations of the future, they are subject to numerous risk factors, as elaborated upon in our 10-K and other filings. And we would encourage you to visit those for the risk factors involved. These comments constitute forward-looking statements within the meaning of the Securities Act of 1933, and the Securities Exchange Act of '34. Such forward-looking statements are subject to certain risks and uncertainties as disclosed from time to time from our filings.

As a result of, the results may vary significantly from what we expect and/or implied in our forward-looking statements. And now with that, I will turn it over to Tony to get started.

Good morning, everyone.

I want to thank you all for participating this morning. As Denny said, I will be referring in my presentation to slides posted on the website by slide number on the bottom right-hand side of the page number. Before I start, I would like to talk about some 2012 highlights. I would like to go into the operating results, and I would like to highlight some accomplishments this year, in spite of challenging commodity prices and formidable market conditions.

First, record financial results. Starting with slide 4, Nabors generated record operating revenues, gross margin, and EBITDA in 2012. Obviously, we would have liked to also report record operating income and EPS. But the fact that these results were obtained regardless of the market challenges we faced, speaks to the quality of our assets, our people and our geographically diverse operations. And also I think it gives you some insight into the potential to unlock additional value through leveraging our scale.

Debt reduction through cash flow and asset sales. On slide 5, you will see that we reduced net debt by $678 million, from its first quarter 2012 peak of $4.3 billion. This lowered our net debt to cap ratio to 38% from 42%. We accomplished this by generating net operating cash flow, which we are defining as EBITDA less CapEx, of approximately $550 million into asset sales. Approximately $400 million of our net operating cash flow was earned in the second half of 2012, as previously committed projects worked their way through the pipeline in the first half of the year. We expect to generate significant net operating cash flow again in 2013, despite weaker North America market conditions.

Turning to slide number 6 on capital discipline. We improved our capital discipline in 2012. Capital expenditures of $1.4 billion, was $749 million lower than 2011, and as we implemented more stringent return criteria for capital spending. This is even more impressive, considering that a significant amount of 2012 of CapEx was already committed when we undertook the task of increasing return hurdles, and focusing on the certainty of achieving the returns. We maintained consistent year-over-year CapEx levels in the US Lower 48, where new build returns continue to be attractive, and significantly reduced CapEx in International and Pressure Pumping and, obviously, Oil and Gas.

The Lower 48 CapEx was the largest area of capital allocation, as we deployed 25 new builds on a multi-year take-or-pay contract in 2012, and took our PACE-X rig from concept to design to manufacturing. Our current 2013 capital budget will continue this trend, with approximately 40% of CapEx allocated to the Lower 48 drilling market. Oil and Gas CapEx for 2012 was still significant at $100 million, of which $60 million was spent in the first quarter. However, we only spent capital for the purpose of enhancing these properties for sale, where we were required to maintain working interest. We anticipate 2013 Oil and Gas CapEx to be de minimus.

PACE-X rig. Slide 7 highlights our PACE-X rig, and some of the features. Our first PACE-X rig is deploying to the Haynesville shale for a major operator on a three-year contract. This new rig design leverages Nabors' 40 plus years of experience and dedicated designs for pad drilling, and applied them to today's environment of large-scale development in unconventional resource plays. The PACE-X is also designed to have best-in-class, pad-to-pad and over-the-road move times, making it equally applicable to today's development and exploration work, both domestically and internationally.

We are pleased to announce the signing this quarter of nine additional contracts for PACE-X rigs for one major and three operators on long-term contracts. This brings our total of new build PACE-X rigs scheduled to deploy on long-term take-or-pay contracts in 2013 to 17. These 17 rigs have average daily revenue rates of over $29,000 per day, and an average initial contract term of 2.7 years. The strong customer acceptance of PACE-X rig vis-a-vis our ability to sign term contracts for new rates in a challenging market reinforces our belief that we have designed the optimal rig for both exploration and development of global unconventional resources.

Further, we continue to have encouraging conversations with customers for additional comp commitment, and we will increase both our rig construction and capital spending should we win additional new builds. One of the things about this new rig is, that it is also incorporates as I said, the best of what Nabors has to offer, and it shows the strength of the portfolio, because it uses historically designs from Alaska. It uses knowledges of our International and Offshore divisions, as well, in the engineering. So it represents using all of Nabors, in terms of bringing it to bear on a problem.

With respect to safety, in 2012 we achieved the best safety record ever for Nabors. Achieving a total recordable incident rate across all of our global operations of 1.18 incidents per 200,000 man hours, while we averaged 20,000 employees consisting of 74 nationalities in 24 countries. Slide 8 illustrates the progress we have made over the years in our outperformance compared to the IADC. This reflects the human and monetary capital we have invested and initiatives we have implemented on our way to zero recordable incidents.

Nabors' commitment to safety starts with the Board and myself, and permeates throughout the organization. We have accomplished a significant amount over the last decade, and we are one of the safest contractors in the world, and continue to focus on safety aggressively.

Turning to slide 9, the bank facility. We expanded our committed revolving facility from $1.4 billion to $1.5 billion, extended the maturity by three years to 2017, and reduced our LIBOR spread by 70 basis points to 130 basis points. In addition to the $1.5 billion committed amount, this facility includes a $450 million accordion feature, providing the potential for additional liquidity if an opportunity warrants. As shown as slide 10, 2018 is the earliest maturity for our senior notes, and we are pretty comfortable with debt duration.

Next I would like do to update on our strategic objectives. Beyond the highlights we have previously outlined in early 2012, some key objectives. First, was improving the balance sheet quality and flexibility. As I have previously mentioned, we reduced the net debt to cap by 42% to 38%. We will continue to improve our balance sheet quality and flexibility, as we continue to responsibly deploy capital for state-of-the-art new build rigs and other equipment, acquire technologies that enhance our capabilities in drilling technology and automation, and act on attractive new value -- accretive acquisitions.

Streamlining the business. Near the beginning of the year, we set out a plan to divest our Canadian well-servicing, Peak Oilfield services in Alaska, coil tube and drilling rigs in Canada, and offshore jack-up and barges in our oil and gas holdings. Unfortunately, the market for those services and commodities and the associated multiples that acquirers were willing to pay for them declined, just as these assets were being marketed. Our Oil and Gas assets tie up a large -- large amounts of capital, and have additional capital requirements while contributing minimal cash. We sold off a portion of our holdings, including Columbia and five other smaller holdings.

We have also entered into a transaction to modify its NFR, which was partially realized during the fourth quarter, but not yet finally completed. We will provide additional information on this in the near future. Our oil and gas assets now comprise solely of Alaska, Horn River and Eagle Ford, and we will continue to pursue their sale. We continue to operate Canadian well-servicing, Peak Oilfield Services, the coil and tube in Canada, and our offshore jack-ups and barges, and we will continue to maintain this equipment, pursue new jobs and generating operating cash flows in the meantime.

With respect to our goal of enhancing operational excellence, I would like to point a few of our 2012 operating highlights. First, we were recently awarded the Rig of the Year by one of the largest operators in the Bakken shale for our rig, BO3. This rig was the customer's best performing rig in safety, downtime, and turnover, and it beat out several leading competitors for this award. Additionally, for the same customer in the Bakken, we averaged the highest footage per day, beating out their other two large contractors.

Our rig M25 drilled the best well to date for one of the Permian' s largest operators. The rig had the best drill time and the best mode time, beating out competitor rigs that were established in the basin. And finally, we performed multiple integrative solutions for our customers across our operating areas including the Marcellus, Bakken and Eagle Ford, delivering our broad suite of completion and production services in a coordinated, one Nabors package. Typically, that would involve pressure pumping, coil tubing, wireline and frac tanks.

Next on driving technology and innovation. In addition to the commerciality of the PACE-X rig design, we also had some significant technological achievements. This included first, our MODS 400 rig will commence operations later this year or in early 2013 -- 2014, excuse me. In this 4600 horsepower modular rig is the largest platform drilling rig in the Gulf, and other example of our ability to provide innovative solutions to our customer's challenging drilling requirements. We also completed two small acquisitions as we continue to round out our rig automation capabilities, focusing on handling systems, automated drilling and advanced downhole tools.

And finally, while dual fuel is getting a lot of publicity in relation to pressure pumping, Nabors' first incorporated dual fuel capabilities in our Alaska operations in the1980s, and more recently offshore. We are applying our dual fuel expertise to our Completion Services, and are currently working with Cat and other vendors, as we build the units for training and testing and plan to have dual fuel pressure pumping jobs run this year, probably in the Northeast.

Strengthening customer alignment. During the year, we merged our US well-servicing and pressure pumping units to create our Completion and Production Services business line. We also consolidated our US offshore and Alaska drilling operations with Lower 48 drilling.

We now are divided into two lines as a Company, Drilling and Rig Services and Completion and Production Services, which, hopefully, simplifies the way people think about us, both internally and externally. Both of these organizations bring an extraordinary wealth of experienced personnel and deep technical knowledge to their markets. By integrating them, we have, we think, brought together the best of what we have in these divisions. We have created new growth opportunities for our talented employee base, in the larger combined units, and we are improving our customer interface, particularly with those that we serve in multiple markets across the US.

We are making progress with our cost savings consolidation of our Well Servicing and Pressure Pumping business, and we reduced Completion and Production Services G&A by 16% from the first quarter to the fourth quarter. We anticipate realizing an additional 15% Completion and Production Services G&A savings on an annualized basis in 2013. We are also focused on operational improvements, and realizing additional cost savings across our other business units. Basically, the goal is to get more out of what we have.

Now let me summarize the consolidated financial results for the quarter. Operating income was $150 million, down from $228 million in the prior quarter, and $269 million in the same quarter last year. Our earnings per share from continuing operations was $0.44 per diluted share. The quarterly results benefited from net gains on asset dispositions, higher investment income, and a favorable tax rate.

Operating income reflected a charge of $17.7 million, due to the establishment of reserves with respect to a customer bankruptcy, and lower expected margins on a construction project in our US offshore operations. Early contract termination payments attributable to future periods amounted to $16.3 million, and nearly offset that charge. Net gain on asset dispositions were $17.2 million or $0.04 per share, resulted from $160 million in gains on asset sales, and $143 million in asset retirements and impairments.

The quarter's effective tax rate was 2.9%, which represented an adjustment to prove the normalized full-year rate down to 25%, thereby benefiting the quarter's result by approximately $0.10 per share. We expected the 2013 effective tax rate to be 27% to 30%, and cash taxes should remain at minimal levels. Our capital expenditures for the quarter were $279 million, bringing the full year total to $1.4 billion. This amount was lower than we had anticipated in early 2012, with the decline attributable to our focus on improving capital discipline.

The depreciation for the year is $1.1 billion, and sustaining CapEx was $411 million. For 2013, we expect depreciation of approximately $1.2 billion, and have currently budgeted $1.2 billion of CapEx, which includes construction of rigs in both the US and international opportunities. We also include 20 walking systems, and essentially flat sustaining CapEx. We will continue to focus on our growth and sustaining capital plans, and anticipate increasing our budget with additional new build awards.

Now let's turn to the performance of the operating groups. First one, the Drilling and Rig Services. This group consists of our land drilling operation, offshore rigs, specialized rigs, drilling equipment and manufacturing, drilling software automation and directional drilling operations. In fourth quarter this group earned $139 million in operating income, down to $185 million in the third quarter, and $212 million in the fourth quarter of 2011.

As you can see on slide 14, the seasonal improvement in Canada was offset by weaker results from the other business lines, although US Offshore and international had some items that I will discuss demonstrates their performance was better than indicated by headline operating income.

Slide 15 shows the current status of our worldwide drilling rig fleet. Including rig scheduled to be deployed, we have 213 top-of-the-line AC rigs including advanced deepwater platform rigs and remote location rigs in the Arctic and internationally. Additionally, we have 239 SCR rigs and 92 mechanical rigs. A significant number of these rigs have been upgraded with Canrig top drives and instrumentation, and consistently compete with AC rigs in the most challenging basins. Including 21 new builds yet to be deployed and scheduled upgrades, 221 of our rigs are [active] moving systems to accommodate pad drilling, which is increasingly becoming a differentiator as operators of the shale play transition to manufacturing drilling.

Slide 16 highlights the active fleet totals before and after the asset retirements. For the land rigs, we retired 20 SCR and 21 mechanical rigs. When we look at the net book value of the Lower 48 rigs, AC rigs today make up 75% of that total, and we continue to earn significantly above our cost to capital returns on the remaining SCR mechanical rigs.

Let's dig deeper now into this drilling group, starting with Lower 48 land drilling. The Lower 48 land drilling group earned operating income of $95 million, down from $115 million in the prior quarter, and down $35 million from the same quarter in 2011. For the full year, this operation earned $468 million, up from $414 million in 2011. On average our -- our average rig count was essentially flat in 2011 at 201 rigs. However, we saw a sharp decline in activity from the first-quarter 2012 high of 219 rigs, to a low in the fourth quarter of 173 rigs.

During the fourth quarter, we lost 21 rigs, and our average margin for the fleet increased $333 per day, finishing the quarter at $12,363 per day. However, this includes $1,028 per day related to early termination margins for future periods, and $490 per day due to the traditional fourth quarter favorable workers comp adjustment. We deployed 25 new builds in 2012, and already have 17 rigs scheduled to be deployed on long-term take-or-pay contracts in 2013. Looking across the various regions, fourth quarter rates were relatively flat compared to third quarter. But this is not evident in our margins due to rigs rolling over.

I would like to take a few minutes to discuss our relative market share in the US, the Lower 48 which has been the subject of a few recent analysts' few reports. On our third conference call, third quarter conference call, we acknowledged and briefly outlined the circumstances surrounding our disproportionate reduction in working rigs, as reflected in the third-party rig count data. I know Denny has spent a lot of time with you all, personally walking people through the factors, and I would like to summarize them today.

The industry rig count is down äpproximately14% from its 2012 high, to its recent low. Our Lower 48 rig count is down over the same period of time by approximately 68 rigs or 31%, as reflected in published third-party data. I think the situation can be condensed into four major factors.

First, capital misallocation. As we have acknowledged, we had missteps in the allocation of capital between 2006 and 2011, the correction of which is one of our major current priorities. Specifically, in the aftermath of the 28 -- of the 2008 financial crisis, we not only suspended US land rig building program, but negotiated economic settlements of 16 new build contract commitments that we had in place. The combined effect of these two moves put us at a severe disadvantage when new rig demand recovered in 2010, and we could not respond fast enough, thereby seizing a sizable share of the new build market all the way into 2012. Our improved capital discipline that I discussed earlier is designed to avoid missing opportunities like this in the future.

Second is contract cycles. In several cases we were the only rigs that the customer could terminate when they reduced budgets, in light of the weak dry gas and liquids pricing in 2012. As shown in our routine contract published schedules, we had a 118 long-term contracts matured in 2012, due to our efforts in early 2010 to secure the maximum extent of term contracts as a hedge against weakening gas prices. So, while we are ahead of the game in securing long-term contracts, we fell prey to unfortunate timing of the expiration of them.

Third, customer exposure. Several major customers with whom we enjoy an outsized market share sharply curtailed their own spending, 4 of which accounted for 41 of our 68 rigs decrease. 12 of these rigs received early termination compensation, with the balance released as long-term contracts matured. The one customer that dropped the most rigs is also the largest subscriber to our new PACE-X rigs contracts, affirmed their satisfaction with our performance So again, we view this as a temporary drop with views this towards gaining momentum with those same customers over the long-term.

Finally, industry market data. Industry rig counts do not reflect the economic equivalent of 25 rigs working, which is represented by the $75 million in lump sum termination and stand-by payments we received in the last three quarters of 2012. These two examples account for our disproportionate share loss. We are committed to regain that share as the market improves. We do not believe that there is a structural issue with our customer base, as exemplified by several points

First, we have subsequently received new build commitments from some of the same customers highlighted above. Secondly, we have recently designated by a large super major as a preferred provider for land drilling, as well as other services offered globally. Third, our performance continues to match or exceed best-in-class, as exemplified by the awards and records I previously mentioned. And fourth, the acceptance of our new PACE-X rig is testimony to our commitment to regain our position in leading the industry in advance rig and designs. We continue to put significant effort into developing tomorrow's drilling technologies, through our drilling operations and engineering organization supported by the R&D of Canrig and Ryan.

You will remember that the last quarter, we were cautious on industry predictions about market reset at the first of the year. As we predicted, operators did not ramp up their activity immediately. We do, however, expect rig counts to be higher by the end of 2013. But our optimism is tempered due to the lack of E&P budgets that have been released. It appears that operators are displaying hesitancy, given the uncertainty about commodity prices.

Additionally, customers are drilling more wells with fewer rigs, as efficiencies from crews, rigs and pad operations are now being realized. We are optimistic that a gradual increase in industry active will serve to improve utilization and stabilize pricing, although there continues to be a number of speculative new rigs entering the market at lower rates and shorter terms. With the lack of significant movement in the rig count so far in 2013 we anticipate pricing to remain under pressure in the near-term, which will impact our margins with first quarter expected rig terminations.

Today, we have 170 rigs on revenue, including 11 not working but earning revenue. We currently have 126 AC rigs working on -- working or on rate, and have put 8 AC rigs back to work since the beginning of the year. Our current AC utilization is 92%. We put these rigs back to work at an average rates of around $20,000 -- $20,000 to $21,000, driven by spot market pricing. Four of the rigs we put back to work recently in West Texas accounted for 40% of the year-to-date rig count increase. I think there was a 10 count rig increase in West Texas, 4 of them of ours.

Although spot pricing appears to be stabilizing with the improving rig count, the impact of the high number of rigs that we priced in the market throughout the fourth quarter will likely result in a decrease in first quarter normalized margins on the order of about $1,000 a day.

We had 118 term contracts expire in and roll to the spot market in 2012. 36 of those were in the fourth quarter alone. This coupled with the other 74 rigs that were working on at spot market rates is what leads to the lower margin expectation. However, we believe the mark -- the bottom for us -- this represents the bottom for us, as we only have an average of 12 rigs expiring per quarter, as we go forward in 2013 in the first quarter of 2014 -- 2013, excuse me, assuming spot pricing remains stable.

Our legacy rigs have been recently described as our upside, and we agree. 14 of these other rigs have been upgraded with AC top drives, a higher hydraulic horsepower and K-Box controls, and have the power, torque, hydraulics and setback capacity to be competitive in unconventional basins, especially should there be a rebound in natural gas prices.

We refer to these rigs as our SCR plus rigs. We have 75 legacy rigs sidelined, consisting of 14 SCR plus rigs, 38 SCR rigs, and mechanical rigs. Our SCR plus rigs' utilization is double that of the SCR mechanical rigs, and we are reviewing the opportunity to add walking systems to some of the SCR plus rigs.

We have maintained a strong foothold with our legacy rigs in North Dakota, where the rigs and their crews continue to demonstrate their relevance in today's market. In addition, we are looking at repositioning our larger horsepower rigs to Canada and the international markets.

Another point of strength in our fleet is our pad drilling capability. We currently have 86 rigs capable of drilling on pads, 61 of which are on walking systems that allow multi-directional walking, and 25 of which have skid systems that are similar to competitor systems and are therefore similarly functionally limited. Our current pad-capable rig utilization is 88%. After completion of planned upgrades to walking systems on existing rigs and completion of PACE-X new builds, we will have 139 pad-capable rigs,114 of which will have multi-directional walking capabilities. So between the AC fleet composition and the pad concept, I think we are very well-positioned in terms of our asset base.

Next turning to the US offshore. Our US offshore operation reported an operating loss of $14 million, down from a $4 million operating loss in the prior quarter, and $3 million of operating income in the fourth quarter of last year. As previously mentioned, including the fourth quarter loss was $17.7 million related to an allowance for doubtful accounts due to a customer bankruptcy, and lower margin expectations on a construction project. Excluding the these amounts, operating income was $5 million, a sequential increase of $9 million driven primarily by higher super sundowner platform rig utilization and margins.

As previously mentioned, last year we integrated this operation along with Alaska drilling, into our Lower 48 drilling operations. This allows us to leverage the deep engineering know-how embedded in both of these units with ND USA and apply them across the Company. We expect to see significant year-over-year -- significant year-over-year growth in the offshore business with continued increases in platform rig utilization and margins. The two new 460-horsepower deepwater platform rigs we are building for major customers, one of which we own, should commence operations in late 2013 or early 2014.

Alaska. Our Alaska drilling operations posted operating income of $2 million, down seasonally as expected from $4 million in the third quarter, and down from $5 million in the fourth quarter of last year. Operating income for the year was $42 million, up significantly from $28 million in 2011 due to increased rig and camp utilization. Alaska has become highly seasonal, with little year round drilling work being done in the legacy North Slope fields where progressive tax rates limit reinvestment.

With the recent election results in Alaska, there is a high level of optimism regarding relief from the progressivity of the tax structure in the 2013 legislation which ends in May. Should this much-needed tax reform occur, we expect to see a significant increase in activity over the next couple of years. Longer-term, there are numerous strategic projects planned in new areas where tax incentives are in place, but these are characterized by long lead times, and will likely not commence for two or three years. Our market position will allow us to participate meaningfully in these market opportunities when they materialize.

Canada. Our Canadian operations posted operating income of $28 million, up seasonally from $22 million in the third quarter, but down from $37 million of the fourth quarter of 2011. Rig activity increased sequentially by 2, to average 36 rigs operating in the fourth quarter. However, this increase is much less significant than it traditionally is, given the current market environment. Our current AC rig utilization in Canada is 67%.

Margins increased $950 over the prior quarter and averaged $14,389, primarily from a favorable market mix of big rigs versus small rigs which benefits us. We are exploring the option of moving additional large rigs from other markets into Canada to continue to capitalize on this demand. For the year, this operation posted operating income of $97 million, up slightly from the prior year of $95 million. As compared to the prior year, the $1,955 per margin increase was not enough to offset the 5 fewer rigs running, which ultimately weighed on Canada's earnings.

While customer cash flow constraints limited the traditional seasonal growth in activity in the fourth quarter, we still expect to reach seasonal activity highs in the first quarter of 2013, but less than in previous years. The same spending practices witnessed in the Lower 48 are weighing on this market, and any positive sign in the US should be reflected positively in Canada. Similar to the Lower 48, pad drilling capability is becoming increasingly important in the Canadian market. Our current pad-capable utilization rate is 82%. In order to satisfy demand for pad rigs, we upgraded 2 existing rigs with walking systems during 2012. We have 1 new build rig with a walking system scheduled to deploy this quarter, and are upgrading 2 existing rigs with systems over the next few months. These new upgrades and new conditions will bring our capacity to 20 pad-capable rigs, of which 18 are on walking systems and 2 are on skid systems.

Now let's turning to International. For the quarter, International posted operating income of $23 million, down from $30 million in the third quarter, and flat with the fourth quarter of last year. Third quarter operating income included an early termination payment of $8.8 million, of which $6 million would have been earned in future periods. Adjusted third quarter operating income for that third million dollars -- for that $6 million, resulted in essentially flat quarter-to-quarter operating income.

Rig activity of 119 rigs was unchanged for the quarter. Headline margins declined by $295 to $12,004 per rig day. However, excluding the early termination payment from the third quarter, margins actually increased $252 per day in the prior quarter.

In 2012, our international operations generated operating cash flow of $422 million, a $25 million increase in over 2011, and demonstrated improved capital discipline with CapEx in 2012 of $265 million, down from $389 million the prior year. This resulted in net operating cash flow of $156 million for 2012, a $413 million improvement over the prior year which is significant, given that 2012 operating income declined annually, $32 million to $91 million. We expect to see year-over-year growth in our 2013 international operations as contracts are renewed at higher rates.

Jack-up. Our jack-up rig 660 recently secured a three-year contract at an attractive rate in Saudi, although it will be going into the shipyard in late fourth quarter of this year or first quarter of 2014. And our second P&G rig in Paupau New Guinea is expected to spud in the second quarter. This growth will be somewhat muted in the first half of 2013 with the ongoing situations in Iraq and Yemen, and potential weakness in Colombia as rigs come off contract. Regardless, 2013 should see a significant increase in net operating cash flow, and we remain optimistic about the long-term growth prospects given the levels of discussions on additional potential tenders.

Rig Services. Our Rig Services line consists of Canrig, Peak and Ryan which posted results of $5 million this quarter, compared to $16 million in the prior quarter, and $13 million in the same quarter of last year. We had lower results as Peak's traditional fourth quarter seasonality was further impacted by a slow start to winter weather in Alaska, and Canrig experienced a decline in service and rental activity, lower third-party shipments and higher investment in R&D. For the year, these businesses generated operating income of $79 million, up from $56 million in 2011. We expect Canrig to be up marginally this year, and the other businesses to be flat to slightly down in 2013, with Peak experiencing its seasonal high in the first quarter.

Now let's turn to our other line, the Completion and Production Services line. This line consists of services that complete and maintain wells, including pressure pumping, well-servicing, workover and coil tubing rigs and fluid management. Operating income for this division is tabled on slide 26.

Completion and Production Services posted $51 million in operating income, down from $80 million in the third quarter, and $101 million recorded in the fourth quarter of 2011. Completion Services operating income of $30 million for the fourth quarter, was down from $47 million in the prior quarter, and $76 million in the fourth quarter of 2011. Results were negatively impacted by contracted customers reducing stage counts to contractually required minimums, which impacted utilization and consequently pricing with the change in geographic mix of work.

Results were also impacted by exacerbated seasonality with customer-driven holiday shut-ins and continued weak spot markets. These factors resulted in reduced sequential revenues, and US operating income margins declined from 13.1% to 11.6%. This quarter's total operating income included a $4 million loss for operations in Canada.

As seen on slide number 29, we have 26 frac spreads in the United States and Canada, with a total hydraulic horsepower of 805,000. We have a strong mix of Completion and Production Services across our footprint, and have been successfully -- successful in pulling through additional services to our customers with integrated services and bundled packages across our region. We continue to actively market our bundled services packages to additional customers.

Referring to slide 13, we now have 19 crews working in the US and 2 in Canada. In the US, we have 11 term contract crews, with maturities ranging from mid 2013 to 2014. We have 10 crews working in the Bakken Rockies, with 7 of these crews working under term service agreements. 2 of our 3 Eagle Ford crews have term agreements. We have 1 term agreement crew and 3 spot crews in Marcellus, and 1 term agreement and 1 spot crew in the Permian. 2 spot crews are working in Canada. The spot market remains weak, and we currently have 5 spot market spreads idle. These spreads were operating in the Haynesville, Mid-Continent, Barnett and Permian markets. For the year, operating income was $189 million, down from $229 million in 2011. Our guar gel costs peaked in July, and we realized lower guar material costs of goods sold in the fourth quarter.

Turning to 2013. While January activity levels were off to a slow start, utilization of contracted crews has recently increased. The continued strong operating performance of our crews has enhanced our ability to extend our contracted commitments with key customers. Visibility with respect to the spot market remains challenging, however, given the continued horsepower supply demand and balance, and there continues to be pricing pressure in certain markets. On a positive spot market note, we recently put one of our stack crews back to work in the Marcellus, which will improve Marcellus total utilization. Overall, however, we remain cautious on this business with 5 stack spot crews, and do not anticipate utilization pricing -- utilization improving until the rig count increases.

Production Services. Our Production Services operating income of $20 million was down from $33 million in the third quarter, and $24 million in the fourth quarter of 2011. The sequential decrease was driven by a 7% decline in rig hours, and a pronounced seasonal slowdown, which was accentuated by a few key customers. As shown in slide 29, at the end of the fourth quarter, our US operating fleet consisted of 442 well service rigs, about 3,500 fluid service trucks, and a little over a 1,000 frac tanks. We remain encouraged by the long-term prospects for this division, given the large number of new oil wells that will convert to artificial lift over time, and will require increasingly frequent maintenance.

The increased inventory of horizontal wells, which are more workover intensive, should also decrease the demand for these services, particularly among higher capacity rigs. We have seen consistent year-over-year growth in rig and truck hours, and rig and truck rates are shown on slide 32. Operating income for the year was $104 million, up from $75 million in 2011, and we expect to see continued annual growth in this business in 2013 from existing assets and the opportunity to deploy additional growth capital with this -- with attractive returns in this sector. Our first-quarter 2013 results will experience typical seasonal weakness.

In summary, the near-term market is challenging. Macro worries are still prevalent, and lower levels of customer spending in North America are adversely affecting all our areas of our operation. While we anticipate some increase in customer spending as the year progresses, we will improve utilization moderately. It is not likely to absorb sufficient capacity to restore pricing momentum. That will come with a more meaningful increase for demand in rig and services, which can occur for a number of reasons including improving gas prices, which would have the greatest impact.

What this translates into for us, is the need to focus on the matters that are within our control, extracting more from our overall infrastructure and asset base. By first enhancing utilization of our asset base. Second, maintaining execution excellence in the work we are doing for our customers. And three, focusing on our cost structure. We are positioning Nabors to be the provider of choice in reducing well costs, particularly in unconventional resources, and are focusing our activities, resources and assets in that direction. I would just like to close with the reminder, that despite the weaker North American market conditions, we still expect 2013 to be another year of significant generation of net operating cash.

So that concludes my official remarks. And with that, I would like to hand over the call for questions.

We are ready for question and answer, please.

Thank you.

(Operator Instructions)

Our first question is from the line of Jim Rollyson with Raymond James. Please go ahead.

Good morning, gentlemen, and Tony, thanks for all that detail.

You are welcome.

Kind of going back to your last statement just on free cash flow. And you did a really good job last year of working on taking cash, and repaying your debt level. And I am kind of curious what your kind of today target is of raising cash from operations and divestures and what have you, in terms of what are you expecting to repay for debt when you look at 2013?

Sorry -- it is about $400 million. (Multiple Speakers) Without assets, James.

Okay. Prospects for asset sales still -- (Multiple Speakers) -- on E&P?

Yes, we have got those three E and P properties out there. And they are all with people. And we are working it hard, to get those put to bed. And so that focus continues. That remains a high focus, because it's part of the concept of reducing the noise in the Company and focusing our energy on things that benefit us in the long term. So we are really committed to do that.

Okay. In your offshore segment, you mentioned things maybe looking a little bit better heading into '13. Kind of your outlook for -- maybe time frame of returning to profitability? Because it sounds like the new platform rig you mentioned doesn't come in until very late in the year. Just kind of curious how you think about that progression through the year.

The super sundowners right now are enjoying good utilization. As I mentioned, if you adjust out those one-time charges for the fourth quarter, first quarter we should just see profitability in that segment in the first quarter.

Okay. And lastly, you mentioned on the international front the fact that margins should improve a bit. It sounds like a little bit from pricing. And then as you go through the year I think you said you have got some contracts that come in the back half of the year. How do we think about international, just broadly from an activity standpoint? Last year we were waiting for that to ramp up, and obviously things have kind of stayed from a rig count perspective and a profitability perspective relatively flat. How do we think about the -- maybe where the rig count is today and where you think that may exit the year?

I think the rig count will slightly increases in 2013. But we see a lot of tender activity. And so I think we may exit 2013 with more rigs. But keep in mind that when you look at tender activity internationally, it probably takes six to nine months just to -- from- submitting a tender, getting the award and preparing the rigs, you could easily talk 9 to 12 months before the rig actually is started. So the year from that perspective is pretty much over.

Okay. Thanks for the help.

Thank you.

Thank you. Our next question is from the line of Mike Urban with Deutsche Bank. Please go ahead.

Thanks. Good morning.

Morning.

So, Tony, give us some good color on some of the cost savings that you have realized. Although it sounded like it was primarily on the G&A side. Could you maybe give us a little bit more sense in terms of -- just how far along you are in the whole integration and consolidation process internally, whether that is in dollar amounts, in baseball terms in innings, and kind of where we can expect to go from there?

Well, as I mentioned, the first quarter to fourth quarter decline in G&A, just in the completion of production services, that has been -- that has occurred. In other words, you take our run rate, how those units were operating before the merger took place, to how they are operating in the fourth quarter, there is a 16% decline in that combined G&A number already. And what we are saying is that we think going into next year, we can realize an additional 15% on an annual 2013 to 2014 basis. That effort does not include efforts on facilities which is still on the table, which will take longer. So I'd say we're still in the early innings of the ballgame, to use your metaphor.

The other aspect is that is just G&A. The other point is to really use the Nabors supply chain organization to help change our cost structure on stuff we do in that. And there also, I think we are in the early game, the early stages. Nabors supply chain has now taking over part of the inventory and distribution of material, for example, in the -- on the completion side. And we hope the greater focus there is going to yield some benefits. So I think there is -- I mean, the good news is everyone is already committed to it. The fact that we have actually done this already shows we are serious about it. And I think there is still more to be done.

Okay. That's helpful. And then I guess on the revenue side you had talked about some successes in integrated services, and I think you termed it, a one Nabors concept. Is that something that you are focusing on more as you do integrate the business? Is there a concerted sales and marketing effort there, or is that there more of a customer pull kind of thing?

It is definitely something we are focusing on. First of all, within the completion of production group themselves, there is a lot of related -- related work. So if you have a Pressure Pumping job, why should you be there with a fluid manager, for example? So by combining these groups together, there is going to be a much more concerted effort of marketing these all to the customer on a uniform basis. That is basically going to be core to what they are doing. In the facilities, the way we are putting together, the facilities will facilitate that by combining in various core places, all those operations in one place, which would make it easier. It will combine the back office, et cetera. So that is all part of the same strategy.

Okay. So as we roll all those things together, you gave a fairly conservative outlook, which I understand. But given potential to gain share, to integrate, to bundle and the costs coming out, assuming a flat outlook, we could still see margins come up based on the things that you control. Is that the way we should think about it?

That's the objective.

Okay. That's all for me. Thank you.

Yes.

Thank you. Our next question is from the line of Byron Pope with Tudor, Pickering, Holt. Please go ahead.

Good morning.

Morning.

Just one question from me, as it relates to Completion Services. When you talk about operating income being down again sequentially in Q1. I am trying to understand if it is the seasonal headwinds in place like the Bakken or Marcellus, or more a competitive landscape that you are see out there. And really what I am trying to get to is, I am trying to think about from Op income perspective for Completion Services, when we should think about that business potentially troughing? Is it kind of Q1, Q2 as you think about that business?

Tony?

Yes, I think in the first quarter -- we definitely are seeing the effects of kind of a holiday hangover, if you will. In addition to that we are positioned in a way with our footprint that represents about 75% of active assets, where we work in some of the seasonal environments, i.e. the harsh winter environments, if you will. But we are encouraged as we have been able to place some additional low utilized crews to high-utilized positions, and recommence operations for one of our idle crews. In addition to that, we have been able to extend several contracts that have had [mudding] and services with them. So as far as 2014 based on operational execution and our safety performance. So, frankly, while it is below expectations right now, we are cautiously optimistic that due to some of the ramp-up we are seeing in potential utilization, that eventually that is going to lead to improvement in pricing. When that happens -- it's still a bit foggy, that is tough to say, but we are encouraged to say the least. And the rollovers that we have done on the contract, these have been at price levels that -- under the current marketing conditions they are advantageous for today.

Okay. Thanks. Appreciate it. I'll turn it back to you.

Thank you.

Thank you. Our next question is from the line of Jim Crandell with Dahlman Rose. Please go ahead.

Good morning. Tony, I think it's pretty impressive -- with all the contracts you have won for your X rigs, and the day rates are pretty impressive, too. I mean, are you -- you must be, A, very pleased to be -- to what extent do you think that this -- that your developments here with this new X rig really sort of change the dynamic there? And I know you also -- you have talked about some of the products of Canrig. Your strategy in the US business has been really to -- to try to compete by improving your offering, and offering the best quality rigs and what the market wants out there. And I guess if you could elaborate on the success you have had, to the extent that you think you could really continue that going forward?

Well, Jim -- I am glad you raised this question. I think one of the things -- first of all, I am kind of personally pleased about is -- we got these rig awards in the context of a market that has this -- shift downward, a market where even today everyone talks about new rigs. And I don't know what you all have analyzed in your analyst reports, but people say that anywhere from 50 to 75 AC existing rigs out there. And yet, not withstanding that, we signed up these new rig contracts. So it must mean that there is something really special about what we are offering. And what I would like to say is that these rigs really try to represent a little bit of what the change is, what's going on here at Nabors.

It is a real focus on providing a solution to an operator, not just to -- an asset to earn a day rate from. And it is also an effort to have this Company use best of what it has to offer from, all the various what is heretofore known as silos within the Company. I mean, this X rig, when people look at it, they say it is a -- it looks like an offshore rig on land. Other people say it has a lot of the mobility issues figured out that when we are moving stuff internationally, because it breaks down into container sizes. And as I mentioned, it is at its heart a pad-capable rig, which we have been doing pad drilling in Alaska. So really what it represents is, the change at Nabors, to tap all the knowledge that we have and energy to bring it in a uniform fashion to what we do.

And the point of Canrig in this thing, is also interesting. I mean, as you know, 40% of the purchase price or cost of the rig is manufactured by Canrig. So what we like to think is that the smartest components, the BFD for example, the top drive, all the controls, and one of the things that we are also very focused on is embedding all Canrig's algorithms and building on that to make -- it is not just a new rig from a hardware point of view, but a new rig from an intelligence point of view. And we are going to spend a lot of time using that and using Canrig to help us do that. So that is sort of where we are at.

Okay. Good. Another question, Tony. On your asset sales, you talked about the three Oil and Gas units. How about the rigs and oil service assets that you have for sale now? Are you optimistic that those businesses will still be sold? Will they be sold for what you thought you could get for them early on? Or might you just sit with some of these assets and wait for improving markets?

I think on the well servicing, we will probably wait having been through it, and not found the window, the right window. But on the jack ups, we -- the Gulf of Mexico jack-ups, I think we are still -- and barges in the Gulf of Mexico we will be looking at an opportunity. It depends. Right now the way the market is going, maybe an opportunity will open up.

Okay. And last question, Tony. Of your different -- of your different business -- of your different product lines, which businesses if any, do you think you may not have seen the lows now in EBITDA? And you could be still looking at results heading down from here?

I think Pressure Pumping is probably the one that is the greatest risk. And then the USA for the reasons I said, the $1,000 a day difference going into the next quarter. Those are the two from where we sit today.

Got it. Okay. Thank you very much, Tony.

Yes.

Thank you. Our next question is from the line of Wager Syed with Goldman Sachs. Please go ahead.

Thank you very much. Tony, you have about $380 million of assets held for sale on your balance sheet. And even if you -- assuming that somewhere around the $300 million mark, would you consider like a dividend? You could easily pay, like a $1.00 in dividend to the shareholders. Or a even consider a share buyback which at this price could amount to 5.5% of shares outstanding?

I think our focus right now has been to generate the cash and get that cash down, get our net debt down, and still have enough firepower to undertake our capital development program. So I am not saying we wouldn't consider those things. I think we will -- we think about them all the time. It is just in terms of the current -- the short-term priority. If you go back about four years ago when we had excess cash -- well, we thought we had excess cash, we had no reluctance in doing a $1.5 billion or so in share buybacks. So you are not talking to a management team that is not prepared to give back money to shareholders. It's just a question, where do you think the right opportunity and use of the cash is. And given the variability and uncertainty of the outlook with our sector right now, and the visibility, it doesn't seem like it is the smartest time to maybe do what you are talking about. But we are looking at it all the time.

And when could be the next time that you could take a look at that? Does that have to be a Board meeting where that decision is made?

I think you could assume that we are taking -- we are taking a look at that regularly, including our next Board meeting.

Okay. Thank you very much.

Ian, I think we are bumping up against our time limit. Let's take one more question, please, and we will wind up the call.

Okay, great. That is from John Daniel with Simmons & Company. Please go ahead, sir.

Thank you for taking my call, and thank you for all the granularity this quarter. Tony, first question is --on your rigging work count slide shows 18 rigs in the Haynesville. Can you share what your outlook is for those rigs over the next couple of quarters?

(Multiple Speakers). In Haynesville, you have got 18 rigs. What's the outlook for those?

(Multiple Speakers). Actually interestingly John, the first X rig is going to Haynesville. Yes, the (inaudible) first set is actually mobilizing into this week for the Haynesville. Between the Gulf Coast, and what we call our architects area, we are positioned for -- the market is going to change. We just don't know when. We are well-positioned for that market. And also the Haynesville area also contributes operational support down into Woodbine. So we -- there is no short-term uptick, with the natural gas prices do, we are going to see a big opportunity for our rigs.

Okay. Next one, Tony. You mentioned that Lower 48 cash margins will be down about $1,000 a day. Is that decline based off the reported cash margins, or are the cash margins adjusted for the contract termination payments?

That's adjusted out.

Adjusted out.

That's kind of the exit rate of 4Q. So it's not really any further deterioration that we expect.

Got it. Okay. Then the last one is just, Denny, just some color or commentary on your cash margin expectations for Canada in Q1?

It gets very mixed influence. We are going to have more rigs running. But there is a mix of -- the big rigs work early and then the smaller ones come in. So it could probably average slightly less than it did this quarter. Mostly all because of mix.

Okay. Thank you very much.

Thank you.

Ian, that will wind up our call today. If you would close it out for us, please.

Thank you. Ladies and gentlemen, this concludes the Nabors Industries Limited fourth-quarter 2012 earnings conference call. Thank you for your participation. You may now disconnect.