Nabors Industries Ltd (NBR) 2014 Q4 法說會逐字稿

Good day and welcome to the Nabors fourth-quarter 2014 earnings conference call. All participants will be in a 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 Denny Smith. Please go ahead.

Thank you for joining Nabors earnings teleconference.

Today, we will follow our customary format with Chairman, President, and Chief Executive Officer, Tony Petrello, and William Restrepo, our Chief Financial Officer, providing our perspectives on the quarter's and the full-year results along with some insight into the trends we are seeing in our markets and how we expect Nabors to react to these trends.

In support of these remarks, we have posted some slides to our website which you can access to follow along with the presentation if you desire. They're accessible in two ways. If you're participating by webcast, they are available to download within the webcast.

Alternatively, you can download the slides from within the Investor Relations section of Nabors.com under the events calendar submenu where you will find them listed as supporting materials under the conference call listing. Instructions for the replay our posted on the website.

With us today, in addition to Tony, William, and myself, are Laura Doerre, our General Counsel, and the heads of our various business units. Since much of our commentary today will concern our expectations of the future, they may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in its filings with the Securities and Exchange Commission. As a result of these factors, our actual results made differ materially from those indicated or implied by such forward-looking statements.

Now, I will turn the call over to Tony to begin.

Good afternoon and welcome to the Nabors Industries conference call to review results for the fourth quarter and full year of 2014. We appreciate your participation.

As Denny mentioned, we have posted the accompanying presentation slides on our website. I will begin with some opening remarks. William will then follow with the financial review of the fourth quarter, and I will wrap up and take questions. I will lead off with our accomplishments during 2014.

First, we were awarded multi-year contracts for 23 new build rigs. These awards included 16 PACE-X rigs to 10 different customers. Our international segment secured awards for six new builds, including four in Saudi Arabia and two in Kazakhstan. Our Alaskan operation received an award for new coiled tubing drilling rig for work on the north slope.

Second, we deployed 36 new or substantially upgraded rigs during the year. These included our 11 new builds for Saudi Arabia, both of the platform rigs for Mexico, five rigs in Argentina, and platform rigs in Australia and Malaysia. In the US, we deployed 16 new PACE-X rigs.

Third, our strategic review process culminated in the merger agreement with C&J Energy Services. In this transaction we are combining our Completion of Production Services business with C&J Energy Services. We will receive $688 million in cash and retain ownership of approximately 53% of the combined publicly held company.

Next, I would like to mention one very notable achievement. For the full-year 2014, the Company's total recordable incidence survey, or TRIR, improved to 0.93. This is the first time in the Company's history that rate has been better than one. This performance is a testament to the combined efforts of every Nabors employee and the Company's total commitment to eliminating injuries and incidents. Continuing this highly favorable trend, our safety performance in January improved even further. We are encouraged by the start to the year and we remain focused on our goal of zero incidents.

Now, I will, and fourth quarter performance. In total our operating results came in slightly below our internal expectations at the beginning of the quarter. The downturn in the lower 48 rig count impacted several of our businesses during the latter part of the quarter. At the same time, the international business benefited from new rig deployments. We began taking actions to rationalize our expense structure and I will speak to those in a few moments.

As we enter the fourth quarter, we had plans to ramp our PACE-X new build program to four per month starting during the first quarter. In view of its deteriorating environment, we have taken rapid action to drastically cut back on our new build schedule for 2015.

At this point, we anticipate completing 17 rigs during this year. Four of those have already been deployed, five of the remaining 13 already have contracts. We are also continuing our investments in advanced rig and downhole technologies with great prudence. We believe our customers will increasingly demand high-performance drilling solutions that improve well economics, especially in this environment. Nabors is fully committed to driving that progress.

So now to some specifics on our fourth-quarter results. All of our drilling segments improved on the financial results of the third quarter, excluding the impact of previously reported early termination payments in our US drilling operation.

Total revenue for the quarter of $1.78 billion slightly exceeded the third quarter, again without the early termination payment. This performance occurred despite the steep decline in commodity prices during the quarter which impacted volumes in our US and Canadian drilling segments.

The drop in oil prices also drove the decrease in volumes in our Completion and Production Services business. Normal end-of-year seasonality for these activities played its part in NCPS's sequential decline.

Fourth quarter operating income declined to $152 million from $173 million in the third quarter, adjusted for the $30 million termination payment paid in the third quarter. EBITDA was $446 million versus $460 million on the same basis in the previous quarter. Moderately improved drilling results were more than offset by more material declines in Completion Production Services, as well as in other rig services.

As part of the annual review of the value of our worldwide asset base we recorded impairments and retirements of approximately $1 billion. Of this total, approximately $400 million was for goodwill and intangibles in the Completion Services and Ryan Directional Drilling business. The remaining $600 million address legacy rigs and rig-related equipment throughout our global fleet.

For the full year, revenue totaled $6.8 billion, up from $6.2 billion in 2013. Operating income for 2014 was $598 million, up from $558 million in the previous year. In 2014, Nabors generated operating cash flow, or EBITDA, of over $1.74 billion, up nearly $100 million from 2013.

I will wrap up the summary with a recap of our fourth quarter new build activity. As we announced a few weeks ago, we received awards for three new build rigs. Two were for PACE-X rigs, each for a different customer in the lower 48. The third was for a new coiled tubing drilling rig for the north slope of Alaska. We expect to deploy the new X rigs during 2015. With a new Alaska rig, we are looking to begin drilling operations in 2016.

Now, I will update you on our pending merger with C&J Energy Services. In February, we reached an agreement to reduce the cash portion of the consideration we expect to receive by $250 million to $688 million. Subsequently on February 13, the SEC issued a notice of effectiveness for the S-4 registration statement of Nabors Redline Unlimited.

With that milestone, a special meeting of C&J stockholders to consider a vote on the transaction has been scheduled for March 20. Proxy materials have been distributed to C&J shareholders and assuming satisfaction of all customers and closing conditions, we expect to close the transaction in March 2015. In the meantime, merger integration plan has made substantial progress. Both teams continue to work to diligently to plan for a smooth transaction after the closing. We are pleased with the progress with a to realizing the benefit of this transaction.

With the consummation of the merger now in sight, I want to reiterate our enthusiasm for this transaction. We believe the combined operations will be formidable competitors in their target markets. The new company, led by Josh Comstock, will have a deep management bench with some of the best people in the sector. Its asset base and geographic footprint will provide ample opportunities for future growth.

At the same time, we will sharpen our focus on the drilling business. The transaction enhances our financial taxability and our shareholders should benefit from Nabors ownership of just over half of the new entity.

Now, let me turn to our results: our fourth-quarter earnings were driven primarily by, first, end of year reductions in lower 48 drilling activity, which had a material impact on our results starting in the month of December; second, a decline in volumes and margins in our Canrig and Ryan directional drilling subsidiaries; and, third, seasonal declines in the impact of lower oil prices in our Completion and Production Services business. These were partially offset by improved performance in the international segment as new rig deployments and contract renewals lifted margins. Our Canadian business benefited from seasonality, while Alaska benefited from seasonality, as well as higher demand.

Now, let me turn to our outlook. The steep drop in oil prices and uncertain prospects have caused extraordinary rapid drop in drilling activity in the US. The industry has shed approximately 35% of the rigs that were working at the peak of the fourth quarter. Our lower 48 rig count is down approximately 32% from our peak. It currently stands at 138 rigs, including 21 stacked on rate. Thus far, the downturn has been largely indifferent to rig types and capabilities.

In this environment, operators are slashing their capital spending commitments. They are shedding rigs based on the lack of term contracts rather than on the quality of the rigs or the drilling performance. Utilization of our US lower 48 AC rigs has declined to 68% from 94% at our peak rig count. Among our AC rigs, our 1000-horsepower M-class rigs have experienced the largest decline in utilization, while our 1500-horsepower rigs have held up better.

Utilization of our X rigs remains at 100%. Legacy rig utilization has dropped 20% and 40% in the same timeframe. By geography, the Rockies, as expected, including the Bakken and the mid-continent, have seen the greatest slowdown in the number of rigs working.

Going forward, we expect continued erosion in both industries in our rig count. The impact of pricing and reduced activity will be evident in our first-quarter results. Based on the current trajectory of the decline in our rig count, we expect financial results to decline further in the second quarter. As we look further out and as the market stabilizes, we anticipate operators will high grade their rigs after they right size their drilling programs.

We have already had preliminary discussions with several customers who are interested in upgrading to higher performance rigs for their future drilling plans as their existing rig commitments with competitors expire. We are also working on multiple initiatives to enhance the value proposition on certain classes of rigs.

In our Completion Services business we are also seeing significant impacts an industry downturn. Price competition has intensified as the market contracts. Utilization has fallen as our clients reduce their drilling and completion activity. We expect this unfavorable environment to persist throughout the first quarter with activity potentially suffering further from harsh weather.

The Production Services business has recently experienced some pricing deterioration for both rigs and fluids management. Nonetheless, we have experienced some stability in activity during the early part of the year. In the last major down cycle, demand in this business line proved more resilient than are US drilling business. At this point, we anticipate that should be the case again.

At Canrig, the drilling industry's new rig-building activity, at least for the domestic market, is decelerating. Service and rental activity will also be impacted by the declining North American rig count. Canrig is seeing growth in its repairs business and has been pursuing services in rental in new international markets.

In Canada, activity and financial results improved sequentially in the fourth quarter and we're about on par with the year ago, though less than we originally anticipated. The typical seasonal strength of the winter drilling season was severely curtailed with customer programs and budgets being cut as a result of low oil prices. We now expect declines in both activity and financials in the first quarter, setting the stage for a challenging year in 2015.

Now, let me shift gears and discuss two of our businesses with more positive outlooks. In Alaska, our current outlook calls for year-over-year increases in both activity, and financial results through 2015. That does not include the new rig which we plan to deploy in 2016.

Last but not least, I will finish of the outlook for the international business. In 2013 and 2014 we were busy bidding, contracting, building, and refurbishing rigs. We started to plummet from this activity in 2014, though the financial impact was subdued. As we peer through 2015, based on our work over the past two years, the full impact of these rigs begins to emerge. At the same time, we are winding down some significant programs such as the project in Papua New Guinea and some less significant ones, including our work in Romania and offshore India.

The international market is not immune to the current price of oil. Many operators are seeking cost relief. We are working with them to work with credit solutions that will benefit both sides. Our forecast for 2015 calls for lower rig activity than in 2014 as a result of the completion of several projects and of our long-standing plans to abandon several low profit or losing markets.

Nevertheless, the financial contribution of the rigs we are putting to work should outweigh the negative impact from the lower number of rigs and the short-term concessions to customers. In other words, we still expect our 2015 international financial results show improvement over 2014 though certain markets could be at risk.

Based on the concrete steps we have taken recently and in prior years, I have great confidence in the Company's ability to manage the current downturn. This is not our first rodeo. These initiatives are ongoing, and we will modify them as market conditions and our outlook warrant. The drilling business by its nature requires regular capital expenditures.

Our target in the current downturn is to generate adequate free cash, which we define as EBITDA minus capital spending to cover interest in cash taxes. The most recent iteration of our capital budget is right at $1 billion. This plan represents a $900 million reduction from our spending in 2014. The 2015 budget funds our current project and supports our ongoing operations.

At this point, our budget contemplates 17 new build X rigs. It also includes the Completion of Production Services business. If the market deteriorates more than we expect, we will reduce that spending figure. We are also in advanced discussions with multiple operators for additional rigs. We could increase our spending if those opportunities, backed by from contracts, materialize.

On the operations side we have reduced field staff by 12% as our operations have contracted. At the same time, we are trying to retain our best field personnel to preserve our competitive position when the market improves. Were also reducing our G&A spending as the business volume declines. The senior executive team has voluntarily reduced salaries. We have already achieved a 10% reduction in Company-wide G&A headcount. We have established a target and have implemented actions to reduce G&A spending for 2015.

Our strategy to manage through the downturn varies somewhat by specific business unit. It includes the following: first, consolidator for bring in the field by combining your closing field offices; second, reduce our field staff linearly with decline in operating assets; third, lower costs across our supply chain in cooperation with vendors; fourth, implement innovative pricing structures for services and, last, reduce G&A Company wide by $70 million versus the fourth quarter run rate.

I would like to call attention to the steps are taken on the balance sheet to write out the downturn. Recently, we extended our borrowing capacity under our revolver by $225 million and we borrowed $300 million under our new term loan agreement with a group of banks. Assuming we close the merger with C&J later this month, based on the balance sheet at year-end 2014, we anticipate having liquidity of approximately $2 billion available post closing.

To summarize, several specific factors can further impact our results in coming quarters. The shareholder vote for the C&J transaction is scheduled for March 20. Assuming a favorable outcome, we'd expect to close the transaction within the following week. The domestic E&P industry continues to reduce budgets and release rigs at an unprecedented rate, implying a high degree of discipline in this environment. Given our term contracts we would expect our financial results to bottom a few quarters after the rig count does. Breakup in Canada after a muted drilling season is earlier than usual.

The rig built for the Big Foot platform in the US, Gulf of Mexico is set to flow down any day. This development will mark a significant milestone for this project. We currently assumed the rig will commence operations and go on, on full-day rate, before the end of 2015. This project will materially increase the operating profit of the offshore business.

We continue to expect year-to-year improvement in our international segment; however, the full effects of lower oil prices may not yet be fully reflected in the international markets. Fiscal stress in certain markets could drive activity lower.

In the Mexico market specifically, we completed construction and deployed the two previously announced new build platform rigs for the Mexican Gulf. The commencement of day rate has been pushed back by unexpected operator delays with the platforms which these rigs are intended. We anticipate they will begin earning day rates early in the second quarter.

Finally, we have taken concrete steps to improve our cost structure and we will implement additional ones. These should dampen the impact of the activity downturn and better position the Company for an eventual upturn.

This concludes my comments. Now, I will turn the call to William who will detail our financial results.

Thank you, Tony, and good afternoon, everyone.

Before discussing operational results, I would like to point out that our earnings included several very material items related to the current market conditions, as well as other charges pertaining to transaction with C&J Energy Services. These latter charges have been anticipated during our third-quarter conference call. Impairments and other charges related to the downturn totaled $1 billion before tax or $2.73 per share on an after-tax basis.

The following are some details on the impairment charges during the quarter: first, we took a $357 million impairment to goodwill principally in our Completion Services segment related to the acquisition in 2010 of Superior Well Services. The balance of the goodwill impairment was in our Ryan Directional Services business. We also impaired intangible assets by $30 million, again principally in completions.

In the US drilling business we retired 26 mechanical rigs and four jack-ups with limited to no prospects of future work. In addition, we impaired the lower 48 SCR rigs and retired a certain number of yard assets unlikely to return to operations. The total impairments in the US earnings segment totaled approximately $408 million.

In Canada, retirement of four rigs plus impairments totaled $34 million. In the international business rig impairments mainly offshore plus yard asset retirements totaled $127 million.

Finally, we retired approximately $41 million of equipment in Canrig. Expenses related to the C&J deal, including losses and debt repurchase and transaction costs, totaled $7 million pretax or $0.02 per share after taxes.

Also related to the C&J transaction were tax charges of $180 million, or $0.63, associated to the reorganization of certain legal entities in preparation with a combination with C&J. These charges were essentially non-cash. The combined impact of all these items was a $3.39 reduction in earnings per diluted share. Net income from continuing operations, excluding the above charges, was $96 million, or $0.33 per diluted share, compared to $116 million, or $0.39 per diluted share, excluding charges during the third quarter.

For the fourth quarter, included in our adjusted earnings we had other items of note that help explain our results. First, our effective tax rate excluding net charges reached 6% for the quarter which was significantly lower than our expectations. This added approximately $0.05 per share to our earnings compared to our expectations of a 20% effective tax rate.

During the quarter the impact of the downturn was most pronounced in our US operations. Thus, our geographic mix of income shifted significantly towards lower tax regimes. This shift not only lowered the effective tax rate for the quarter, but required a downward adjustment to the tax provisions booked through the third quarter. Second, our losses on ordinary fixed asset sales in the quarter were over $2 million higher than the prior quarter, which translates into $0.01 per share.

I would now like to focus on the key metrics for a second. Within the US drilling segment our lower 48 daily operating margin increased by $236 to $10,458 per day, excluding the effect of the $30 million early termination payment realized in the third quarter. This translated into a 40-basis point increase in operating margins.

Cash margins benefited from the deployment of five PACE-X rigs during the quarter plus the erosion and the utilization of our lower margin legacy fleet. Active rigs in the lower 48 averaged 198, down four from the previous quarter. Currently, we have 138 rigs in revenue with our AC rig counts and 116 rigs. Utilization of the AC rigs in the fourth quarter was 88%. For pad capable SCR rigs, utilization was 65%.

During the fourth quarter contracts on 33 of our rigs expired. Thirteen of those received extensions or new term contracts averaging 6.2 months and materially higher day rates. Of the remaining rigs, nine converted to well to well.

We expect a sharp decline in the average number of working rigs during the first quarter versus the fourth, in line with the decline in the total lower 48 rig count. Looking across basins, demand is most challenged in the Rockies, including the Williston area, but we are seeing record declines in all major markets. While all drilling activity decreased in the Gulf of Mexico, Alaska activity increased as the drilling season commenced.

In our international drilling business, the improved performance was driven by a 130-basis point margin expansion which more than offset a decline in rigs as we closed certain low-margin operations. Rig years declined by 9 to 121 while daily rig margins increased by $2313 to $17,803 per day. The improvement in reflected rig startups in Saudi Arabia, Australia, and Malaysia partially offset by a decline in Mexico. The quarter's performance continues to demonstrate the improved financial performance that our international operation has been working on for some time. Additional new build deployment should bolster results in 2015.

In Canada, activity increased by almost three rig years and margins improved by over $200 versus the third quarter. Nonetheless, the normal seasonal upturn in drilling activity has been muted. This market is increasingly challenged and we can see both activity and margin declines in the first quarter.

Results in our Rig Services segment reflected deteriorations for both Canrig and Ryan Directional Drilling businesses. Sequential revenue at Canrig was relatively flat; however, margins declined due to mix. Ryan's results reflected the early impact of the lower 48 downturn and drilling activity.

Completion and Production Services declined compared to the third quarter. The decrease was more pronounced in Production Services with revenue declining by 8% and operating margin decreasing by 325 basis points versus the third quarter. Year end seasonality and budget reductions by some of our largest customers contributed to the decline.

In Completion Services, revenue increased by nearly 3% versus the third quarter, while operating margin declined by 270 basis points. Despite increased mix-driven revenue per stage, pricing concessions, and expanded cost related to 24-hour operations, outweighed improvement in revenue. Stage count in the fourth quarter declined by 4%, though October was the highest month in the Company's history. During the quarter, 17 of the 19 spreads operated on 24-hour schedules.

Looking forward, I would like to share expectations for some of the important metrics and operating income outlook. We expect full-year 2015 capital spending of approximately $1 billion, and we estimate full-year depreciation and amortization of approximately $1.2 billion. Our full-year effective income tax rate is now estimated at 20% and normalized pretax earnings. With respect to the C&J transaction, we still expect to deconsolidate our Completion and Production business after the merger and to account for our investment using the equity method.

Given the commodity environment, as well as the continuing decline in drilling rigs in the lower 48 and Canada, providing guidance on our first-quarter results has become more difficult. Nonetheless, I still want to make some comments on our operating income for the quarter. We expect results from most of our businesses to reflect a decrease in industry activity with a possible exception of international and Canrig segments. Our North America drilling businesses are particularly impacted by the market decline. I expect the lower 48 rig count to fall by 50% versus its peak level, though I anticipate a somewhat lower production in our own number of rigs and revenue given our term contracts.

In concluding, I would like to stress the steps that Nabors has taken to respond to the current environment. Our CapEx budget reflects an approximately 50% reduction in planned spending. Any increase to our investment plans will require high return contra visibility. We have targeted cost reductions of at least 15% versus the year end run rate in our SG&A, and have already begun reducing the Company's overhead cost structure both in the field and in our corporate organization.

Since the last week of 2014 our total Company workforce has fallen by approximately 12%. These reductions reflect a 20% decline in our US drilling workforce and a 10% decrease in our SG&A organization. These cuts are geared towards generating neutral to positive free cash flow.

Finally, we have increased our liquidity by $525 million during expansion of our revolver and by drawing on a $300 million three-year term loan. This incremental equity on top of an already strong balance sheet should bolster our ability to navigate the downturn and take advantage of unexpected opportunities.

Now, I will turn the call back to Tony for his concluding remarks.

Thank you, William.

Let me finish with a summary of our overview and outlook. First, the US drilling market is contracting rapidly and that is rippling through other markets globally. We are responding with focused efforts to balance current market pricing in utilization and adjust our cost structure and capital budget as necessary.

Second, we continue to pursue opportunities to add rigs in high spec drilling markets around the globe at attractive risk-adjusted rates of return. Third, in this environment the importance of financial flexibility becomes paramount. We have improved the Company's financial position significantly over the past several years and we are positioned to withstand the market downturn.

Fourth, we are committed to our vision of the future drilling market, one where technology enables a meaningfully lower cost structure for our customers. We plan to continue to invest prudently through this downturn. We intend to emerge with drilling solutions that position Nabors as the clear driller of choice.

That concludes my remarks this afternoon. Thank you for your time. With that, I will take your questions.

Thank you. We will now begin a question and answer session.

(Operator Instructions)

Jim Wicklund of Credit Suisse.

Good afternoon, guys. The issue that seems to be on everybody's mind these days is duration of this down cycle. Everybody is hoping for a 2009 recovery, including me, but I don't know, I assume you guys have done some work.

If the rig count drops by the 50%, how long does it have to stay there before we fix the problem? And I'm assuming Enron hit the -- I mean EOG hit the nail on the head the other week when they said the problem is slowing US production growth. How long -- we know it's going down. How long do you think we have to stay there?

Well, I think from our point of view we are not counting on (inaudible) [the oil claims] we're making is an extended period of rebound. We think by the end of the summer things should sort themselves out where people are, but we don't see a quick read this year. So, I would say well into next year, Jim.

Okay. I don't disagree with that. And we've heard reports from Saudi Arabia, which has been everybody's, including you guys, best drug market for the past couple years that especially on the jack-up side that Aramco is getting a little draconian on asking for price reductions even under existing contracts. Are we seeing that in the land business at all?

I think it's fair to say that the lines of communication between North American and the rest of the world are open well and every operator has a standard play book and they're all asking for consideration. I think our tactic continues to be that we're interested in long-term relationships with these key customers and we're working to find solutions that satisfy their requirements to meet our goals, which means we try to accommodate their interest at least in the short term and that's the response we have to take to these long-term key guys.

We haven't seen yet any big shoe drop in Saudi. We know that there's some oil rigs that are coming down, which is not our core there. We're aware of what's happening on the jack-up market, but we haven't seen what you've talked about in any large scale there or anywhere else yet.

Okay. Last question if I could, and I know the answer to this but we've got to ask you guys so you can say it. I'm assuming that you guys are not wild about working your equipment at any cash loss, and so when it comes down to maintaining market share or working at a cash loss, which is the strategy of Nabors going to be if it comes to that?

I think you know us well enough to know the answer to that question.

I know, but we had to get it out there, and I'm assuming that you won't work at a cash negative.

We're not going to work at cash negative.

That's what I needed, guys. I appreciate it. Thank you very much.

Thank you.

Mike Urban of Deutsche Bank.

Thanks, good afternoon. So, clearly customers asking for price reductions and I certainly have to assume that's not your first choice and you mentioned some enhancements that you can make to existing rigs, some potential alternatives and kind of create pricing solutions. I guess without showing your hand too much, could you speak to what some of those might be and your ability to mitigate just pure pricing declines of the magnitude that your customers might be looking for?

Shure. Obviously the first thing is extension of term for additional work at a lower rate. The second is to add content, meaning additional rigs. Pull them away from somebody else, so we add additional margin to our base.

The third is additional sets of services. As you know, Nabors has a bunch of other things that we can put on a rig, everything from instrumentation to rocket to [rev] it.

There's a whole bunch of these assorted services that we're making a better push to try to capitalize on those commercializations, those things as well. So, that's the kind of thing we would respond with.

Got you. And then as it pertains to the CapEx program. Clearly you said you can scale that up or presumably down if need be. But you still do have a handful of uncontracted newbuilds even in the kind of scaled-back plans there.

Why at this point presuming even if we do ultimately go into recovery mode that this probably had a slower rate of growth and maybe we saw maybe the US needs to be capitalized for a 300,000, 400,000, maybe even 500,000 barrel a day growth market rather than 1 million barrels a day. That was clearly a strategy that worked last cycle I think for clear reasons that you were replacing legacy rigs at a much greater pace, but I think a lot of those are gone. So, if you could walk us through your thoughts in terms of continuing to essentially build on spec at this point?

I think at this down sized cycle which I respect that we're going to be at a build of 17, including port authority, would have been built, so the remaining 5 of those have contracts, so the amount of exposure we have is pretty de minimis, but what it does is it does leave in place our manufacturing capacity and we also believe that there are markets. North America, as you can see from our financials compared to everybody else out there, North America is not the be-all end-all. We think there are opportunities elsewhere so this keeps our pipeline active and if the market does turn, we'll be well positioned to rev up.

In the last downturn last time around we actually shut everything down wholesale. Therefore, when things did turn, it took quite a while for us to gear up.

So this time around I think what we're going to do is just be, we're still going to be mindful of CapEx. We're not going extend ourselves, get ourselves in trouble. On the other hand, we're going to keep that capacity in place and, as I said, we're committed to some other technology changes that we're working on as well during this downturn, so that's the thinking right now.

And you don't have contracts at this point, but are there some at least specific projects or jobs or customers that you might have in mind for those X rigs, whether in the US or internationally?

Yes, there are.

Great, thank you.

Matt Marietta of Stephens Inc.

Good afternoon, guys. This is actually [Chris Dennison] in for Matt Marietta. Just wanted to clarify some of the Completion and Production assets as they stand today. At 4QM looks like there's 800,000 horsepower in service between 19 crews.

Is all 800,000 and 19 crews, are they still marketed today? Has any gone idle at this point? Just trying to get an idea of what the current pressure pumping fleet looks like and maybe the average age of the fleet, if you could?

Okay. So today we're actually down 12 from 19. Just to give you an idea. There's a couple in south Texas, we have four in west Texas, the mid con, a couple in the Marcellus, one in the Bakken, and a couple in Powder River basin. That's roughly the distribution today.

And in terms -- the challenge -- this is not an [ordinary] market decline right now. The market has become very competitive as the work declines. There's a lot of aggressive pricing going on.

For us, the challenge is to maintain utilization and not get caught up in extra costs of stand by and trying to have things in the marketplace that we can get that good utilization. So price is important, but also utilization, and that's the strategy for us to try to blend them together to run operations that are still positive margin going back to Jim Whitman's remark. We're not interesting in running stuff at negative margin, so that's where we stand right now.

Right. Do you have any indication of what the average age of the fleet might be?

Our average age? Well, about half the fleet was post superior in terms of capital that we spend, so that's pretty new since Nabors acquired it. The rest was legacy assets.

Okay.

I think that's right. This is Ronnie. I think for the most part we have right around 250,000-horsepower stack. So of the active horsepower that we continue with right now, probably 75% of that was purchased right after the acquisition of Superior in the fourth quarter of 2010.

Okay. Awesome. Great color. And then just a similar question on the well servicing side. 445 US rigs in the fleet at 4Q end, is that the market fleet as it stands today?

Have any of those fallen out and maybe if you could just elaborate. Have you seen any bifurcation between horsepower classes or regions?

I'll let Steve.

Steve, here. No, 445 is still the number that we're marketing. We're operating today about 320 of those rigs. We have not seen a bifurcation between normal production work and work over work, but in this downturn more production work than we've seen in the past.

Okay, awesome. Great color. That will do it for me, guys. Thank you.

Dan Boyd, BMO Capital Markets.

Hi, thanks. Can you help us with a road map for US drilling margins? Recognizing Alaska you have pretty good visibility there, margins are significantly higher than the US.

And just assuming that the rig count does fall to 50% the you expect, I would also assume that your US margins are going to be potentially higher or not come down as much because you have the contracted rigs earning higher margins than whatever's working in the spot market. So, could you maybe help us over the next few quarters, what should we expect from the aggregate US margin level?

The margin level, as you know, in the first quarter there are extra costs that come into play and so I think there is going to be a decline in margin and I would think over the next first quarter I would think something around the order of 10% margin decline whether that stabilizes or not depends in the third fourth quarter is going to depend on the rapidity of a bunch of other stuff that's occurring. Visibility right now is in the first quarter. I don't see anything more than 10% right now.

Okay. That's helpful. And then pretty much the same thing internationally. I know a lot of the contracts that you have starting up are higher margin and we are likely losing rigs just going to the lower margin, so how should we think about the --?

Right. As I said, for international I would say it's a little bit reversed. As we mentioned, our expectation going into this year has been that we still have our sight set on year-over-year increases and I've already that we see some rigs coming down so, therefore, the only way it's going to be made up is margin increase and we think that there is going to be some margin expansion and it's our expectation that margin expansion is going to offset any decline and we're actually going to get some year-over-year increase and that's the strategy right now.

Can we hold the 4Q level? On an operating income level?

Well, I said year-over-year increase. There's always a black swan event obviously and that we already signaled that the two Mexico platforms which we are expecting to go on earlier this quarter is now pushed to the second quarter, so I think there could be some deterioration, but I think in the neighborhood it should probably try to hold it in the neighborhood.

Okay, thanks. That's all for me.

(Operator Instructions)

No additional questions. This concludes our question and answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you all very much for your participation today and look forward to talking with you again. Thank you.

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