Nabors Industries Ltd (NBR) 2015 Q1 法說會逐字稿

Good morning, and welcome to the Nabors Industries' first-quarter 2015 earnings conference call.

(Operator Instructions)

Please note: This event is being recorded.

I would now like to turn the conference over to Denny Smith, Director of Corporate Development and Investor Relations. Please go ahead.

Good morning, everyone, and 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 results, along with some insight into what we are seeing in our markets and how we expect Nabors to perform in these markets.

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 are accessible in two ways. One, if you are 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 in supporting materials under the conference call listing.

Instructions for the replay are posted on the website. With us today, in addition to Tony, myself and William, are Laura Doerre, our General Counsel, and the Heads of our various business units.

Since much of our commentary today will concern our expectation of the future, they may constitute forward-looking statements within the meaning of the Securities and Exchange Act of 1933, and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risk 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 may differ materially from those indicated or implied by such forward-looking statements.

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

Good morning, everyone. Welcome to the Nabors Industries' conference call to review results for the first quarter of 2015. 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 follow with the financial review of the first quarter. I will then wrap up and take some questions.

A lot has happened since our fourth-quarter earnings announcement, which was just last month. There have been three developments which I want to call particular attention to.

First, on March 24, we closed the transaction with C&J Energy Services. The transaction is transformative for both companies. For the Nabors shareholders, we significantly enhanced our balance sheet liquidity. At the same time, Nabors retains just over half the equity ownership in the new C&J. Now that the deal has closed, we are looking forward to a long and mutually beneficial relationship with the team at C&J.

Second, we have been awarded a contract to deploy six newbuild PACE-X rigs with a customer in Columbia. These rigs constitute six of the eight uncontracted X rigs which we previously indicated we intended to build in 2015. This contract illustrates the appeal of our advanced rigs in markets beyond the Lower 48. These six rigs will be the first X rigs to work outside the US.

Third, the Big Foot platform was floated out with our rig installed to the Gulf of Mexico in late March. This 4,600-horsepower rig on that platform is one of the largest floating rigs in use today. It represents a very significant capital investment on our part. This milestone enables us to begin generating return on that investment.

Now, I will comment on the performance in the first quarter. Our overall results were approximately in line with expectations when we spoke last March. Measured against our internal forecast, the strongest performance was in our international businesses, followed by our Rig Services segment. The US drilling business also outperformed our expectations. I will address these factors that influenced the performance shortly.

Our Canadian drilling segment was challenged by the contraction in commodity prices, exacerbated by the arrival of warm weather in January. Our consolidated results for the quarter included the Completion and Production Services business through the closing date I mentioned earlier. For those 12 weeks, both portions underperformed our expectations, particularly Completion Services.

Before I begin my detailed comments on the quarter's results, I would like to highlight the improvement in our balance sheet during the quarter. We reduced net debt by over $600 million. At the end of the quarter, our net debt was approximately $3.2 billion. That amount does not reflect the value of our equity in C&J, which totals approximately $950 million today.

Now, to some specifics on the first-quarter results: Revenue for the quarter totaled $1.42 billion, including $367 million for Completion and Production Services through the closing. The sequential drop reflects steep declines in activity across most of our business lines. During the quarter, our international business had an exceptionally strong performance, with minimal impact from lower commodity prices.

True to form, the international business is typically less volatile than our North American business lines. It tends to lag trends that start in the US. We believe this segment will be negatively impacted in future quarters, and I will address that in my outlook comments.

First-quarter operating income declined to $93 million from $152 million in the fourth quarter. EBITDA was $374 million versus $446 million in the previous quarter. The improvement in our international, US and Rig Services businesses was more than offset by the declines in Canada, and in Completion and Production Services.

I will wrap up this summary with a recap of our newbuild activity. We planned to deploy 17 PACE-X rigs, in total, during 2015. As of today, we have deployed seven in the field. Of the 10 remaining to deploy as of today, eight have term contracts.

We are also making progress on our new rigs destined for Saudi Arabia, Kazakhstan and Alaska. We expect them to deploy on schedule.

Now, let me turn to our detailed results. Our first-quarter earnings were driven primarily by: first, reductions in US drilling activity, particularly in the Lower 48, which had a material impact on our results, as our rig count declined throughout the quarter. Second, an abrupt and early end to the drilling season in Canada; it was breathtaking, actually. And third, reduced demand, stiff pricing pressure, and seasonal issues in our Completion and Production Services business. These were partially offset by improved performance in the international segment, as new rig deployments and full-quarter impacts from start-ups in the fourth quarter lifted margins.

International results also benefited from the fact that, once again, many things went right. There was strong execution across the operation, and a few favorable swings in revenue.

Let me now turn to our outlook. The steep drop in oil prices, and uncertain prospects for global drilling activity, led us to a cautious outlook for the near term. As of last week, the Baker Hughes Lower 48 land rig count is approximately half of the number of rigs that were working at the peak in the fourth quarter.

Our Lower 48 rig count is down approximately 45% from our peak. It currently stands at 111 rigs, including 18 stacked on rate. We see operators continuing to reduce their drilling programs as they align their field spending with their cash flow expectations.

We have seen more deterioration in our smaller and older rig counts. This decline reflects shorter remaining contract duration in those rigs as we entered the downturn. Utilization of our US Lower 48 AC rigs has declined to 57% currently, from 94% at our peak rig count in October of last year. Among our AC rigs, our 1,000-horsepower M-class rigs have experienced the largest decline in utilization, while our 1,500-horsepower rigs have held up better.

Utilization of our X rigs remains the highest, at 97%. Legacy rig utilization has dropped to 15% from 40% in the same time period. By geography, the Rockies, as expected, including the Bakken and the Mid-Con, has seen the greatest slowdown in the number of rigs working.

Going forward, for the second quarter we expect our rig count to decline further from today's level. This quarter should see the idling of some of our more capable rigs, as their contracts expire. Daily rig margins will be under pressure, and could decline by over $1,000 per day, due partially to mix.

As we attempt to market our rigs, we are increasingly competing with operators trying to subcontract rigs for which they have term contract obligations. This is putting additional downward pressure on rates.

We are beginning to have success replacing competitor rigs, as some operators try to upgrade their rigs as their drilling programs start to stabilize. We are seeing, generally, more innovative rate and contract structures than we saw at the peak of the market last year.

You are no doubt hearing anecdotes of very low day rates. In our experience, these do not reflect all of the gives and takes in the new rate structures.

At Canrig, the second quarter should reflect the dramatic slowdown in newbuild activity for the US market. Reflecting the reduction in Nabors owned rig building plans, the reduction in Canrig's backlog is most severe for inter-company equipment. The global drilling industry's new rig building activity is decelerating rapidly, and most acutely in North America. Service and rental activity will also be impacted by the declining North American rig count. During this time, Canrig is expanding the footprint of its repairs business, and has been pursuing services and rentals in new international markets.

In Canada, activity in the first quarter was down versus the year-ago level. Illustrating the severity of the downturn, activity was also down sequentially in what is normally an up quarter. We expect a steep drop in activity and daily rig margins in the second quarter. We also expect a seasonal pickup in activity beginning in the third quarter; but at this point, we do not see margins improving materially for the foreseeable future.

Changing to 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.

I will finish with the outlook for the international business. The first quarter's financial performance illustrates the potential earnings power in our international fleet. Our activity level, 130 rig-years, matched the multi-year high set in last year's third quarter. Daily rig margins approached $19,000 per day, which is an all-time high. International markets generally react more slowly than North American markets to changes in commodity prices. Accordingly, our first-quarter results do not reflect the impact of the downturn.

Virtually every international operator has asked for relief on rig rates. We are currently in negotiations, with the goal of reaching a combination that provide economic benefits to our customers and to us. Beginning in the current quarter, we expect our daily rig margins to reflect lower day rates, as agreed-upon rate reductions begin. In addition, we are seeing reduced activity in several markets, most notably in Mexico, but in others as well.

Finally, our two-rig, multi-year project in Papua, New Guinea, is winding down. The two rigs involved met the objectives set by the customer and ourselves. We are now actively marketing them in other markets. In light of these factors, we expect international rig-years to decline by more than 10% sequentially in the second quarter. Looking ahead, in light of the negotiations I just mentioned, we expect margins to decline more significantly beginning in the third quarter.

I will now discuss our strategy to manage through the downturn. The key elements include the following. One, consolidate our footprint in the field by combining or closing field offices. Two, reduce our field staffing linearly with the decline in operating assets. Three, lower cost across our supply chain in cooperation with vendors. Four, implement innovative pricing structures for services. And five, reduce G&A Companywide by $70 million versus the fourth-quarter run rate.

Now, let me outline our specific plans, and the actions we have taken. They are divided into two main categories.

First, we are implementing tactical plans to limit the impact of the downturn. Since the end of 2014, our employee count, excluding the Completion and Production Services segment, has declined 18%. As you might expect, staffing into our international segment, our largest, has barely budged, considering the new rigs we have recently started.

Employee count in our North American businesses is down 34%. We remain committed to scaling the businesses to the current volume of activity. In addition to staffing levels, we have reduced our daily direct cost per rig by approximately 6% versus our 2014 baseline.

Our efforts to resize the Company's G&A footprint are making real progress. Excluding the Completion and Production Services segment, we have already achieved our targeted G&A workforce reduction for 2015. The dollar impact is also significant. We are on track to reach our annualized target savings of $70 million, and we anticipate further progress through the year.

In the second mitigation category, we continue to make progress on our strategic vision to integrate downhole technology with our advanced rigs. During the quarter, we completed our first resistivity job for a customer using our own new proprietary tool. We are running our first unmanned, remotely controlled, directional drilling jobs this quarter, as well as field testing our new rotary steerable tool.

Finally, downhole measurements taken during a successful run of our AccuSteer tool led the operator to re-engineer his well design, with the ultimate goals of realizing quicker time to drill, higher rates of penetration, and higher well productivity. It's still early, but we are excited to be at the leading edge, combining real-time downhole intelligence with advanced rig performance.

On the balance sheet, we have taken several steps to ride out the downturn. Most notably, the cash proceeds from the C&J transaction materially improved our liquidity. Together with the expanded borrowing capacity under our revolver, which I mentioned on our last call, we now have liquidity approaching $2 billion available.

To summarize, several specific factors could further impact our results in coming quarters. The domestic E&P industry continues to reduce budgets, and release rigs at a high rate. Given our term contract coverage, we expect our financial results to continue to be supportive a few quarters after the rig count bottoms.

The drilling market in Canada, after a subdued drilling season, remains depressed. We expect seasonal improvement later this year. However, we expect negative year-over-year comparisons through 2015.

The rig built for the Big Foot platform in the US Gulf of Mexico floated out in March. We currently assume the rig will commence operations and go on full day rate before the end of 2015. This project will materially increase the operating profit of the offshore business.

In our international business, as we account for all the moving parts, we still expect an improvement in full-year results over the prior year. However, the full effects of lower oil prices are not reflected in the international market. Fiscal stress in certain markets could drive activity levels lower.

Finally, we remain committed to scaling our cost structure to the size of our operations. We have made progress improving our cost structure, and we will implement additional steps as necessary. 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 over to William, who will detail our financial results.

Thank you, Tony, and good morning, everyone.

Net income from continuing operations, as reported for the first quarter, was $124.4 million, or $0.43 per diluted share, on revenue of $1.42 billion. Consolidated revenue for the quarter decreased by 20%, as compared to the fourth quarter of last year. Revenue for the businesses remaining in Nabors following the C&J transaction fell by 11%, while the Completions and Production business fell by 39%. I would like to point out, though, that as a result of the effective date of the transaction, these product lines had 9% fewer days available in the first quarter. Therefore, the sequential reduction in Completion and Production activity on a comparable basis was similar to the one experienced in our US Lower 48 land drilling business.

The Company's first-quarter results included several items whose net impact somewhat obscured the operational trends of the Company. These included: first, capital gains related to the C&J transaction, for a total impact after taxes of $61.9 million, or $0.22 per share; second, various benefits from prior-year taxes related to settlements on existing contingent exposures and the filing of tax returns in several jurisdictions, for a total of $10.5 million, or $0.03 per share; and third, after-tax severance costs incurred in adjusting the Company structure to the current market situation, totaling $6.3 million, or $0.02 per share. Adjusting for the above items, first-quarter net income was $58.3 million, or $0.20 per share, as compared to an adjusted $96.3 million, or $0.33 per share, in the fourth quarter of 2014.

The above first quarter still included completion and production financial results that will be replaced from the second quarter onwards by 53% of the C&J Energy Services net income. This item will be reported as earnings from affiliates, below the operating income line. Excluding transaction costs, these businesses lost in the first quarter a combined $44.2 million after tax, or $0.15 per share, as compared to positive operating income of approximately $0.04 per share in the fourth quarter of last year.

I would like to conclude this section with some general comments on the initiatives in place that have allowed us to mitigate the impact of the North American downturn in drilling activity. Although we cannot fully control our number of active rigs, or the day rates paid by our clients, we can certainly manage our overhead structure, our direct costs, and our capital expenditures, and we can work with our suppliers to reduce the costs of our consumables and services. We can also ensure that we continue to incentivize our commercial structure to accelerate technology introduction and cross-selling efforts. Initiatives in all of these areas have already started to bear fruit in the first quarter, as my discussion of the segments will highlight.

So, the main cost initiatives we've launched so far are: first, reductions in capital expenditures to a level consistent with positive free cash flow. We have reduced our planned capital expenditures to $900 million in our drilling-related businesses; less than half our initial expectations.

Second, we are targeting reductions in SG&A, in line with both the reduced revenues from Completions and Production, and the decreased drilling activity levels. Our objective is to cut SG&A by at least $70 million on an annualized basis. This is in addition to the $120 million of SG&A within the NCPS organization that will depart with the C&J transaction. These cuts translate into approximately 17% of the 2014 levels for our Drilling and corporate SG&A structure. Our SG&A in the first quarter has already fallen by $12 million versus Q4. I'll point out that these SG&A costs in the first quarter included approximately $5 million in severance costs.

Third, focused management of our direct operating costs, including field support groups, to ensure we adjust these expenses in line with the reduced activity levels. From the last week of 2014 through early April, as part of these initiatives we have reduced our total workforce by 5,500, which translates into an 18% reduction. US drilling and Canada have fallen by 41% and 26%, respectively.

And fourth, multiple rounds of discussions with our vendors to find ways to cut our costs, including, but not limited to, price concessions. This initiative also includes more centralized management of our spares inventories and our maintenance CapEx, now feasible under our new organizational structure. We will continue to look aggressively for ways to reduce our addressable spend as the year progresses.

I would now like to focus on the key metrics for our segments. US drilling: The US drilling business experienced a reduction in revenue of 17%; but operating margins, excluding severance, improved to 17.5%, with 12% incremental margins on the revenue reduction. This performance reflected strong revenue and operating income improvements in Alaska, and a slight increase in the offshore operating income, as well as effective cost management in the Lower 48 operations. This latter unit experienced a 27% reduction in revenue, but held its operating margin, excluding severance, at 12.7%, translating into incremental margins of 27%.

Within the US drilling segment, our Lower 48 daily operating margin increased by $676 to $11,134 per rig. That amount includes $105 per rig in lump sum, early termination payments for revenue that would have been earned subsequent to the first quarter. Cash margins benefited from a more favorable mix of assets, and proactive direct cost management.

Active rigs in the Lower 48 averaged 149, down from 198 the previous quarter. Currently, we have 111 rigs on revenue.

During the first quarter, contracts on 33 of our rigs expired. Seven of those received extensions or new contracts averaging 5.2 months. Of the remaining rigs, four converted to well-to-well.

Although the pace of drilling activity decline has slowed down considerably, we don't believe we have hit bottom, and expect further declines in our number of rigs on revenue, as more contracts expire and clients continue to reduce drilling activity. Given our current revenue rig count and expected further declines, we expect a sharp reduction in our average number of rigs during the second quarter versus the first, approximately in line with the decline in the total Lower 48 rig count.

International: In our international drilling business, the improved performance was driven by a 610-basis-point margin expansion, and increased rig years that were up nine to 130. Operating margins for the quarter were 23.6%, and daily rig margins increased by $1,062 to approximately $18,900. These improvements reflected rig start-ups in Saudi Arabia, partially offset by a decline in Mexico.

Reductions in SG&A, and closures of lost countries, also contributed to the 39% increase in operating income on a 3% revenue increase. The quarter's results continue to demonstrate the improved financial performance that our international operation has been working on for some time. Additional newbuild deployments should bolster results in 2015, and partially offset the downward pressure on international day rates.

In Canada, activity decreased by more than 11 rig years to an average of 26 rig years for the quarter, while daily margins remain essentially flat versus the fourth quarter. We did not experience the normal seasonal upturn in revenue, as drilling activity continued to fall sharply in the markets we serve. Canada drilling revenue fell by 34%, with operating margins decreasing to 13.2%. This translated into decremental margins of 23%. The margin resiliency reflected early action on adjusting the direct cost and overhead structures to the anticipated activity reductions.

The Canadian market remains severely challenged as we head into the seasonal breakup. In the second quarter, we expect activity to decline significantly into single-digit rig years.

The Rig Services segment revenue fell materially, as land drilling activity slowed in the Lower 48. Canrig and Ryan revenue decreased by 22% and 35%, respectively. However, Canrig operating margins, excluding severance, expanded by 630 basis points, reflecting a significant shift in product and customer mix, as well as reductions in overhead cost. Despite losing over a third of its revenue, Ryan's operating income improved slightly as a result of early and meaningful actions in anticipation of the sharp downturn in drilling activity.

Completion and Production services: We are clearly further ahead in our mitigation efforts in the Drilling business than in the Completion and Production business. Our US operation has lagged in its reaction to the downturn. The pending C&J transaction, and the need for optimizing synergy capture in the combined entity post-transaction, has resulted in a more measured approach to cost cuts, which is reflected in the Q1 results for NCPS. The Completion and Production business line recorded an operating loss of $58.5 million, due mainly to sharp declines in utilization in the Completions business, with pricing reductions also contributing to the deterioration.

Activity for the year started slowly, with clients generally delaying well completions, and with weather affecting operations in west Texas and the Rockies. Pricing concessions in most businesses, granted at the end of last year and at the beginning of 2015, affected quarterly results. Revenues started to rebound towards the third week of March, with fracturing work recovering over the last 10 days of the quarter. Cost-reduction actions taken during the month of March started to yield results late in the first quarter.

Looking forward, for Nabors as a whole, I would like to share our expectations for some of the important metrics and operating income outlook. We expect full-year 2015 capital spending of approximately $900 million for our drilling operations. We estimate full-year depreciation and amortization of approximately $1 billion. Our full-year effective income tax rate is now estimated at low- to mid-single digits on normalized pre-tax earnings, as our profitability has dropped in high-tax locations, and improved in lower-tax jurisdictions.

Given the commodity environment, as well as the continued decline in drilling rigs in the Lower 48 and Canada, providing precise guidance and results remains difficult. Nonetheless, I still want to make some comments on our operating income for the second quarter. These comments are based on the underlying assumption that oil prices will stabilize at slightly higher levels from the second quarter onwards, and the drilling rigs in the Lower 48 will also bottom out during this quarter.

Further, we assume a moderate level of drilling activity increase during the fourth quarter of 2015. Day rates should weaken incrementally in the second and third quarters under this activity scenario, but should stabilized by year end. Nonetheless, I do want to clarify that there are many factors that could affect these assumptions, and there could certainly be significant downside to our expectations.

We expect operating income for all our businesses to reflect the decrease in industry activity and pricing, and to decline sequentially. Our North American drilling businesses are particularly impacted by the market decline. I expect the Lower 48 rig count to bottom at significantly below 50% of its peak level, though I anticipate a somewhat lower reduction in our own number of rigs on revenue, given our term contracts. I also expect operating income for the Lower 48 to remain at close to breakeven during the remainder of the year.

Canada and Ryan are anticipated to show operating losses during the second and third quarters, with a recovery in the fourth quarter for our Canadian operations, as seasonally driven activity returns. Our international business will start to feel the impact of price concessions in various countries, as well as the end of several high-margin projects, but should remain at strong levels during the second quarter. Sharp declines are anticipated in the second half. Canrig should stay above water during the remainder of the year, but at levels at a fraction of the Q1 results.

In concluding, I would like to stress that, through this severe downturn, we will remain extremely focused on managing our costs, and on generating free cash flow. I know that we have worked hard to ensure that we will come out of this downturn with a more modern and capable fleet of focused, streamlined, more cost-effective organization, additional drilling-related products and services that will be leveraged onto our drilling rig platform, and a stronger balance sheet with more financial flexibility. We are excited to show our shareholders these enhancements to our Company over the quarters to come.

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 continues to contract, and that is rippling through other markets globally. We are responding with focused efforts to balance current market pricing and 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. With the proceeds from the C&J transaction, we have significantly improved the Company's financial position, and we are well positioned to withstand the current market downturn.

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

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

We will now begin the question-and-answer session.

(Operator Instructions)

At this time, we will pause momentarily to assemble our roster.

Hello? Laura?

Ole Slorer, Morgan Stanley.

Thanks a lot and congrats with a very robust performance in a difficult backdrop. I wonder whether you could maybe first of all just give us a little bit of a sense of where you stand, in terms of streamlining the organization? Not just from a cost standpoint, but previously you have been talking about changing the way you're marketing the rigs in North America and making other structural changes to the organization. So, Tony, where do you think you stand in terms of achieving some of these structural objectives for the Company?

Actually, we're in the process of a consolidation of our business unit -- our historical business unit structure of -- combining it. We're going to a more unified management structure where the US operation, Canada and international all have a common management structure and common goals and objectives, et cetera. We're in the process of doing that and we're going to be announcing something on that very shortly. That's a continuation of the changes we've made so far in terms of consolidating certain corporate staff functions like engineering, et cetera. So we think that's the first step.

The second thing is we are looking at changes to market, taking the benefits of Canrig's technology in terms of making it more paramount in our marketing of our rigs, which we think really differentiates the Nabors rigs. So part of this reorg that's going on right now is going to do that as well. That's a clear priority for us right now.

And when do you think we get some more color on that? You said an imminent announcement, but is this an initiative that rolls off for the next 18 months or is this something you will carry out with the full benefit of the current down cycle and see more completion of in 2015?

This is happening now. It's going to happen this quarter.

Okay, thank you. On a follow-up, on the PACE-X rigs, you mentioned 97% utilization but also that the current -- for the rest of this down cycle, I think you suggested that your own decline in rig count would be in line with the industry, so could you talk a little bit about the resilience of PACE-X rigs into this? You highlighted that some of your higher-end equipment would now start going down, so could you shed a little bit more color on how this decline really impacts the various segments of your fleets?

We didn't quite understand the question. Could you re-say that again?

You highlighted that there will be a continued slowdown in the overall industry rig count into the second quarter and that your own -- if I understood correctly, that your own -- drop in your own rig count would mirror that of the overall US rig count. Did I misunderstand or could you just shed some more light on that?

No, I think that's correct. I don't think we expect to do as good as the industry, frankly, and obviously the drops should be tempered by the existence of the term contracts. Almost 90% of our rigs are on term contracts, so that provides some additional protection compared to the market as a whole. I think given that, since the market as a whole doesn't have 90% on term, I think we should do better than market.

Okay.

As things get down to the bottom here. That's the way I would look at it. Of course, the other thing is it's hard to say where the bottom is. I think what's clear is the rate of decreases has slowed and -- but I think we're still not ready to call the bottom.

And in the context of that, your PACE-X rigs, how do you see rigs rolling off contract? Do you think you'll get them back to work and displace competitor rigs? Or do you see that the PACE-X rigs will also lose utilization in line with your overall reductions?

I think the PACE-X rigs are still the preferred rigs. To the extent the operators' plays in today's market with the economics requires pad drilling, the X rig is still the preferred rig and, frankly, X rig is -- weekly, we're out performing everything. In fact, we're moving the X rig -- most people looked at the X rig as a rig that moves slower than some of the faster 1,500-horsepower rigs that don't have the same pad capability, but we now can actually move the X rig. We've had moves to three days. For a rig that size to move in three days -- less than three days, I'm told, the guys are telling me. I think the X rig is really differentiating itself. I expect as long as the economics for an operator include pad drilling, the X rig is going to be the favored rig.

Okay. Thanks for clarifying that. I'll hand it back.

Thank you.

Angie Sedita, UBS.

Thanks. I echo the sentiment. Congratulations on a solid quarter, particularly in the US, given current conditions.

Thank you.

So, Tony, it was mentioned a little bit there by William, but if you think about 2009, right, clearly a very different cycle, but one that we did start to see a recovery in the fourth quarter of the year, and I think you guys touched on a possibility of seeing a recovery in Q4 of this year, which is an interesting comment. So can you talk a little bit about your thoughts about the pace and timing of a recovery in 2016, in a $60 to $70 oil world?

Well, as I've said before in conference calls, if I could predict oil prices, I wouldn't be doing this job, Angie. I would be trading it for my own account. That's pretty clear. In terms of -- I don't subscribe to the V theory. I think I said that previous to everyone. I don't see the V recovery here. I view it more as an elongated, slightly increasing long bathtub. In other words, we've got a decline and over the next 18 months, it's going to be a slow climbing up with jigs and jags. I think those number of uncompleted wells are about -- I've heard estimates now, close to 4,000 is the latest estimate I've heard. Once we see some kind of rebound in pricing you see some production response to that, I think it's going to make everything a little bit of a jagged return. Our strategy, frankly, is we're hunkering down for planning that 2016 is not a great year, and we're acting accordingly.

We have certain priorities that I've articulated on the call here today that are guiding us. Obviously, the first thing is our cost control, things within our control, to do the best at lowering our cost structure. Not just SG&A, but our direct expense, and you saw our margins have improved. In part, we've gotten some cooperation from vendors, helping us lower our costs as well. That's been helpful. We also have a priority here of extracting more out of our asset base.

I think Nabors has a terrific global asset base and to the extent that is not fully utilized or optimally utilized, that's been a real priority. We actually have an internal metric that we're imposing of the business units to make them have incentives to do that. One of the things -- I think with the success this past year in terms of moving rigs to the international markets is a good chunk of the capital came out of existing assets that was not on the payroll. So that a real objective for us.

The third thing is to look at content, more content with our customers and aligning ourselves better. I think Nabors has always been viewed as a smart Company for an operator. I think today we want to really be viewed as the guy that help them with the value proposition. We're having a lot of tools that we are making available to operators to help them understand the costs, understand the performance of a well, and work together to improve the economics.

And then the last thing, of course, is the technology aspect. So it's interesting, at this time today, I would say anecdotally a number of operators, even with all the cutbacks, they seem to be holding onto some guys, looking at different ways of doing things because I think everyone realizes the only way you're going to get to a different kind of cost structure today is by changing -- I mean, there's only so much you can extract from just brute force reductions. There's not much more to give by the service companies. The only way you are going to get there is some technology, and I think today we're finding that operators are more willing to think about new ideas.

When things are really -- markets tighten, everyone is blowing and going, they're really into execution, but today, I think they're more willing to think about different things outside the box. So one of the things we want to do is take advantage of Nabors' size, the things we have underneath to help us prepare for that. So those are the things today that we're looking at and as I said, I think we're acting as if this thing is going to go on for -- well into 2016.

That's fair. I would think the same, that's a very shallow U, with that exit point of the U at a far lower rate than we entered in that U, and so therefore, if you think about the world that way in 2016, and obviously we will see some resumption of activity and the PACE-X clearly are showing their mettle. Do you think the industry as a whole, if you have your PACE-X rigs all back to work in your peers have their, quote, pad-capable rigs back to work, do you think you could actually see a raising or rising day rate environment for those rigs? Even if we have idle SDR mechanical rigs or --

Rising from today? Yes, I could see that. I mean, I think -- I don't see us getting back quickly to numbers that we were ten months ago, but we will see, as 2016 unfolds, how rapid that increase incurs.

Great, thanks. I'll turn it over.

Douglas Becker, Bank of America.

Thanks. Tony, you highlighted the value position that you are focusing on for customers. The PACE-X rigs are getting very high utilization. When we finally do see activity improving, how do you see market share among the four larger players playing out? Just really, given the differences in the fleets and the fact that everyone has now a pretty viable pad capable land drilling rig?

I think that there's a role for the four. I think the four as a group, frankly, should -- if you look at other industries, I think this thing should consolidate more and more to be a larger percentage of total pie. That's what I think is going to happen over time. I think the natural thing to happen, and as the operators' expectations change in terms of what the demand for safety and performance, et cetera, I think the 10-rig operation is just not going to be competitive. I see over time, and especially in this market right now, you're going to -- all those other players are going to be driven out, and it's going to be something like the big three or the big four left, and of course we want to be one of them.

On an organic basis, would you expect to be taking share as well?

That's our mission, obviously. Our mission is, we think we have the best arsenal and we're going to -- I think you're going to see -- I think you've seen a new Nabors in the past 12 months and I think you can see, hopefully, in the next 12 months some other steps we will be taking to make sure that we can differentiate ourselves and show something to grow disproportionate to the market. That's our mission.

Makes sense. And then just briefly on the operating costs, very impressive in the first quarter. If we think about it for Lower 48 on a per-day basis, do those continue to trend down over the course of the year, even though activity may be trending lower, or is that just too much to offset?

The cost themselves, you're saying?

Yes, on a per-day basis.

I would say they're going to continue to trend down. That's obviously the goal. There's obviously a fixed element of cost here --

Sure.

-- that doesn't get -- so a certain number, there will be plateaus reached. I think there's going to be staggered levels where at certain points, where you can't get to that next level at a certain rig count, so you're stuck with a kind of fixed overhead in the field somewhere. But generally, I think we've been pretty good about adjusting, as quickly as we can, our rig count to our infrastructure, including fixed cost. That's one of the missions for the guys here, that they're really very focused on. We're going to try to do our best on that.

The first quarter bears that out. Thank you.

Kurt Hallead, RBC Capital.

Good morning. I'm kind of curious, as we go through this cycle downturn and as we come out the other side of this cycle, do you think that there is going to be a structural shift back to how business used to be done in the context of well-to-well drilling activity? Is this whole fervor about manufacturing-style drilling and pad-style drilling, and the need for a three-year contracts, is that kind of like -- is that going to change in this next phase? What's your take on that?

I think the underlying motivations are still going to be the same. In other words, if the shales are here to stay, and you are committed to a manufacturing environment, the only way you really get there is consistency and repeatability. And so whether that -- whether the actual same kind of term contract is the vehicle that makes sure that happens or not, I can't be sure to say, but I think there's going to have to be something that makes that become a priority with the customer. And frankly, even in this market today as things are being jockeyed about, one of the things that we are finding is customers are recognizing that building alliance relationships with one or two people is core to them for those reasons. So I do think that's going to remain a priority.

As I said, whether that means there will be continued new-building against term contracts, and I think that will be dependent on, frankly, bigger macro issues like supply and demand, and availability of rigs. I think operators and contractors, it's in their collective interest to not go through this jig-jag that was characteristic of years ago. I think one of the reasons you see this well productivity and performance, frankly, is because a large portion were on term contracts and it's like a baseball team, right? If you put a bunch of guys on the field that never worked together and they're only there for a couple of innings, they don't perform, but if they get the time to work together over time, that improves the team performance. I think those kinds of dynamics apply in our business and I think the operators, smart operators, are realizing that, and it is up to us to make that clear to them and give them a reason to go down that path.

Okay. And then secondarily, I know that there has been some subletting of land rigs out there by your customers. Kind of an interesting dynamic, as that's usually been reserved for the offshore drilling space. What's your take on that and how exposed is Nabors from sublet?

It's not a big exposure, but frankly, it does affect operators in terms of the availability of operators for us to put back rigs to work, because they're filling other customers' needs by transferring term contracts. So I think it is a factor in terms of a resistance point for us, but not a big factor in terms of our problem, ourselves.

Okay, great. That's it for me, thanks.

Marshall Adkins, Raymond James.

Bravo, gentlemen. Good work. Let's hone in on the international side. We haven't delved into that in too much detail. Obviously, a remarkable turnaround from a few years ago. The new rigs that you have going into the international market, could you give us a feel for, number one, geographically where those are going for? Number two, I assume some of them will be going to Saudi. Are those replacing -- since you all have a dominant position there, are they replacing some of the rigs that were there or are they incremental? Just highlight us on the overall geographic outlook?

I am going to let Siggi take the call, okay?

Thanks for your very nice comments regarding international.

I think -- to interject, it's been a while. Everyone has talked about us hitting a $100 million quarter operating number and frankly, I was really pleased at what happened this quarter. I actually didn't expect it myself. I think what it does show, Marshall, is the real depth of international, which we been talking about for a while and we know we had disappointments in prior years, but -- and I can't say that, as we've said in our remarks, this thing is going to continue at this rate right now, but I think it does demonstrate what we have is really a -- really an operation with a lot of potential. Siggi?

Regarding the question, the rigs that go to the Middle East, they are clearly incremental rigs, while the other rigs that Tony talked about, they are going to South America. It's a mix of incremental and existing fleet, so it's a mix of replacing existing rigs. (Technical difficulty) Its' -- we're replacing four legacy rigs, basically, and put six new rigs in.

Okay. And then the follow-up on that, to stick on the same subject is, obviously that is likely to slow. We all know it lags. Any thoughts on looking out to 2016 and beyond? Do we see it stabilize in 2016 and move up, or is this going to be a multi-year battle we're fighting on the international side?

To be honest, it is still yet to be determined. I think the battle, as we've mentioned before, there is a battle on pricing right now. The interesting thing, Marshall, is bid activity is still ongoing in both South America and Middle East, so that gives me some expectation that things could be okay in 2016, but we'll have to see. We do have, actually, we do have current bid activity in both locations right now. So that's the only visibility I have to answer your question.

That is what I'm getting at. It sounds like things, they didn't just shut down, that we're going to keep going there?

Right. People haven't a just got -- closed the door, basically. That hasn't happened internationally, like in some quarters in the US. That hasn't happened, at least in some of our core markets.

Great job. Thank you, all.

Thank you.

Laura, this is Denny. We're getting close to the top of the hour. Why don't we just take one more question, please.

Sure. That final question will come from Robin Shoemaker of KeyBanc Capital Markets.

Yes, thank you. On the international activity, and these pricing concessions that you're mentioning, how does that work? I mean, you're giving -- your customers are asking for pricing concessions and you're giving them. Is there any trade-off there with regard to contract term? Or is it kind of like, at this point, mainly a unilateral type of move on your part?

I think you can assume that's obviously one of our objectives. We try to make it work for both sides. That's one of the things we pitch to the operator and -- more term, or you picking up additional legacy rigs that someone else -- that they are laying down on somebody else, is going to add more share to us. Those are some of the things we add. Then also, we also try to get more content; for example, selling them on some performance tools, which would also add margin. So there's a bunch of things like that. That's why said, in today's environment, it's hard to figure out when you hear pricing, you can't read too much into it because there's a lot of these other things going into effect in these new deals, but extension of term is clearly one of them.

Okay, good. So you are getting something in return there. So then, you're expecting the international activity to be down in the second half of the year, I believe you said, along with reflecting the pricing concessions that you've made is -- and it's down 10% in the second quarter, in terms of your rig years. I assume it goes down from there?

We said for the full year, 10% reduction in rigs. We did say the second quarter would be affected already by some pricing concessions that are in the pipeline, but we still we expect a strong quarter in the second quarter for international. The sharp decline would be in the second half of the year.

Okay. If I may ask, just on your domestic rigs that you've -- the 18 that are stacked on rate. You're including those in your active -- or your rigs on rate. So is the margin on those rigs stacked on rate operable to a working rig, or --

I would say comparable is a good phrase. Obviously, there's pluses and minuses and maybe a little bit more pluses, but comparable is probably the best way to say it.

Okay. And unlike -- assume that those are unlikely to go back to work, but are more likely to be just stacked for the duration of their term?

They'd be likely to be stacked for duration of the term, but depending on what happens in the market, our historical experience has been things that get stacked on rate, a lot of the times we've had operators once they change their mind, they quickly come back and say they want to reactivate it. The question is going to be, how soon does anything turn around that would prompt them to think in those terms? But we have had situations where not only things stacked on rate but things where the operator actually gave us a full payout and came back to us within six months and said, we want the rig back. Both have happened to us.

Okay. All right. Thank you very much.

Thank you. Thanks very much.

Laura, that will wind up the call today. Thank you everybody for participating, and if your question didn't get answered, feel free to give us a call.

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