Nabors Industries Ltd (NBR) 2016 Q1 法說會逐字稿

Good day, and welcome to the Nabors first quarter 2016 earnings conference call and webcast.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference call over to Mr. Dennis A. Smith, Vice President, Corporate Development and Investor Relations. Mr. Smith, the floor is yours, sir.

Good morning, everyone, and thank you for joining Nabors' earnings teleconference to review our first quarter results. Today we will follow our customary format, with Tony Petrello, our Chairman, President and Chief Executive Officer, and William Restrepo, our Chief Financial Officer providing perspectives on the results, along with insights into 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 as a download within the webcast. Alternatively, you can download the slides from the Investor Relations section of nabors.com under events calendar sub menu, where you will find them listed in supporting materials under the conference call listing. Instructions for the replay are posted on the website as well.

With us today, in addition to Tony, William and myself, are Siggi Meissner, our President of Global Drilling and Engineering, Chris Papouras, our President of Nabors Drilling Solutions, John Sanchez, who recently joined as head of our Canrig operations, and Laura Doerre, our General Counsel.

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 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.

Also during the call, we may discuss certain non-GAAP financial measures such as adjusted operating income, EBITDA, adjusted EBITDA, operating income, and free cash flow. We have posted to the Investor Relations section of our website at www.nabors.com a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. Now we'll turn the call over to Tony.

Good morning, everyone. Welcome to the call. We appreciate your participation, as we review our results for the first quarter of 2016. I will begin with a brief summary, and then comment on our performance. William will follow with a review of the quarter's financials. I will then wrap up and take some questions.

A chart of WTI in the first quarter, shows a distinctive V-shaped pattern. Prices declined steadily from the upper $30s at the beginning of the quarter, to the upper $20s by mid February. From that point, oil prices rebounded, and even broke through the $40 level by the end of March. The steep drop in prices in the first part of the quarter, precipitated a forceful reduction in our customers' spending plans. That impact was unmistakable in our Lower 48 activity.

The decline of rig activity outside of North America, and especially in the Middle East, was less pronounced than in the US. In the first quarter, Nabors generated adjusted EBITDA of $162 million. Operating revenue was $598 million. Despite stiff market headwinds, our operations generated modest positive free cash flow including working capital, and after capital spending, interest expense, taxes and dividends.

Results in our Lower 48 drilling business declined sequentially. That decrease was mainly due to the decline in working rigs, lower day rates, and to a lesser extent, normal seasonal increases in labor-related expenses. We also realized lump sum early termination revenue on two of our rigs. Our rig count dropped significantly toward the end of the quarter, as operators released additional rigs.

Results in our international segment declined. Primarily this was due to price concessions to three key customers, a reduction in rig years, and some negative expense items. Nabor's total revenues for the quarter were down 19% sequentially. Worldwide rig activity declined to 188 rigs in the first quarter, from 223 rigs in the fourth quarter.

Adjusted EBITDA was down 27% sequentially. The decline in EBITDA was most pronounced in the US drilling segment, where performance in all three geographies decreased. In addition to this financial performance, during the quarter we had several noteworthy developments. First, we deployed a newbuild PACE-X rig to a significant customer in the Lower 48 under a term contract. We are running several additional services on this rig.

Second, we commenced the marketing of our new M800 rig. This high-performance rig is optimized for low density pads, those with one to four wells in the Lower 48 and international markets. Initial customer response has been favorable. We are confident we will contract the first unit in the near-term.

Third, we've repurchased $154 million face value of Nabors' debt during the quarter. We funded these with the revolver and commercial paper. In addition to buying the notes back at a discount to face, we reduced our annualized interest expense by approximately $7 million.

Now I will share our view on the market, our strategies to manage in the current market, and the near-term outlook. The North American customer base has been implementing deep cuts in spending since the beginning of the year. From our discussions with them, it appears they will reach their target spending levels mid-year this year. A similar downward trend is occurring in the international markets, although the magnitude of the reductions are on balance, less pronounced than in the US.

With that backdrop, let me elaborate on our view of the future. In light of decreasing E&P spending and natural decline curves, production in many bases is already declining. Offsetting these reductions in supply, are concerns about both global oil demand, and incremental production from certain international producers. These factors could delay a sustained recovery in oil prices.

Notwithstanding this outlook, we are in discussions with several large customers regarding their plans to increase activity, when oil prices sustainably surpass the $50 level. We fully intend to play an integral role in those plans.

I will now discuss the outlook. As it has been for some time, our near-term visibility in the current market remains severely limited. We recently surveyed 20 Lower 48 customers, representing approximately 35% of the rig count. Of those, six have plans to reduce rigs in the current oil price environment. Two have plans to add rigs later this year. The rest are flat.

In international markets, customers are increasingly challenged by the current environment. The reaction has been to reduce the drilling activity. In some cases, that reduction is significant. The number of customers expressing interest in increasing rigs is quite small. As reflected in our results, we see pricing pressure across all markets.

With that backdrop, I will now make a few more specific comments for our larger business units. In the Lower 48, our rig count currently stands at 45 rigs, including 8 rigs stacked on rate. We exited the first quarter at 44 rigs in total, including 8 stacked on rate. Of the 44 at the end of the quarter, 32 rigs were working on term contracts.

For the second quarter, our rig count could average in the low 40s, and exit the quarter somewhat below that range. We also expect the second quarter average daily margin to decline to the $6,000 level, and possibly below that threshold.

For our international segment, rig years totaled 110 in the first quarter. Given current trends and our outlook, international EBITDA could drop by approximately 6% to 8% in the second quarter. The majority of the expected reduction in rigs is concentrated in our Latin American markets. Nearly half of the anticipated drop is comprised of small workover rigs, which generate marginal income. With this shift in mix, our daily rig margin should improve. Primarily, this results in the expected positive shift in rig mix, fully developed price concessions, and normalized expenses.

To summarize, several factors could further impact our results in the coming quarters. First, lower commodity prices are impacting activity, and pricing in all markets. We expect further activity declines in our largest segments, as well as continued pressure on pricing. The low prices are having a severe impact on some of our national oil company customers, principally in Latin America.

Second, the drilling market in Canada remains depressed. We expect second quarter activity to be particularly low, even for the break-up quarter. Third, in our international segment, we expect activity to decline, and further impact results. However, the rigs we foresee coming down should drive a positive shift in mix. This could support higher margins in the second quarter.

Next I will review the strategies which we will use to navigate through this environment. First, we remain committed to reductions in spending. Those are in the areas of direct costs, deal support, and SG&A. Second, we continue to realize incremental revenue and margin from our portfolio of additional services.

We are running two or more services on about two-thirds of our US rigs currently. Third, we expect our technology initiatives to result in near-term revenue, and to create a sustained, competitive advantage in the next upturn. Fourth, our capital discipline is unwavering. In the first quarter, our net debt decreased modestly, even as we funded our semi-annual interest payment.

Finally, our focus on operational excellence is relentless. Thanks to efforts across the organization, we are achieving record low rig downtime in the US.

We are now six quarters into this downturn. Signs of an emerging supply demand balance in the oil market are beginning to emerge. While we do not yet see tangible evidence of recovery in activity, we are beginning to collect anecdotes, which could point to a recovery late this year going into 2017.

We believe the recovery will be modest initially, and could accelerate as commodity markets rebalance. We expect demand for high-performance rigs to increase at first, and for pricing in that segment to react accordingly. As well, we would expect the restoration of temporary pricing concessions agreed to with our international customers. This concludes my outlook comments.

Before I turn the call over to William for his comments, I would like to address two other topics. C&J Energy services. Before I talk about our investment in C&J, I would like to say a few words about Josh Comstock. We were shocked and saddened to lose our friend and business partner, Josh Comstock. Josh was proud of the Company he built, and rightfully so.

He had a personal magnetism and a presence that made him larger-than-life. His pride and passion for C&J was infectious, and engendered deep loyalty and commitment from his colleagues. He will be missed by all. In the current environment, C&J's existing capital structure is inconsistent with the Company's current earnings power. We will continue to evaluate the situation and our options as the Company's largest shareholder.

Balance sheet and capital structure. We are intensely focused on our balance sheet, financial strength and liquidity. The steps we took during 2015, bolstered our financial position. Most notable were the extension and upsizing of the revolver, and the addition of the term loan. Our near-term debt maturities include $350 million later this year, and our next maturities are in 2018. As of the end of the quarter, we had an $80 million balance on our revolving credit line, and $10 million of commercial paper outstanding.

Our intention entering 2016 was to maintain free cash flow neutral or better performance. With the recent decline in global activity, this target has become more difficult. Notwithstanding the current environment, we believe we have adequately prepared the Company for this market, and have sufficient sources of liquidity in place.

This concludes my comments. William will now review the quarter's financial results in more detail, and provide additional thoughts on the outlook.

Thank you, Tony, and thanks, everybody, for joining us today. Our net loss from continuing operations for the first quarter was $396.6 million or $1.41 per share. Included in the first-quarter results were losses of $316.6 million after tax, or $1.12 per share related to a portion of C&J's earnings with a one-quarter lag, and a further impairment of our C&J investment.

These amounts compared to the loss we recorded in the fourth quarter of $45 million or $0.16 per share. Our core businesses, excluding the impact of C&J, delivered a loss of $0.29 per share compared to $0.06 in the fourth quarter. Continuing with our results, revenue and other income for the quarter of $598 million decreased by $141 million, or 19% sequentially, as our drilling business continued to deteriorate sharply in North America and to a lesser extent in our international operations.

Revenue in our international segment decreased sequentially by 11%. As we had anticipated, we saw the impact of lower commodity prices on our clients' drilling activity, with a significant number of rigs placed on standby or released. We also experienced day rate erosion as we granted pricing concessions to three major customers effective January 1. The impact for the first quarter of lower activity levels was a net seven-rig reduction in average rig count. Our revenue in the North American drilling market fell sequentially by 33%, driven primarily by a 30% falling rig count and by weaker pricing in the Lower 48.

In Canada, our rig count declined sequentially reflecting the muted drilling activity during the high season. Adjusted operating income dropped quarter on quarter by $46 million to a loss of $54 million. All of our drilling segments declined.

Our adjusted EBITDA for the quarter of $162 million fell sequentially by $61 million or 27%. The decline in EBITDA was most pronounced in our US drilling segment.

Let me turn to the key performance metrics from the first quarter. First, the US drilling business. The quarterly average Baker Hughes line rig count declined by nearly 200 rigs or 27% from the prior quarter. Our own Lower 48 average rigs declined to 54 for the same period, a 30% decrease.

Daily gross margin in the Lower 48 decreased to approximately $7,400 from $10,300 in Q4. However, both quarters include early termination revenue, approximately $700 per day in the first quarter and approximately $200 per day in the fourth quarter. Further, the fourth-quarter figure includes year-end savings related to workers' comp and vendor rebates.

Adjusting for these categories, the comparable daily margin was approximately $9,200. The normalized sequential decrease of about $2,500 per day was attributable to lower average pricing to the higher weight of our field support structure on a much lower volume, and to the usual first quarter reset in labor-burdened rates mainly payroll taxes.

As the year progresses, we expect that term contract rollovers at lower day rates will continue to compress daily margins. In the second quarter, we anticipate a reduction in drilling margins of up to $1,000 per day versus the normalized first-quarter margin. Utilization in the Lower 48 continues to vary significantly by rig type with the highest utilization on our most capable rigs. At the end of the first quarter, 62% of our PACE-X rigs were on revenue, the highest utilization rate for any of our rig categories.

In Canada, the normal peak drilling season was dampened. It also ended early and abruptly. Our rig count declined sequentially by almost two rigs. Our daily margin declined by almost $5,900, in part due to customer payments for commitments on minimum annual activity received in the fourth quarter.

In our international segment, first quarter rig count totaled 110.5 rig years, down from 117.5 in the fourth quarter, slightly less than the decline we anticipated on the fourth quarter earnings conference call. Average daily cash margin in the international business widened slightly by almost $200 to $16,500. This increase was lower than our expectations as negotiated price reductions involving a total of over 50 rigs in multiple markets took effect at the beginning of the year, several months earlier than we had anticipated.

In terms of cash generation, we once again remained cash flow positive during the first quarter. Our net debt fell by $18 million. We reduced total debt by approximately [$71] million and ended the quarter with $2.17 billion undrawn on our revolving credit facility.

Despite the difficult operating environment in the US, we continue to focus on our initiatives to remain free cash flow neutral. First, we maintained strict control over our capital spending. For the first quarter, capital spending totaled [$150] million. For 2016, we are targeting capital spending of just over $400 million, roughly half of that amount for maintenance CapEx and the remainder for contractual new-build commitments in international awards, our commitment to deliver a new-build rig in Alaska, and the completion of a handful of our newest technology drilling rigs.

Second, we are now deep into another round of G&A expense reduction. We are targeting a further $20 million annualized reduction from the fourth -quarter level. We are also targeting continued reductions in our fuel support cost.

The third initiative is managing our direct costs. The largest reduction in activity has taken place in our Lower 48 operation. We remain focused on aligning direct operating costs with activity levels, and we have continued to reduce field staffing as we stack drilling rigs.

Looking forward with prospects for a continued unfavorable environment, we remain focused on generating free cash flow through 2016. Our current rig count in the Lower 48 is actually up by one unit since the first quarter exit rate. However, we expect that the second quarter average will be flat with the current level at best and with a significant likelihood of further deterioration. We also expect reductions in activity levels in our Alaska, US offshore and Canada markets.

Finally, our international market has not proved immune to this long-lasting low level of oil prices. We have already dropped almost 20 rigs from our peak in 2015 and continue to experience pressure on both rig count and pricing. We believe that an additional 10 to 12 drilling rigs are vulnerable in the current market environment, along with a handful of low contribution workover rigs.

Because we cannot count on increased activity for the near term in the US or elsewhere, we will continue to focus on controlling our overhead, our operational costs, and our capital expenditures throughout the remainder of the year.

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

Thank you, William. I want to conclude my remarks this morning with the following summary. Markets declined broadly in the quarter. Our own international business was shy of our expectations. We think it is important to keep the actual performance in perspective, however.

Run rate EBITDA in our international business exceeded $0.5 billion. This is in a down year. Our US drilling operations, while depressed, are expected to generate positive EBITDA for the balance of the year and more than $100 million for the full year. In the face of this market, we are pursuing our technology initiatives. Along with our streamlined organizational structure, we are positioning the Company to emerge from the downturn in a significantly stronger market position.

As always, I look forward to updating you on our progress. That concludes my remarks this morning. Thank you for your time. With that, I will take your questions.

Thank you, sir.

(Operator Instructions)

Marshall Adkins, Raymond James.

Thanks for all the color. I'd like to get a little more detail on the international side, if I could. We are hearing a lot of tough things in Latin America. You mentioned that's been a weak spot or you expect it to be.

Tony, could you give us a little more color on specifically Colombia, Venezuela and Argentina, where you have a pretty good collection of rigs? What's the outlook there? And is that where we should see the biggest falloff in the international drilling rigs, not just workover rigs?

That's a fair question. Let me just try to give a little more additional color on international generally, including what you just said. So we did have significant issues in Latin America, specifically in two countries. In Colombia, all of our rigs went on standby in the quarter pending customer conversations. Where we've ended up is we've renegotiated our contracts with the state oil company.

We now expect half of our rigs to go back to work at the full original rate over the next several weeks and the other half will start under contract at the end of the year. In both cases, all of the rigs have had their contract terms extended an additional year from the original terms.

That's how we worked it out. But it took a lot of effort and that was a large hit during the quarter.

In Mexico, we've experienced an abysmal drop in activity. This, obviously, had a big impact on Q1. We now expect additional impact in Q2, [spending] in the country has contracted dramatically. I think you have seen that across the industry. I think you are aware of that.

In Argentina, we think it's sort of steady right now. What's at risk there is we have a bunch of workover rigs which don't meaningfully contribute.

I think those are at risk in this environment. And just looking at it from a profitability point of view as well, so I think that's at risk there.

In the Middle East, I think you know we had two jackups that finished their contracts late last year. The good news was that we renewed one of them, 657, and we're still working on the second one.

The renewal terms on the first one, though, dictated some idle time and additional expenses to fit it back into the operator's plan. So that's why the quarter didn't benefit from that as much.

In addition, in Saudi we had to have another round of price renegotiations. The [nights was] modest, but those were also embedded in the quarter and will be applicable for the year.

In terms of activity in international, we also [ended] a rig in Kuwait and a land rig in India. And finally, in the quarter we did have some unusual operating expenses, most relating to unfavorable rig movement and repairs.

What does all this mean? Let's wrap it up. Looking to the second quarter, I think our daily rig margins should approach back to the third quarter of last year level which is where we thought we were going to be this quarter.

The two main drivers of that and the thing that we have to focus on to make sure that happens are lower expenses so we don't have unusual costs and a shift in mix as William discussed in his remarks. The mix, including those workover rigs, getting out of the -- as the rig count should drive margins higher as well.

As William noted, overall there is more deterioration of rig count possible in the number of rig years. But when you sum it up all through, looking at the second quarter, where I think we are is, EBITDA and the international segment to decline maybe about 6% to 8%. That's the bottom line.

That's extremely helpful. One follow-up there.

The big elephant in the room here is Saudi. Are you seeing any weakness or cracking in their desire to continue drilling at these prices at all? Or has it just been price concessions, but they still want to keep drilling as much as they have been?

There is in process a plan to reduce rig count by about 10%. So far we haven't been hit with that. As I indicated, we have to get the other jackup back to work -- we are working on that.

There's obviously a lot of competition there. The whole market is going to be subject to that pressure on that 10%. Away from that, I will ask Siggi to add any additional comments to it.

Just the pressure on budget cuts and some reduction in rigs. As you said, so far we have not been impacted.

Right. That's what our mission is. Obviously we are mindful and some of our numbers anticipate getting hit somewhat. We are working to try to avoid that and try to be the preferred driller in that marketplace.

That's certainly good news. Thanks, guys.

Ole Slorer, Morgan Stanley.

Let me just follow up from where Marshall left it on Saudi Arabia. A lot of debate about whether the rig count is going up, down or sideways. You suggest a 10% reduction, but there are also news articles out that they're thinking about increasing or re-engaging on some of their shale drilling that they've been trying to do, presumably shale gas.

Would you have your -- clearly, all of these various pockets of Saudi drilling do not require the same type of rig. How do you see these moving parts playing out in terms of your type of asset in a country?

I think the wells -- the unconventional wells or the gas wells, the type of rigs that are required are basically the same rigs that they are using today. I don't think our fleet has any exposure. We are drilling mostly of the unconventional wells today, actually.

And in terms of the [rig], if would there be a 10% reduction in the Saudi rig count, any views on whether this would be an average slice, 10% down? Or would it be smaller workover rigs or how do you view your positioning in context of their comment?

I don't want to speak on behalf of Aramco but I believe they're going to budget cuts and, for example, maybe delay some exploration projects and [pick] rigs of that nature -- and maybe rigs that come up for contract and have immediate cost savings. I think that's the way things have been approached.

Okay, so just terminating rigs that are coming up for contract rollover regardless of what they do.

William, next question comes to you. Clearly the entire focus area is on the balance sheet, and your ability to comfortably make it through the trough and emerge a stronger Company on the other side. Could you take us through what makes you so confident that there will be no financial pressures? Remind us again of your covenant on your cash generation. You said now that maybe neutral cash, would that be a little bit optimistic in context of how much cash you have on hand and your refinancing needs?

Before Williams answers, let me just say overall that we have a target of running the Company as close to cash flow neutral as possible. We've articulated that.

Obviously with the first-quarter numbers, our goal is more challenging. We are going to do everything we can to get to it as close as possible.

There's overhead issues that we are still targeting. There's capital spending issues that we try to revisit that as well.

But just looking at the quarter, I'll let William elaborate, during the quarter if you adjust for the interest payment, which was $90 million which was semiannual, if you adjust for that, after our free cash flow defined, after CapEx and interest and cash taxes, was close to zero, excluding the dividend. And obviously if you take into account working capital, we actually were positive by $20 million. So I will let William now elaborate on why we think that is something we can navigate.

Obviously, since our last conference call, the environment got a little bit worse, in the US certainly, but also internationally, with a $20 oil price, that we saw in the [$20s]. That being said, we said before and we continue to believe that we can still reduce our CapEx further as required.

We have plans in place to reduce SG&A and overhead. SG&A alone in the $20 million range and field support, probably a similar number.

So those initiatives have now been put in place to continue ratcheting down our costs as the activity levels warrant. That's where we are confident.

We think we can be very close to neutral in operating cash flow -- in free cash flow, I'm sorry -- even without the impact of working capital. Working capital just puts us over the hump.

In the first quarter, for instance, as Tony mentioned, we reduced debt by almost $20 million, while we had a $90 million semiannual interest payment. That means in the second quarter we don't have those interest payments. That's why we are confident that we can finish the year without materially increasing our net debt.

Hopefully, and targeting to even reduce it if we can. So that's the first piece.

The second part of your question which was in regards to our covenants. The revolver only has one covenant, which is a 40% equity to total cap, book cap. So we feel very comfortable with our revolver.

The revolver is about $2 billion, and, frankly, it does cover all our maturities through its expiration, whatever debt maturity, assuming the markets are close in 2018 or 2019. The revolver would allow us to meet all of those commitments and have significant money left over to meet any other unforeseens that come along.

So we feel pretty comfortable throughout this downturn. We worked very hard to get in this position and now we're not becoming complacent. We will continue making sure we don't burn cash. But we feel very comfortable with the support provided by the revolver at this point.

William, Tony, thanks for going through that one more time. This is a big focus at the moment. I think it can be said too often, but thanks for highlighting this.

Thank you for the opportunity of making it clear to everybody. Obviously for us it's high on our list as well. We've spent a lot of time trying to make these things work that way, the way William articulated. It's core to what we're doing right now.

Jim Wicklund, Credit Suisse.

Hey, guys. This is Jake on for Jim. First question, you mentioned there was a possibility for some of the international price concessions to come off once the market started to turn.

I was just wondering if you could give a little more color on that, maybe in context how big are some of those price concessions that would come back across the portfolio? Maybe if you can put it in terms of average daily margin uplift or however you guys are looking at it.

Overall, maybe 7% of revenue, something like that.

So that was 7% of revenue?

Yes. (multiple speakers)

It varies by area.

It varies by area; it varies by -- (multiple speakers).

Okay. And then just touching on the notes that you repurchased during the quarter, I guess just some small detail question, which maturity was that? And second of all, within the context of it, how are you guys thinking about your priorities for uses of cash through the downturn?

We purchased -- we focus on the earlier maturities. Those within the life of our revolver at this point. We're not comfortable consuming the liquidity of the revolver by buying the longer dated senior notes. And as far as our uses of cash, as I said before, we do have a certain amount of maturities coming up within the next couple of years.

That is the first priority of a revolver, that we have some money left over from those amounts. And at this point, again, we are very focused on preserving our cash and making sure that we don't go into a rebound on our capital expenditures at this point or any M&A activity we don't have in the pipeline today. So the uses of our cash is going to be mainly to meet our obligations and make sure we have sufficient liquidity to take us through the downturn.

Okay, that will be it for me. Thanks, guys.

Robin Shoemaker, KeyBanc Capital Markets.

Tony, in your comments you mentioned something about anecdotes that maybe signaled a little more positive direction in the rig market. Did I mishear that or is there anything you could share with us regarding that in the second half of the year?

Sure, let me just maybe elaborate a little bit on the Lower 48. In general, I will tell you we are still cautious about the Lower 48. We expect sequential deterioration in our rig count and daily margins in the second quarter.

Still, given what's happened with OPEC, inventory levels, global production, we are not prepared to call the bottom to the rig count. Our own rig count has been relatively stable over the past month or so, so we think that is a sign that the rate of decline may have peaked.

With respect to your specific comment, we have had discussions with several major operators about what plans can be made for a potential upturn of activity in the second half. People want to know what the contingency plans are, we are talking to them about contingency plans, how fast things can be reactivated, et cetera. So there are a number of operators have contacted us about that.

But I want to say, this does remind us, if you go back to the last summer, we had -- commented the same thing. And actually we took those comments to the point where we actually start doing stuff.

That's why we got out in front of ourselves, a bit of a head fake there. We are going to be a little more guarded here. But those discussions have occurred with several operators.

Okay. So, in terms of -- were they talking about this as a second half of 2016 or was this further out in terms of these conversations?

Second half, third, fourth quarter, like middle of third quarter, fourth quarter, kind of discussions. Obviously with the ramp-up on both sides, they have some ramping up to do.

We have some ramping up to do. They want to know how fast and how many rigs, et cetera, would be possible. That sort of thing.

Yes. Okay. That's very helpful. Thank you.

Byron Pope, Tudor, Pickering, Holt.

With regard to the US Lower 48, it seems as though most of the rigs you have contracted today are AC walking rigs, which I would assume are skewed toward the PACE-X rig. I think you mentioned the number of rigs that you had term contracted in Q1. Could you share with us in ballpark terms for the remainder of the year, roughly how many of the rigs you have term contracted?

Denny, do you have that information in front of you?

I should have it.

By the end of the year, I think we should have about -- exit the year with 15 rigs on term contract right now, basically. It's kind of a stairstep -- pretty even stairstep down for the rest of the year. The end of Q1 was 33, basically.

Okay. And then appreciate the guidance with regard to Q2 for US Lower 48. As I think about the moving pieces on the day rate and the cost side, it currently seems as though roughly 20% of your rigs that are contracted are stacked on rate. I'm just trying to think through of the sequential up to $1,000 per day decline in fleet average margin for the US Lower 48. Is that fairly balanced between the cost side of the equation and day rates bleeding lower? I'm just trying to think through the dynamics there.

Yes, it's pretty good. More day rate, I would say, from a rollover.

Thanks, guys.

Sean Meakim, JPMorgan.

We've talked a bit about potential recovery for US customers. On the international side, any sense of the customer response in terms of potentially reactivating rigs, perhaps in 2017? Just curious if you think if there was an uplift in activity if it would be more limited to the Middle East or if there are other areas where you think you could see some uplift?

We talked earlier about Colombia. As far as we know, Colombia is going to the back to a more normal [level], so there will be increase in Colombia. And then there are several projects in the Middle East that are basically on deferred status right now that we could see coming back.

That would include Kuwait?

Kuwait, Saudi, maybe some other places. There's plenty of projects, they just need to get reactivated.

And a similar comment in Algeria, I would think as well.

Got it. That makes sense. Just thinking about the notes repurchased during the quarter, can you give us a sense of the magnitude of the discount at which you purchased them?

Something in the range of 5%. We focus on the earlier maturities and picked up from those. Obviously the pricing on those bonds has now come up quite materially and they are all trading around [99], even over [100]. We have stopped those purchases at this point.

Okay. That's helpful. Thank you very much.

Dan Boyd, BMO Capital Markets.

Appreciate all the color internationally. Just had a couple of follow-ups there. You talked about 50 rigs have repriced. Can you give us any color on the ongoing negotiations on the other 50 rigs that you will have active in 2Q?

There is no negotiations ongoing right now, nothing really substantial, there's nothing ongoing. This was really an activity at the beginning of the year when the customers wanted to basically extend the discount that we gave in 2015. That really was at the beginning of the year.

There's nothing really significant ongoing right now.

Okay. And then I just wanted to clarify some numbers. If EBITDA is going to be down 6% to 8% internationally and margins can go back to 3Q levels, that implies a 15- to 20-rig decline internationally in 2Q. Do I have the math correct there?

Including workover rigs which would be about half of that, that could be about right. As William said in his remarks, he gave a number for the drilling rigs, declined drilling rigs, the balance would be workover rigs, which really don't contribute much.

Thanks.

So when I said 10 to 12 rigs were vulnerable, I didn't mean that those dropped on April 1 by any means. Some of them may not drop at all. But I was just saying, based on the clients and the type of contracts and what those clients are doing currently to reduce costs, that's where we see the exposure.

Okay. Thanks.

Michael LaMotte, Guggenheim.

I just wanted to follow-up on the international side too from the standpoint of moving pieces. I am wondering if there's any emphasis or impetus on the part of the NOCs to go through any rig upgrades, anything from a mix standpoint that you can speak to in terms of high grading potentially?

In the Middle East, as you know, the gas projects all require rigs that don't exist in the marketplace. By definition they are kind of new rigs, so all 3,000 horsepower rigs with huge BOPs and at a price level of rigs that don't exist today. Same thing's true in Kuwait.

In Colombia, as you know, we relocated X rigs down there, which are new state-of-the-art walking X rigs. I think they were really happy with the performance on those rigs. In fact, we've had some initial really good success with them. I think, over time, there will be an interest in more of that kind of technology. In the short-term, I don't see a big shift right now.

Okay, thanks, Tony.

Angie Sedita, UBS.

Thanks. Tony, on C&J, if conditions continue to be challenging here for pressure pumping, can you talk a little bit about what you think your options are for the Company and would you be willing to support the Company with an influx of capital if needed? Can you just talk about various scenarios as far as C&J?

Angie, actually I can't. What I can say is the following.

First of all, in terms of just looking at the Company from a macro point of view, right now, as far as I understand, they're probably number two in hydraulic horsepower, in the active market today. They're number one actually in cased-hole wireline, which is amazing to me. They are number two in workover and number one in fluid hauling.

The overall position of the Company is truly -- it's built well. I have said publicly that I don't think putting any additional equity into the existing capital structure and the current capital structure doesn't suit the business. In particular, for all the pressure pumpers out there, I think this period of time, it's really kind of destabilizing for these guys because it is forcing them to defer maintenance and everything, so when a ramp-up occurs, everyone's going to need a lot of capital for the ramp-up, et cetera.

I think whatever happens here with C&J, it needs to have a restructured balance sheet. What role we can play in that is open and we will just take it as we see it.

Okay. And then separately, you want to talk a little bit further about your version of the US land rig future and your thoughts there on new construction timing and investor interest in design?

Sure. On the M800, which we recently announced, we are hoping to get one of those active in the marketplace during this quarter, at the end of the quarter, maybe. And I think the rig is targeted, as part of the market of the X rig, it's not there. In other words, one to four wells, fast moving, and it has more racking capacity, hydraulic horsepower and it will move in two days.

Compare it to any other rig out in the marketplace today, on all those metrics which are important to an operator, I think it will surpass any of them. And it's our first step in a long line of creating a platform for integrated services on the rig for things that are logical for a drilling contractor to take responsibility for, like we've articulated our vision.

There's some things that service -- third-party services done on a rig, like rig instrumentation that are third-party services today from other companies in the marketplace. That will be incorporated in the rig directional drilling. We are looking not to just do directional drilling but to actually change the way it's done by building it into the rig and trying to downsize the numbers of bodies that you have on the rig, not just from downsizing bodies but from doing it better by automating the process itself.

So there's a bunch of these initiatives. We're starting to show them to the operators and see if we can get some interest in it. There are several other services around the rig that, again, third parties do that we're targeting as well.

So we have a full-scale effort now out to do this and this is there -- we think we can grow. We will be measuring it by dollars per rig of extra services. That's where we go.

Over time we'd like that to be meaningful -- a meaningful number.

Okay. How many rigs do you have under construction today, one? And then, two, do they fall in the same construction range that your standard rigs do or modestly higher, or your PACE-X rigs, per se?

The M800 rig, we just finished this one. We have two more M800s in process, and the all-in cost is -- the all-in cost of the rig compared to the X rig is not really any more expensive. Actually it's going to be a little less.

The cost of these ones in the pipeline are actually significantly less because we have a lot of components in the pipeline from previous new-build plans. It will be not a big increase in our CapEx to complete them.

So we want to get a couple of them into the market and show customers the value proposition and build it and be prepared for the up cycle. That's the strategy here. That's what we're doing for the rest of the year.

And we have shifted a lot of our manufacturing of the rigs overseas to certain low-cost environments. That has allowed us to keep the M800 at a cost that matches the PACE-X and even a little bit lower than that. So that's the good news.

The other thing that Tony was mentioning was on the M800, we do have our new control system which automatically provides the instrumentation that Tony was talking about and integration with the bottom-hole assembly. A lot of exciting things in that rig.

I think the customer interest has been about as high as I've seen it in any of our rig categories. We are very excited about it.

Great. That's helpful. I'll turn it over.

This is Denny. We are getting close to the one-hour limit. Let's take one more question please.

Jud Bailey, Wells Fargo.

Thanks for squeezing me in. I wanted to just circle back and clarify something from your first-quarter results in the international business, if I could. You've all done a really good job executing and meeting expectations there, so I wanted to just understand, was the disappointment in the first quarter -- was -- were the price concessions larger than you had anticipated or did they start sooner, were they more retroactive or did you take more of them? I just wanted to get a little bit more color on what may have surprised to the downside there in the first quarter for your international business.

I think it was more the timing issue, the effectiveness of the issue. In the Colombia, just managing that process, we put a lot of effort into it. I think the result we achieved was a good result.

But it just took a toll that was unexpected by the time we actually got it done. Both were more timing issues than disappointment. The only other miss, I would say, is the planning on some of those -- the 657 which was part and parcel -- that's inherent in the business we are in where these things just don't always line up perfectly. Unfortunately, that didn't line up perfectly.

Again, we are really happy that we actually got a jackup signed to Saudi Aramco in January which compared -- you survey the other people out there, you know how hard it is to get that, which is a sign of their confidence in us that they were able to do that. But, again, just navigating, fitting it into the well program the right way and coordinating with the shipyard, et cetera, I think we fell a little short of where I wanted to be.

Okay. All right.

Like you said, this is one of the first times in quite a while that that's happened. So everyone knows we have to really focus and try to do better. So the message is pretty clear here.

I appreciate the color there. My follow-up is when you look at your international business now, you've taken price concessions on roughly half your fleet, your Latin America rig count is bouncing around at pretty depressed levels already. You've given us pretty good guidance for the second quarter on where you think EBITDA goes.

Can you help us try to think about when you think perhaps, if oil prices stay here or start to move higher, when should we think about your EBITDA internationally stabilizing? Does that happen by the fourth quarter, is it the third quarter, or is it a little bit later? Is there a way to think about the moving parts on when we might see EBITDA internationally stabilize?

On that, I'd like to have a crystal ball for the second half. I really can't get into the specifics because the visibility does remain limited. It is, obviously, as you know, very dependent on price of oil and we're going to be really working aggressively to maintain our market position everywhere.

We think that things could maybe by the end of the third quarter, you'll start to see something improve. Again, it's so macro dependent right now. I think anybody would just be guessing.

I appreciate it. Thanks, guys.

Mike, with that, I'll have you close out the call. We just want to thank everybody for participating.

If we didn't get to your question, just feel free to call us or email us. We will get back to you as soon as possible.

Thank you, sir, and to the rest of the Management team, for your time. The conference call has now concluded. At this time, everyone, you may disconnect your lines.

Again, we thank you all for joining today's presentation. Take care and have a great day.