Nabors Industries Ltd (NBR) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Nabors Industries Fourth Quarter Earnings Conference Call. (Operator Instructions) Please note that today's event is being recorded.

I would now like to turn the conference over to Denny Smith, Vice President of Corporate Development. Please go ahead.

Good morning, everyone, and thank you for joining Nabors' fourth quarter and full year earnings teleconference. Today, we will follow our customary format with Tony Petrello, our Chairman, President and Chief Executive Officer; and William Restrepo, our Chief Financial Officer, providing their perspectives on the 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're available as a download within the webcast; alternatively, you can download the slides from the Investor Relations section of nabors.com under the sub-menu Events Calendar, or you will find them listed as supporting materials under the conference call listing. Instructions for the replay are posted there as well as under teleconference information.

With us today in addition to Tony, William and myself are Siggi Meissner, President of our Global Drilling Organization; Chris Papouras, our President of Nabors Drilling Solutions; John Sanchez, our Chief Operating Officer for Canrig; and other members of our senior management team.

Since much of our commentary today will include our forward expectations, they may constitute forward-looking statements within the meaning of the Securities and Exchange Acts of 1933 and 1934. Such forward-looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may 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 and adjusted EBITDA. All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word "adjusted" or otherwise, mean adjusted EBITDA as that term is defined on our website and in our earnings releases. We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures.

Now I'll turn the call over to Tony to begin.

Good morning, everyone. Welcome to the call. We appreciate your participation as we review our operations for the fourth quarter of 2017 and our view of the market going forward. William will follow with the review of our financial results. I will then wrap up, and we will take your questions.

Before getting into the quarter's financials and market trends, I would like to take a moment to review what a transformational year 2017 was for Nabors. Specifically, I would like to highlight 4 main accomplishments. First, we initiated operations with SANAD, our joint venture with Saudi Aramco. I believe this materially enhances the value of our International franchise. Second, we acquired Tesco to support our NDS strategy. This is already yielding synergies globally. Next, the pace of U.S. market expansion has shifted markedly faster and our SmartRigs units continue to be fully utilized. We expect this trend to continue through the year. Finally, we met our $50 million annualized Nabors Drilling Solutions or NDS adjusted EBITDA target for the fourth quarter. This $12.6 million figure represents over 450% growth from that of a year ago.

Let's start with SANAD. This partnership between the world's largest oil producer and land driller represents an opportunity to achieve significantly higher operating efficiency and well productivity over time. We started operations on December 1 and currently have 45 working rigs total in Saudi Arabia. Of these 45, 3 are jack-ups subject to previously announced contingent purchase of sale agreement. 8 of these rigs are owned by the joint venture, with 2 more to commence later this quarter. These are the remaining rigs contributed by our partner Saudi Aramco. SANAD should begin taking deliveries to what will ultimately be 50 new-build rigs manufactured in Saudi Arabia. We expect initial deliveries to begin in 2020. These rigs will benefit from long-term contracts at prescribed economics.

We are pleased that Aramco has sent its 3 experienced senior executives to the SANAD board and is committed to ensuring that the venture is a commercial success.

On December 15, we successfully closed the acquisition of Tesco. Our vision is to leverage the joined rig to serve as a delivery platform for Rig Services. We are doing this successfully across multiple product lines. Tesco has long had an excellent reputation worldwide as a top-tier tubular service provider and rig equipment manufacturer. On our last call, I outlined $20 million synergy target for 2018 followed by a $30 million to $35 million run rate thereafter from cost alone. I am pleased to report that we are making good progress on this target. We now anticipate around $25 million of synergy capture in 2018. There may well be additional upside in our run rate number as well, and we will revisit that topic as we gain a better understanding of the revenue potential. The integration is well underway, and we are pleased that the level of cooperation between the fine men and woman of Tesco and their counterparts at Nabors.

Turning to the U.S. Our average daily margins for the segment increased from about $5,300 to nearly $6,450 per day. This acceleration in margin growth came primarily from the Lower 48 business and overwhelmingly from the revenue side. This is due to several reasons, which I will cover in more detail. We anticipate the U.S. will be the primary driver of revenue and adjusted EBITDA growth in 2018.

Given its size and growing contribution to the company, we have revised our reporting to break out NDS from what was previously the Rig Services segment. This new separate reporting segment is named Drilling Solutions. The new Rig Technology segment is composed of Canrig and our recently acquired robotics product line and the rotary steerable systems.

We initiated our goal at the beginning of 2017 to reach an annualized adjusted EBITDA run rate of $50 million for NDS. At that time, our annual run rate from the fourth quarter of 2016 was just $10 million, and many of our products have yet to gain significant penetration. We achieved an adjusted EBITDA of $12.6 million for NDS in the fourth quarter, meeting our target.

With the New Year, it is time to challenge ourselves again in terms of where we would like to see this business at the end of 2018. We are targeting NDS to double its adjusted EBITDA contribution to an annualized $100 million run rate in the fourth quarter of 2018. We see expansion opportunities, both geographically and by products. Economies of scale have enabled us to grow our margin on certain products.

Now let me turn this quarter's results. In the fourth quarter, Nabors generated adjusted EBITDA of $163 million on operating revenues of $708 million. This performance compares to $143 million and $662 million, respectively in the third quarter. The quarter reflected strong performance for our U.S. business, driven primarily by higher Lower 48 average day rates and margins. Also, higher margins in Canada and growth in both NDS in Canrig more than offset a decline in International. Canrig had been impacted by order deferrals in the third quarter, so this rebound is largely expected.

Nabors worldwide rig activity was flat during the quarter, as the dip in oil prices that occurred in July dampened operators' activities for the remainder of the 2017 budget cycle. With WTI solidly in the $55 to $65 range and Brent solidly above $60, we are seeing increased contract interests and activity from our clients. At this price range, we expect to see a steady increase in rig count, both in the U.S. and internationally through 2018.

Now let me drill down a bit further into each of our business segments.

Turning to the U.S., financial results in the U.S. Drilling segment improved even with a relatively flat average working rig count for the fourth quarter. This fourth quarter rig count was down 1 rig to 106. Currently, we are running 114 rigs, as the rate of contract signings has accelerated with the initiation of 2018 budgets. Higher margins drove the entirety of the $10 million increase in the U.S. adjusted EBITDA. This increase of approximately $1,150 a day of margin was due entirely to increased revenue. We believe this accelerated margin growth trend is sustainable. We have renewed our organizational focus in this market and are repricing rigs on short-term contracts with the same clients to market rates with reduced lag.

Rising oil prices with moderately expense of 2018 operator budgets have led to increased demand for rigs over the last few months. We continue to roll well-to-well, or more accurately pad-to-pad contracts higher. At the same time, we are renewing term contracts. To give you an idea of how much pricing power remains coiled in our fleet, we have 13 smart rigs units rolling off term contracts this quarter. The average day rates for this rig is just under $18,000. Take that $18,000 to the low to mid-20s, and you see some of its support bolstering our conviction of higher Lower 48 margins.

Additionally, we still have work to do on costs in the Lower 48. There are multiple operational cost initiatives we are currently tackling. We should see this side of the margin equation pulling its weight in future quarters. With decreasing costs, I expect to see similar margin progression quarter-over-quarter in Lower 48 through the year. When we add in the contribution of the M-400 with the Big Foot project beginning no later than April 1, we expect to add roughly another $800 a day to our average daily U.S. rig margin over and above this pace. We currently have 107 rigs working in the Lower 48 versus the 101 average for the fourth quarter with 103 exiting the quarter. This total includes 3 SCR and 13 legacy AC rigs. The final of our 4 new M1000 rigs is ringing up right now in the Permian about to start drilling for its major client.

Our rig enhancement program, now nearly complete, has enabled us to meet the growing demand for our SmartRig units and share the value creation with customers. We have 8 remaining upgrades in our enhancement program located in the Northern U.S. With strengthening demand, we expect new rigs will be completed and put to work over the next 3 quarters.

Let me turn to the outlook. Current leading edge day rates are moving higher in the Lower 48. Strong customer demand is driving full utilization and pricing traction for the highest spec rigs. Any clients are willing to discuss term contracts, and we are increasing our term allocation as a portion of our overall fleet. However, we are increasing this percentage from a very low base. As of today, only about 15% of our Lower 48 working fleet is contracted on term beyond 6 months from now. In the current low to mid-$20,000 per day pricing environment for super-spec rigs, we plan to lengthen our overall term structure at a steady pace in the coming months.

We again surveyed our larger Lower 48 customers earlier this month. These operators represent about 1/3 of the total rig count. Twice as many of these clients plan to add rigs as to drop them. The additions we see are broad-based and supported by available budget projections. The rate of addition from these large public clients lags that of smaller private clients. Based on this information as of today, we would expect the Lower 48 rig count exits the year at 50 to 90 rigs above the total. Of course, a year is a long time and this may change based on oil prices or other factors.

Let's turn to International. In our International segment, the net average working rig count declined slightly versus our expectations for an increase. A later initiation date for our Aramco joint venture than we had originally anticipated, along with several late start-ups was the source of this variance. However, we exited the quarter with 95 rigs working internationally, first of the 91 average for the fourth quarter. Today, we currently are at 96 rigs. As we noted on the previous call, we expected International margins to return to a more normalized level in the mid to low $17,000 which they did.

After the fourth quarter pause, we should resume rig activity increases in the first quarter for International. All 4 platforms have returned to work in Mexico and India, along with rigs in Ecuador and Russia, offset by a single drop in the UAE this quarter. We still expect a significant uptick in Algeria but these start dates have moved to the right. Finally, the 3 incremental SANAD rigs contributed on December 1 will have a full quarter of work for Q1.

As it pertains to larger tenders requiring significantly newbuild CapEx, we are bidding with several criteria in mind. First, and most importantly, our investors expect a reasonable return on capital.

Next, as both William and I have stated repeatedly, deleverage is a top priority. Any new CapEx should be offset as much as possible with upfront client contributions and should deliver our target payback. To the extent we can add value for clients while fulfilling these requirements, we are enthusiastic to bring our rigs a full package of solutions. However, we will not approach bids with a win work at all-cost mentality when it comes to bidding for incremental newbuilds.

Let's turn to Canada. With a relatively higher gas mix versus the U.S., Canada has not gathered the same level of momentum. We had 14 average rigs working there in the fourth quarter, practically unchanged from the third. We have 23 rigs currently working there, as activity increased for the winter months. The Canadian market has transitioned to more regional E&P companies with whom we have strong legacy relationships. We see both our rig and NDS margins increasing there in 2018 versus 2017.

Our targeted upgrade program has increased our high-spec rig capacity that tends to remain working through the seasonal breakup.

Let's turn to NDS. As I mentioned earlier, Nabors Drilling Solutions will now be reported in its own segment called Drilling Solutions. We met our $50 million adjusted EBITDA run rate target for Q4 2017 and we've set $100 million run rate target for Q4 2018. NDS revenues and margins have continued to decline. Averaged across our working Lower 48 fleet, daily margins increased by nearly $150 per day quarter-on-quarter. Over the course of 2017, these margins increased nearly 3-fold to almost $1,350 a day, with ample room to grow internationally.

In the Lower 48, we expect continued directional drilling penetration, plus additional growth from our early-stage MPD offering, and of course, a big step forward in casing running services driven by Tesco. Incremental to this, we anticipate our rotary steerable tool will be commercial later this year.

Overall penetration rates for the Lower 48 were steady quarter-to-quarter. We had 83% of our Lower 48 rigs running at least 3 NDS services, with 36% running 5 or more NDS services. While NDS to date has focused most of its efforts in the Lower 48, we believe Saudi Arabia will be an emerging market for directional drilling in MPD in 2018. We have commenced 2 directional drilling jobs and Tesco has a strong tubular services business there. Beyond Saudi Arabia, we have additional NDS expansion target identified internationally. These developments give us confidence for continued growth in 2018. We again reiterate our $200 million to $250 million target for 2020.

Canrig, now the principal component of the new Rig Technology segment bounced back this quarter to produce slightly positive adjusted EBITDA. However, when accounting for the development expenses for the rotary steerable tool and the Robotics Technologies division, this segment as a whole had a negative $4.3 million adjusted EBITDA for the fourth quarter. We expect the rotary steerable and robotics efforts to transition from an R&D to commercial efforts this year. A slowly strengthening rig equipment market should benefit Canrig incrementally throughout the year. The addition of Tesco's equipment sales and aftermarket service business, along with associated synergies will also benefit Canrig. Due to these factors, we expect the segment to turn adjusted EBITDA positive in the second half of 2018. But more importantly, from a long-term perspective, we believe Nabors has the potential to become the leading provider of drilling automation systems, both on and offshore. This concludes my comments.

William will now give you the quarter's financial results and provide additional thoughts on the outlook.

Good morning. The net loss from continuing operations attributable to Nabors of $116 million represented earnings per diluted share of $0.40. Results from the quarter were adversely impacted by $16.5 million or $0.06 per diluted share in post-tax costs related to the Tesco acquisition and the startup of the Saudi Aramco joint venture. The quarter also included the impact on our tax balances from the recent changes to U.S. corporate tax legislation, which were offset by adjustments to other tax reserves. The fourth quarter results compared to a loss of $121 million or $0.42 per diluted share in the third quarter.

Revenue from operations for the fourth quarter was $708 million as compared to $662 million in the prior quarter, a 7% improvement. U.S. Drilling revenue increased by 5% to $233 million, reflecting an increase in revenue per day. Average rig count for the quarter fell by 1 rig as we experienced some idle time from rigs moving to new customers at higher day rates in the Lower 48. As Tony noted, the pause in activity growth was temporary, and increases in rig count have resumed this quarter.

International revenue increased by 2% to $381 million despite slightly lower rig activity.

In Canada, revenue increased by 10% to $20 million, driven primarily by a $1,200 increase in average revenue per day. Today's rig count of 23 is well above our fourth quarter average of 14 rigs.

Drilling Solutions' revenue increased 17% in the quarter to $44 million. Increased performance software installations and wellbore placement were the largest drivers.

Tesco tubular services also contributed to our fourth quarter revenue.

Rig Technologies revenue grew by 58% to $79 million. Much of this is attributable to our recovery in Canrig revenue after the third quarter, which was impacted by a high number of equipment deferrals following the weakening of oil prices during the third quarter. Similar to Drilling Solutions, Tesco product revenue had a positive fourth quarter impact.

Adjusted EBITDA for the quarter was $163 million as compared to $143 million in the third quarter. A $10 million increase in the U.S. primarily reflected an improvement in Lower 48 margins. Lower 48 adjusted EBITDA rose by $7 million, driven mainly by higher average day rates, as well as by higher revenue from moves and other charges to customers. We expect this day rate trend to continue, along with lower operating costs in future quarters. Additional seasonal work offshore bolstered results, which will be significantly enhanced in the second quarter once the recently mobilized M-400 platform rigs starts work.

Drilling margins for the Lower 48 increased from $4,160 a day to nearly $5,000, exceeding our expectations for the quarter. The improvement was driven by rigs repricing from term contracts signed in the early 2017 or 2016 timeframe and by steadily increasing spot market rates. We expect this favorable day rate trend to endure. As the remaining newbuilds and upgrades join the fleet, contract rollovers continue to reprice to market, and pricing continues to firm. This trend is most visible in Texas, though we see inquiries picking up in the Rockies and the Bakken, with the upcoming spring thaw.

As our cost reduction efforts start to bear fruit in the first quarter, we anticipate reporting Lower 48 margins around $6,000 per day with a similar pace of improvement going forward for the remainder of 2018.

Given the current level of customer interest and existing commitments, we expect to average between 104 and 106 working rigs in the first quarter. As a reminder, we have 107 working rigs in the Lower 48 as of today.

International margins of approximately $17,200 met our expectations, albeit on a lower rig count. Compared with the third quarter's exceptional margin, adjusted EBITDA declined by $8 million to a total of $129 million in the fourth quarter. The lower rig count cost us approximately $2 million sequentially. Bad debt reserves of $2.2 million also impacted results negatively.

With the inclusion of the SANAD rigs and the startup of various rigs around the world, we expect to report roughly an incremental 5 rigs for the first quarter. We have 96 rigs working as of today.

We signed multiyear extensions effective first quarter that will provide additional term at still attractive but somewhat lower rates. The potential sale of the noncore but higher margin jack-up business, which we anticipate taking place in the next few months would also have an impact. We expect International margins to drop below $17,000 a day following the sale of the jack-ups. Overall EBITDA for the segment should increase, however, with an increase in rig count.

We also expect our International daily margins to regain their traditional levels during the course of 2018 as we add high-margin rigs to our working fleet.

Canada adjusted EBITDA increased by $1.7 million or 65% to $4.3 million, driven by a roughly $1,150 growth in margins to $4,650 per day. We are putting rigs back to work in Canada, and we stand at 23 rigs as of today. We anticipate an average first quarter rig count of approximately 20 rigs with improved margins in the low $5,000.

Drilling Solutions has met its fourth quarter target, posting on adjusted EBITDA contribution of $12.6 million, up from $9.8 million in the third quarter. These services are benefiting from increased market penetration as well as new product offerings and geographic expansion.

The acquisition of Tesco's tubular service business has given us immediate scale in key markets such as Saudi Arabia, as well as footholds in markets Nabors have not previously served. As Tony mentioned, $100 million is our new annualized adjusted EBITDA target for this segment by the fourth quarter of 2018.

The Rig Technology segment representing Canrig and the 2 technology development efforts improved its adjusted EBITDA to negative $4.3 million from negative $7.9 million in the third quarter. Canrig, by itself, was slightly positive. This segment will benefit from adding Tesco's legacy position in such markets as Russia.

Now let me review our liquidity and cash generation. We priced $800 million of 7-year unsecured bonds during the first quarter at an interest rate of 5.75%. This financing was intended to address our near-term fixed income maturity, namely the $460 million outstanding on our 2018, 6.15% senior notes, as well as the $303 million outstanding on our 2019, 9.25% notes. We were pleased with the rate we were able to achieve, which we believe reflects investors' confidence in our ability to generate cash over the years to come.

CapEx for the fourth quarter was $119 million, finishing the year at $539 million. We anticipate CapEx for 2018 will be around $500 million, which we'll regularly reexamine in light of our positive free cash flow target for 2018. We have no plans to complete further upgrades beyond the remaining 8 we have in our original enhancement program. All of these costs, approximately $4 million each.

Net debt declined by $76 million sequentially. Excluding the net cash inflows from our 2 strategic transactions, our cash flow broke even. We expect cash flow for 2018 as a whole to be slightly positive.

Our longer-term forecast continue to indicate material cash flow generation over the next few years. Our free cash flow will be allocated primarily to debt reduction. We will continue to be highly selective in our capital allocation.

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. As William mentioned, our new $800 million 7-year financing at just 5.75% comprise of substantial investor confidence. We have a robust liquidity profile and a pathway to substantially reducing debt. Generating positive cash flow this year remains a top priority. This quarter marks strong growth not in just revenue and adjusted EBITDA, but also in the competitive position and capabilities of Nabors. We officially began the joint venture operations in Saudi Arabia. We concluded the acquisition of Tesco.

Nabors Drilling Solutions is growing at scale, and finally, our Lower 48 fleet is gaining recognition for the value it brings to clients.

As far as the 2018 impact of these events, my expectations are highest for the U.S. To be frank, our margins there have lagged over the past couple of years. I'm pleased to see the fourth quarter make a step-change. With the focus we are putting on our controlling costs and demonstrated the value of our SmartRig platform, I expect our Lower 48 margins to reach approximately $8,000 by the end of the year. This will be across our working fleet that should grow by high single digits from today's level, representing over $30,000 a day of incremental value to our investors. This translates to a targeted increase of over $100 million a year.

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

(Operator Instructions) Our next question comes from Waqar Syed of Goldman Sachs.

My question relates to the Tesco acquisition. Could you provide some more color on how do you plan to generate the cost synergies, and then also the revenue synergies, especially? And the target -- original target of $35 million, that seems to be achievable, mostly from just the G&A. What could be the upside case beyond that? And then also on the revenue synergy side, if you could highlight a little bit more.

Okay. Well, the unique thing about the acquisition, as you know, was they're in the rig manufacturing business, which really had a product overly with Canrig. The overly wasn't that much in 4 categories because Canrig does certain parts that Tesco didn't like, Woolworths and VFDs and -- but -- that Tesco didn't, but Tesco did have a tougher product range that actually is more robust than the lower less than 500 tonne top drive category. So there is -- and then they have tubular services business. So there is obviously ample cost consolidation opportunity to take their organization and overly it into the Canrig organization and manufacturing. And the NDS organization, obviously, with services, which is what we've done right out of the box. And then, of course, our infrastructure has been set to scale, so we're able to absorb this without really much -- very little in the way of incremental corporate additions. So that was a step one, and that's what we're in the process of doing well. Then with respect to field operations, we're moving to a geo market model where -- in the geo market, you have rigs and you have NDS in those markets, and there's going to be savings in the actual field infrastructure for (inaudible) delivering services to clients. That's point 2. Then point 3 is the way we want to run the tubular services business. It's a little bit different, especially on Nabors rigs versus what's been done today. As you know, we uniquely because we have a top drive as part of our portfolio, we -- we're looking to not just bundle a (inaudible) client service with this, but actually, deliver it in different way. So our aspiration is to actually integrate the tool into the rig. In a couple of years from now, we want a rig to look with a top drive the way -- I mean a rig with casing running tool with the way people look at which were top drives, that they're ubiquitous. And that the rig crew is substantially responsible for running the service. So the idea is basically, to disrupt the way it's done today. To do that, there has to be some changes to way casing service is done, and there's technology hurdles but those are being addressed in the second quarter. We can have a model with a typical CRT tool that goes out there with a separate sort of hardware. Some of that redundant hardware will be eliminated. And then we'll be moving to train -- cross training crews to handle most of the services et cetera. So we believe that provides for margin expansion as well. So that may be a long answer, but that's the concept. In addition to that, the Tesco installed base -- it's interesting people may not realize this, Canrig has an excess of about 1,300 top drivers worldwide, and Tesco has about the same installed base worldwide. So there's a huge installed base. Tesco topped that market -- that -- the portion of that AC top drives will also become a target for Nabors' performance products on third-party rigs. That's other growth potential that will come out of the deal as well, which is historically we focused on not just Nabors rigs, but third-party rigs with Canrig AC top drives, so now we're expanding that market as well. So there will be potential for products like ROCKit and our new Navigator product as well.

So do you see this revenue synergy potential show up in '18 results? Or is this is more like a '19 and '20 kind of time period that you realize that?

Well, I thought I'd say, we're working on it every month and the sooner the better as far as I'm concerned. But realistically, to get these products done and out there is probably the second -- late in second half of the year.

Okay. And then on the rotary steerables, could you provide some more color on the commercialization process? It feels as if it's been pushed to the right a little bit.

Well, what -- we've actually had another 2 tests at Tuscaloosa, and I think in March, it's actually going to a customer for a test. So we'll see what the field trial with the customer yields. And we have high expectations and hopefully, that goes well and then we can start gearing up. So the idea is to target the second half of the year, to have a tool in the marketplace, that's the goal. Because we're going to a real customer next month.

Our next question comes from Marshall Adkins of Raymond James.

Let's stay kind of on the tech theme. Give us an update, if you would. Also on the Managed Pressure Drilling, I know the weather for JV fell apart but that and robotics, kind of -- any sense of time there? It seems like the robotics is a lot further off than rotary steerable, but if you just give color on those technology initiatives and any other ones that I missed.

Okay. On the Managed Pressure, I mean, what we're doing with Weatherford is we are sourcing -- are rotating heads with Weatherford, and we're working on a long-term -- kind of working on a long-term arrangement with that. So that's what we're doing vis-à-vis that. But we do have an MPD offering that we had some success about, I'll let Chris talk about it here. Chris?

Sure. We've deployed 4 systems. We've got 6 additional systems coming, but the approach that we're trying to take is really to quantify the value of MPD. And our goal is to ultimately mainstream it. So one of our clients that were working is basically moving over to MPD across their entire fleet of rigs. And the idea is by technically integrating with the rig controls, we can drive down the costs of the operator, while still being able to create the value. So that system is out there, and we expect to achieve some growth as we add -- continued to add systems.

And the good thing about it, Marshall is that the configuration of the hardware as compared to a standalone provider is about probably at least a, may be at least 40% cheaper hardware cost-wise than the standard provider, because the way our SmartRigs are designed, they are designed with the expectation that will be on MPD ready-grade, so the piping is all done to accommodate it as a drop-in. So that's one of the advantages of doing this -- has basically rig as platform concept, which as you know that's our concept, so. And then with respect to the...

Hold on just a second. By your tone there, Tony, it sounds like this Managed Pressure Drilling thing is a -- maybe a little bit bigger deal going forward than certainly I thought or most of us thought?

So I think the issue is right now the service -- the service is so expensive in the U.S. There's probably -- I mean even the leading provider probably only has 10 or 12 jobs or something like that, I don't know the exact number, but compared to the rig count, it's so expensive so one of our missions here is to first get sort of what we call a Tier 1 service, which is a basic service on the rig, and do it at a number that we can recapture our hardware cost in the deal, and then get some additional margin from a Tier 1 level. And then by -- but once we have it set up that way, the infrastructure with the software will be set up to run a fully managed MPD offering where it automatically controls -- it chokes everything. So if the operator elects to do that, then we -- it's a high margin potential. And the value proposition is we have to figure out a way to show the operator that what the true savings are to them, which include (inaudible) losses and another things. And that's a big education process, but as Chris said, we've recently done a project with an operator and that actually is giving us some confidence. We actually come up with an MPD calculator that will show him the savings and why. I think it's a sure thing to say everybody would like to run their rig Managed Pressure Drilling is, obviously, everyone thinks that's the way to do it. The question is, it's never been cost-effective. So our mission is to try to get a model here that is cost-effective, with a low barrier entry to get it in front of the operator. And then what once it's proven to him, they maybe -- try to upsell this full-service. That's the goal, but it's not something that we're going to do overnight because all those hurdles. But that's the thought here.

And then the other technologies?

Okay. So the other technologies. So I mentioned the rotary steerable tool. In terms of performance products, we've -- we have what's called our Navigator product, which is like -- those of you who have heard me talk before, it's like Waze on an iPhone. It's for directional driller, it basically says, "Here's where you are and here's where you need to go." And it calculates what the top drive has to do to get there in terms of turns, et cetera. And then we have another product called PILOT, which is the version of -- our version of a Google Driving Car that actually drives the rig with the tool, it slides and rotates the tool automatically. Both of those products have been in field testing on hundreds of wells, and those are going live this quarter for commercial offerings as well. And the third thing is the robotics, which is a 2-step thing. There's a robotics for a land rig. We're working to get out, as you know, we have the first generation (inaudible) piping on the rig, it's in the green yard. We're hoping to place it with a customer, which is a 1,500-horsepower AC rig, rack and pinion style. And then we're in the process of trying to get out what we're calling the iRacker, which is the pipe handler on the rig floor to convert existing platform of rigs to automatic rigs with pipe handlers. So that's going in testing right now and we're looking for the second half of the year to get that out. And then finally, on RDS, which is the robotics up in Norway, which we also acquired. They -- that product is very mature in terms of -- been through testing for several years now and we're in talks with several large offshore drilling contractors who are -- all have the same issue before them which is how to lower their -- how to increase their efficiency of their operation and how to differentiate themselves. And I think this platform of tools on the rig floor, which is an automatic pipe handler, including a robot that moves the stuff around on the rig floor, it's a unique offering. And we have interest from at least 2 or 3 very large offshore drillers, and we're trying to get that commercial. So the goal on both of those obviously are towards the latter part of the year, but they're highly active and focused on right now.

Our next question comes from Sean Meakim of JPMorgan.

So it's just some of the moving parts with respect to the International fleet. I was hoping to maybe just give us a little more granularity around the interplay between the jack-up sale as well as some of the incremental rigs they're going to be coming in at better rates. Just thinking about that margin profile, the cash margin, is there a normalized type of number you can fill out there for us? How should we think about that progression through 2018?

Okay. So let me try to give you some overall color. First of all, with respect to margins, as we said, we see some additional modest declines in margins in the first half of the year, which I would say in the 3% to 5% arena. However, we expect that, that growth was going to be offset by a gain in activity. The margin decline is primarily due to 2 factors, which you've identified one of them. First is we have certain rigs in South America that were entered into at the height in the market in 2014, at very, very, very robust pricing, which we renegotiated and extended through 2019 at attractive rates today, but still less than what they were at the extreme high in 2014. But we feel that was strategic and it locked up those rigs through 2019. And they're producing solid returns and attractive returns on capital. The second thing is as you signaled is the lot of intent to sell the (inaudible) jack-ups in 2 tranches. Those are no longer core assets outside of -- and they're outside the Aramco joint venture. And there's better natural owners for them at this stage. This will allow us to deleverage and avoid some CapEx. But the jack-ups are working at relatively high margins, before maintenance and sustaining CapEx, so therefore, we have an effect on the average margin. As we said in the call, as we said, we expect the transaction to close somewhere in the next 2 or 3 months. So that's where the offsets occur. As far as bouncing back in the second half, there's a couple of factors at work there. We're not operating yet at full -- with our full fleet of rigs in Saudi Arabia because our partner hasn't yet been able to put in the other 2 rigs on the payroll, and that will improve the daily margins as well. And with Brent prices is now at $65, we're engaged with multiple client discussions, because the market is clearly tightening. Although we have a few 2014 legacy contracts, we have great many contracts in 2016 or 2017, it was [hard to find fewer] rates, and as they roll, we think we'll move to higher rates.

In terms of the activity level, when talking about International markets, International is not a model as you all know. And you've heard us say this before. It's really about 15 separate country markets, and they're all operate, react independently from one another. We currently expect about 4 to 6 rigs higher in the first quarter, and then a modest increase each quarter going forward. We're currently 96 rigs up from 5 in the fourth quarter. And we've put our platform rig back to work in Mexico, another rig in India, and a rig each in Russia and Ecuador. And on top of those, we have the -- as I said, we have the Saudi rigs. So that gives you the overall picture.

That's very helpful. I want to follow up to that -- just one of the more nuanced pieces, I think will be helpful to flesh out a bit of -- with some of those legacy contracts from the prior cycle, some of those were coming in at maybe -- you're amortizing pretty good EBITDA, but the cash component was left -- you pull [40 up,]move it upfront to help finance the rigs. As you think about re-contracting in the [U.S. at similar] -- at lower rates, but you're getting maybe a conversion between EBITDA and cash, and so can you give us some of the impact to cash from ops, which maybe -- sees some benefit on -- as you move to 2018?

Yes. Obviously, as you pointed out, the nominal rate today of those, the nominal real rate today, on a cash basis is less than the prevailing market and therefore, there should be some uptick, as you move it to rollover. But of course, there was also this negotiation but that's obviously something that we're keenly aware of.

Our next question comes from Byron Pope of Tudor, Pickering, Holt.

I just have 1 question on the U.S. Lower 48. It feels like if the market -- Lower 48 market ends up adding call it 90 rigs between now and the end of the year, you're going to have more E&P operators looking to term out super-spec rigs. And so realize you're starting from a relatively low base in terms of your rigs that are term contracted 6-plus months out on the horizon. But how do you weigh the pros and cons of terming out rigs call in the ones to 2-year range? I mean, might we see a return to those multiyear contracts that we saw in the last cycle? How do you think about it?

Yes. I think the -- I think given that the portfolio is now only 15%, I think as we moved it from the -- to the low to mid-teens number. And I think the prospect and the advantages of terming out of portion, I think probably, we'd like to double our percentage. And I think as we all -- all the players march down the path of terming out, I think it actually will probably cause some tightening of numbers as well. So I think that's one of the advantages we have given where our portfolio is assuming the market develops the way you just said, which is what we've planned for, which is why we're in the situation we're in. But that's got to be exactly the plan.

Okay. And then just a second quick question. As I think about the 3 newbuild PACE rigs that will be delivered this year, and then the 8 potential rigs that get upgraded, it seems reasonable to think that most, if not all of those, are probably going to have a similar number of NDS services on them as for the stats that you gave earlier?

Absolutely. I think every operator that booked the new M-800, M-1000 rigs, they're -- they see that rig is MPD-ready and DD-ready, et cetera. They're very open to those discussions. And I think there are best -- our best marketing of the NDS services. So that's the whole strategy in a nutshell.

Our next question comes from Ken Sill of SunTrust.

It's a very good outlook we got here. Tony, you were talking about getting up to $8,000 cash margins towards the end of the year on your premium rigs. Is that inclusive of the NDS services, or is that just a standalone day-rate cash margin?

Yes. Let me be clear about this because when you look at our numbers, there's 2 things about our margins and our revenues on our rigs you have to be aware of. The first one is, our rigs, the number is -- it's a basic rig that we're reported, which means when we give you the indications of rates that we're talking about, we mean a basic rate without any extra stuff, no extra services, no NDS services -- other competitors of ours run some casing, they run some trucking and other things. The numbers I'm giving you is pure base rate ex the NDS, which is now -- I think the marketplace was a little confused now that we split it out. I think it ought to be very clear that the rig numbers are all base rig only. In terms of how we get there, on the base rig, as we mentioned on the rig, we have 13 super-spec rigs rolling over from term contracts this quarter, and our state rate is under $18,000. And so you see the leverage when they move to the low to mid-20s. And then you have the 2 additional newbuilds. But also on the cost side, we've implemented some initiatives that we're beginning to realize in the first quarter. You got to remember a lot of cost that we have in the system is because they gear up to get to the 91 small rigs we have today. And included in our cost saves is still some startup amortization, which is about $500 a day, which will roll off by midyear. But the combination of that and cost focus, as well as rolling up rates, that gives us a path that we're talking about to (inaudible) by the end of the year. And as we earlier said for the first quarter, we're targeting $6,000.

Yes. Let me clarify as well. It's not just for a super-spec rig, it's for whole Lower 48 fleet, which includes a dozen or so legacy rigs and smaller rigs, SCR rigs and so forth.

Yes, that's absolutely true. And so when you compare our average margins per rig, to some -- some people call it pure-play rig companies, with all 1,500 AC rigs, then you have to bear it in mind, that's the other issue. So normalized, the numbers on that stuff will probably be higher.

Yes. So those are very strong cash margins. So I guess, kind of backing into the other elephant in the room question is, at $8,000 a day cash margins, is that enough to justify building new rigs? Or does it need to be higher?

Well with respect to newbuilds, I think right now, our top priority remains paying down debt and generating attractive returns on capital, many dollar. To commence these newbuilds in the Lower 48, I think we have to see first, customer commitments for term contracts, probably close to 3 years. We have to see leading-edge pricing, say in the upper mid-20s or mid- to upper 20s. And we'd have to make sense -- these are the other investable alternatives. I mean, when I look at capital -- incremental capital as a company, though I have to look at where it is best served -- is it best served NDS, the robotics, International or domestic, and so we're actually making the guys kind of compete for the capital to increase returns. I think overall, the mission this year is to attract more from our assets by having use a phrase I'd say, "This is the year of squeezing the orange." In other words, I want to get more juice out of what we have in the company. And I want to get as much juice out of everything I have. I'm very proud of the asset base we now have, I'm proud of the technology portfolio we've put together. But now what we have to do is make hay with it, make money with it. And what we really want to do is to squeeze as much as we can out of everything we have. So I'm not -- I'm not going to say it's not possible, I'm going to say though there's a bunch of preconditions to get there.

Our next question comes from James Wicklund of Credit Suisse.

Ken asked my question on $8,000 day rate, and that was a very good explanation, I appreciate that. The M-400, I mean 20, the equivalent of 20 land rigs, how many chances -- how many opportunities are there for more platform rigs in the world today?

Of that kind? Actually, there has been rumblings of maybe another one. But obviously, there -- one (inaudible) kind of projects. But I think the one thing about Nabors is we're uniquely positioned to deliver that stuff. And I don't think people realize that people come to us because of our technology profile to do that kind of thing. We think those rigs for those platforms in particular, they required certain specialized engineering that to get the kind of rig onto platform, to meet the variable net flow requirements, for example. We had to invent a new 4,000 horsepower drill works that was lighter than the main competitor had -- (inaudible) nobody grinds that 4,000-horsepower drill works. And that is the real testament to the engineering prowess and the technology that we've built up as a company. And it's actually that part of the offshore business for us, is -- Jim is also -- in substance a precursor for stuff to happen out of land because as you know there's always this sophistication stuff going on offshore. But the issue is how to make it commercial in a scaled environment. And that's going to be the focus of our technology initiatives. I'm not trying to be leading edge here on any of the stuff, including the downhole tools. What I'm trying to do is take the existing technology, repackage it, and make it scalable and make it ubiquitous to our platform. That's the mission. So far, we're still at the second inning of that ballgame, but that's what we're trying to do and projects like M-400 is an example of that.

It appears to be working, Tony. Congratulations. And this rig is going to be just on contract, working constantly for how many years?

Five years.

Five years, plus an extension -- but I'm not sure that will not be the same margins.

Our next question comes from Scott Gruber of Citigroup.

Tony, so your International rig count today is 96 heading up to towards 100. I was looking back, you feed that about 130 in 2014. What levels of activity growth abroad do you need to see some pricing gains? And there's obviously some new building activity that looks like it's going to start moving forward here. Does that inhibit potential pricing gains within the base fleet? How do you think about that?

Yes. I think you have to segment the market a little bit. So for example, to the extent there is activity in the 3,000-horsepower arena, which is the deep gas stuff, which the -- the certain Middle East markets, where that is. I think by the next -- see after the next round of activity, maybe second half of the year, those pricings should be pretty attractive because there really isn't any equipment out there other than existing rollovers of existing stuff to do that work. And therefore, every rig is a newbuild. So by definition, you have replacement cost pricing, which is -- and therefore, it's a very attractive target market with a lot of -- quite a few competitors. So with respect to that -- with respect to the rest of the market, I think, yes, there's -- the market, the pricing is still -- it's robust but there's still rollovers out there. So it's not as leading edge yet.

And you have good exposure to deep gas activity in Saudi. Can you remind us what that exposure, what percent of your fleet in Saudi today is drilling deep gas?

Yes. Siggi is on the phone. Siggi, can you give the exact number? It's a very high percentage of the stuff...

I think the -- our market share in the gas is about 22%, definitely over 20%.

What percent of our fleet, Siggi?

I would think we have -- I would say 1/3 of the rigs is probably in the gas.

Operator, I wanted to thank everybody for participating today. If we didn't get to any questions you got, feel free to email us or reach out for us. And operator if you could go ahead and close up the call, please.

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