Nabors Industries Ltd (NBR) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the Nabors First Quarter 2018 Earnings Conference Call. (Operator Instructions) And please do 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, sir.

Good morning, everyone, and thank you for joining Nabors' First Quarter 2018 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 conditions.

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 2 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 the submenu Events Calendar where you will find them listed as Supporting Materials under the Conference Call listing. Instructions for the replay are posted there as well 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 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 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 release. 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 let me 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 first quarter of 2018 and our view of the market going forward.

Our results took another step forward this quarter in terms of revenue and adjusted EBITDA, led primarily by the U.S. Drilling segment. I would like to point to the main drivers of our results. First, higher oil prices are continuing to boost rig count and day rates in the Lower 48. Next, our new MODS 400 rig began operations at the Bigfoot platform on April 1, which will noticeably impact our U.S. results going forward.

In our other drilling segments, rig count also increased. Internationally and offshore, we see increased tendering activity, supported by the current macro environment. Additionally, our Drilling Solutions revenue continued to grow. The casing running business acquired from Tesco played a key role in this growth.

Finally, Rig Technologies fell from the fourth quarter. Manufacturing delays at our Tesco facility in Canada resulted in slippage of shipments into the month of April. Nonetheless, the Tesco integration is proceeding as planned. We expect both the legacy Tesco casing running and equipment sales businesses to contribute positively to our results in the second quarter. With our super-spec rig fleet and the continuing gains in technology penetration, we are confident in our competitive position. The investments we have made in recent years are now paying off. Our smart rig units are pulling in higher margins, while our strong global platform continues to pull through our advanced drilling technologies. We are positioned to take advantage of the improving market with minimal investment.

Now let me turn to this quarter's results. In the first quarter, Nabors generated adjusted EBITDA of $168 million and operating revenue of $734 million. This performance compares to $163 million and $708 million, respectively, in the fourth quarter. The rapidly advancing U.S. business propelled the bulk of the increase, driven primarily by higher Lower 48 average day rates and margins. Peak and seasonal activity in Canada and growth in Nabors Drilling Solutions helped to offset declines in Rig Technologies and lower margins in International.

Rig Technologies was impacted by deferred deliveries of legacy Tesco orders. We believe this was an exceptional development related to the integration. Substantially, all of these deferred units have already been shipped. Nabors' worldwide rig activity grew across all segments as oil prices gathered support. We are seeing increased contracting interests and activity from our clients worldwide. Our expectation for both Nabors and total U.S. rig count growth has shifted modestly higher from our previous call. There is developing interest internationally as well, although tightening high-end rig supply has yet to inflect pricing.

Now let me drill down a bit further into each of our operating segments. U.S. Drilling. The renewed focus in organizational changes we implemented 2 quarters ago have yielded the anticipated results at a faster-than-expected pace. Adjusted EBITDA for the U.S. Drilling segment grew by 36% with a 5% increase in rig count. The first quarter average rig count for the segment was 112, with 106 in the Lower 48. However, higher U.S. margins of $8,171 a day, a 27% improvement from the fourth quarter, drove the vast majority of the gain.

On our previous call, we indicated a Lower 48 margin expectation of $6,000 per day for the first quarter. Instead of this $1,000 per day improvement, we boosted margins by nearly $2,000 a day to almost $7,000 per day. While our day rate gains were in line with our expectation, progress on performance improvement initiatives exceeded our guidance.

When reviewing our results, it is important to note that the various rig contractors include different items in the marking calculation. As a reminder, we do not include products and services pertaining Nabors Drilling Solutions, or NDS. For instance, our performance software tools account for over $1,000 per day of incremental NDS margin. We expect to increase our Lower 48 margin to the low $7,000s in the second quarter. We are leaving our $8,000 per day Lower 48 margin target intact for the fourth quarter.

Offshore, we expect to add roughly another $800 a day to our average daily U.S. Drilling segment rig margin with the commencement of our MODS 400 rigs. With the incremental benefit of this project, we anticipate U.S. margins, as a whole, finishing the year at over $10,000 a day.

We currently have 106 rigs working in the Lower 48, equivalent to the average for the first quarter. This total includes 3 SCR and 12 legacy AC rigs. The first of the 8 upgraded rigs anticipated for this year, which we previously announced, is up and running with the client in the Bakken on a term contract. The remaining upgrades all have either signed contracts or are in advanced discussions.

We again surveyed our larger Lower 48 customers earlier this month. These operators represent about 1/3 of the total rig count, 4x as many of these clients plan to add rigs as to drop them. On our previous call, we gave an estimate of a 50 to 90 rig increase in the Lower 48 during 2018 from late February. According to the Baker Hughes GE rig count, 46 rigs have been added in the Lower 48 since then. From our customer survey, we would expect the Lower 48 rig count will add another 40 to 60 rigs between now and the end of the year. Additions we saw occurring over the first half have been pulled forward, and we have additional visibility on second half plans. I would say we feel confident about the high size of that initial 50 to 90 range, if not slightly above, with continuing macro support. Of course, this may change based on oil prices or other factors.

So what does this mean for Nabors? Spot pricing continues to grind higher. We are still repricing expiring contracts to higher spot market rates. I mentioned last call that during the first quarter, we had 13 smart rig units rolling off term contracts at an average day rate for these rigs of just under $18,000 per day. This quarter, we have 22 smart rig unit roll-offs from an average of $19,700 per day. We are taking those rigs to the leading-edge day rates of the low to mid-$20,000 per day range. As the remaining fleet rolls to that level, we will continue to bolster our average revenues and margins.

Many clients are willing to discuss longer-term contracts, and we have signed several in recent months. However, given the strengthening market, we believe a premium to the spot market is logical. About 20% of our Lower 48 working fleet is contracted on term beyond 6 months from now. We expect to continue growing this percentage as well as the rest of our contracts in the coming quarters.

Bottom line, I am very pleased with the performance of the U.S. Drilling segment. Adjusted EBITDA is nearly 3x what it was in the same quarter of last year, and we anticipate that the full year should be more than double what it was in 2017.

Let's turn to International. In our International Drilling segment, the net average working rig count increased by 4 rigs from 91 to 95. As forecasted on our last call, our average margin declined by approximately 3% to just over $16,600 per day. This was primarily due to new rates agreed in conjunction with the extended terms on various Latin American rigs. In addition to receiving a full quarter from the partner-contributed Saudi rigs, we added 2 rigs offshore in India and 2 rigs in Russia. We expect the pace of rig count additions to accelerate in the near term beyond our previous expectations.

Over the coming months, we are putting 4 rigs back to work in Colombia, 2 offshore platforms in Mexico, 1 rig in Argentina, 1 in Ecuador and 1 in Kazakhstan, and we are in advanced discussions for multiple rigs in Algeria. These come with nominal CapEx requirements. Beyond these contracts, we are engaged in a number of discussions for additional rigs in Mexico and Argentina. Finally, 2 more SANAD rigs from our partner should begin work over the summer.

This new activity will certainly be impactful to boosting the bottom line of our International Drilling segment. Nonetheless, pricing has yet to inflect in most markets. Though several of the rig additions come at a higher-than-average margin, given the current environment, pricing on others will trail our typical margins. With the start-up of these rigs and the potential sale of our jackups, we expect the average daily international margins to take another step downward. The magnitude of the margin decline should be roughly the same increment we saw in the first quarter. However, we expect to start regaining the lost ground on margins during the second half of 2018. On an adjusted EBITDA basis, we expect the International segment to exceed 2017 level on a full year basis and generate ample cash flow.

Let's turn to the Canada Drilling segment. Q1 typically marks the seasonal high for Canada, and this quarter did not disappoint, generating over double the adjusted EBITDA of the fourth quarter. Compared to the same quarter of 2017, we had one fewer rig with margins of nearly $2,000 per day higher. Our average rig count for the quarter was 21 rigs, though with the seasonal breakup, we are currently down to 10. We expect to average around 10 rigs for the second quarter.

Given the more gas-heavy mix and wide oil differentials, the Canadian rig market has decoupled somewhat from the strong rig positive of Lower 48. We still, however, anticipate improvement on both margins and activity post breakup relative to 2017.

Moving on to Drilling Solutions. After meeting our $50 million adjusted EBITDA run rate for the fourth quarter of 2017, we set a $100 million run rate target for the fourth quarter of 2018. The first quarter stayed on that trajectory, with adjusted EBITDA gaining another 17% from the fourth quarter. Averaged across our working Lower 48 fleet, daily margins per rig increased to $1,360. A full quarter of tubular running services from the Tesco acquisition led the way.

Performance software continues its growth with the initial commercialization of our new automated steering product offerings, Pilot and Navigator. In the Lower 48, we expect increases in directional drilling margins, accelerated pickup in our Navigator software and additional growth from our early-stage MPD offering. Pilot has been commercialized with 2 major customers, and we are rolling it out to more. We are currently integrating the Tesco casing running tool into one of our rigs for a pilot test. We anticipate having the field test finalized soon to roll out to the entire fleet. This design will greatly lower both the capital and operating costs of -- for running tubular services at the rig. Already, we are transitioning jobs from 4 to 3-men crews per shift in many cases. The ultimate goal is to get to no more than one man per shift through our new CRT design and our automation efforts.

We grew Nabors rig count with our own tubular running services from 11 to 17 in the quarter. This business is also competing effectively in the U.S. Gulf of Mexico. RIGWATCH is seeing additional pickup with third-party rigs and should see incremental growth from Navigator sales.

Our rotary steerable tool performed as expected in the first pilot well in South Texas for a major customer. We are planning a follow-up test in May and anticipate it will be commercial late this year. As we gauge NDS penetration progress, over 40% of our Lower 48 rigs are now running 5 or more NDS services compared to 36% last quarter.

Internationally, we started our second directional drilling job in Saudi Arabia. Our tubular running services business is maintaining the strong operational history it had with Tesco internationally. As I said before, we expect International NDS growth to be a big driver of the next phase of this business.

Turning to Rig Technologies. The results fell significantly as compared to the prior period. We experienced some shipment delays in legacy Tesco orders. Five large equipment orders encountered manufacturing issues and did not ship during the quarter, 4 of which shipped from the Calgary facility in April. These orders came from the legacy Tesco side. The timing may have been impacted by disruptions related to the acquisition. Combined with the development expenses for the rotary steerable tool and the robotic technologies division, the Rig Technologies segment as a whole had a sizable loss this quarter. Given that substantially all of these deliveries have been made, we expect this loss to reverse next quarter into positive territory.

The rotary steerable and robotics efforts continue to make strides towards commercialization. As I mentioned, the pilot well for the rotary steerable tool was successfully completed as per our target. The tool precisely delivered at a targeted range of penetration.

On the automation front, we recently signed our first contract for engineering for what we expect will develop into a full-system order for our robotics technologies operation offshore. This automation project, which we expect to deliver in mid-2019, will retrofit in existing North Sea platform for a large operator.

There are 2 videos of our robotics line I encourage you to view on our website. One is the animation of an offshore installation. The other is our innovative PACE-R800 land rig, which is built and expected to be delivered to a client later this year. This rig is a single, which incorporates the robotic system and is readily scalable to doubles, triples or quads. After you view these videos, you may wonder why any operator or contractor would want to build a new land rig or offshore rig without robotic technology.

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

Good morning. The net loss from continuing operations attributable to Nabors of $144 million represented a loss per share of $0.46. Results from the quarter included costs for strategic transactions of $7 million or $0.02 per share. In addition, the quarter included noncash tax expenses in jurisdictions with negative pretax income, resulting in a negative effective tax rate for Nabors. The first quarter tax expense was $46 million higher than in the fourth, a $0.15 per share impact. We expect this position to revert as pretax income continues to move towards breakeven and we adjust our legal structures. The first quarter results compared to a loss of $116 million or $0.40 per diluted share in the fourth quarter.

In general, our results continue the trends of the fourth quarter: strong overall drilling results, particularly in North America, and continued growth in NDS. Our international rig count is picking up fast, although pricing still lags. Finally, sluggish shipments of drilling equipment provided a temporary headwind, most of it from logistics and manufacturing issues at our Tesco Calgary facility.

Revenue from operations for the first quarter was $734 million as compared to $708 million in the prior quarter, a 4% improvement. U.S. Drilling revenue increased by 3% to $241 million, reflecting higher day rates in the Lower 48 and higher rig count, despite fewer drilling days in the quarter. Average rig count for the quarter increased by 5.5 rigs as we put the remainder of our new-build PACE-M1000 rigs to work in the Lower 48 immediately upon delivery. We also put an incremental rig back to work in Alaska for the winter exploration season.

International Drilling revenue decreased by 3% to $369 million, due primarily to lower day rates on 8 contract extensions in Latin America, as noted on our previous call.

In Canada Drilling, revenue increased by 60% to $32 million, driven by both higher rig count and higher average revenue per day. The seasonal breakup began in March, and we are experiencing the usual drop in second quarter results.

Drilling Solutions revenue increased 42% in the quarter to $63 million. The largest drivers were higher revenue for our performance tools and improved casing running activity, both from our legacy services and from additional Tesco sales.

Rig Technologies revenue declined by 18% to $65 million. Delayed shipments from our newly acquired Tesco Calgary facility accounted for this miss. The related logistics and manufacturing issues have been sorted out, and we expect these late shipments to be incremental to our prior Q2 expectations. 80% of the units involved were already delivered in April.

Adjusted EBITDA grew for the fourth straight quarter, reaching $168 million as compared to $163 million in the fourth quarter. The $19 million increase in the U.S. was driven primarily by the robust improvement in Lower 48 margins, along with the increased rig activity. Lower 48 adjusted EBITDA rose by $20 million as daily margins increased by 39%.

As we look forward, we expect to see material growth from the MODS 400 initiation of drilling activity at the beginning of April. This growth will be supported by the 8 Lower 48 upgrades, steadily joining the working fleet over the next 6 months. Increasing average day rates for the Lower 48 fleet should also provide a boost to our margins.

Drilling margins for the Lower 48 increased from just under $5,000 a day to just shy of $7,000, far exceeding our expectations for the quarter. We expect this upward trend to continue, although not at the same pace we saw this quarter.

The improved margins reflected an additional $500 improvement in revenue per day as well as substantial reductions to our repairs and maintenance costs. We also addressed our operational support structure in the field while benefiting from a reduction in start-up amortization costs. Rigs continue to reprice to higher spot market rates. We expect this favorable day rate trend to endure as contract rollovers reprice to market, pricing continues to firm and additional upgrades join the fleet.

While Texas remains the tightest market, we are seeing incremental demand in the Rockies and the Bakken for super-spec rigs, which is absorbing our upgrades in the region. Although most of the cost improvements are behind us, further reductions are still possible. At this time, we believe Lower 48 margins should expand beyond $7,000 a day in the second quarter on higher day rates and average $8,000 in the fourth quarter of this year.

Given the current level of customer interest and existing commitments, we expect to average between 107 and 109 working rigs in the second quarter. As a reminder, we have 106 working rigs in the Lower 48 as of today.

International Drilling margins of approximately $16,600 were in line with what we had anticipated. Adjusted EBITDA declined by $5 million to a total of $124 million in the first quarter as 4 additional rigs were more than offset by the price reductions mentioned before and by fewer revenue days in the quarter.

While the potential sale of 3 working jackups would impact our second quarter rig count and margins, the start-up of multiple rigs worldwide will grow our average working rig count in the second and especially third quarters. If we are able to divest these noncore but higher-margin jackups in the imminent future, we expect a decline of approximately $5 million of adjusted EBITDA for this segment in the second quarter, depending on the timing of this divestiture.

Given the contract start-ups we anticipate in the second and third quarters and the increasing rig demand seen more generally internationally, we forecast a strong rebound to adjusted EBITDA for the segment thereafter.

Canada Drilling adjusted EBITDA more than doubled from $4.3 million to $9.3 million, driven by another $1,200 growth in margin to $5,850 per day. While it is difficult to forecast beyond the spring breakup, this segment has been a bright spot for us. With the seasonal trough in Q2, we anticipate an average second quarter rig count of approximately 10 rigs and margins in the mid-$6,000s as many of our most capable and self-sufficient rigs work through the breakup.

Drilling Solutions posted an adjusted EBITDA contribution of $14.8 million, up from $12.6 million in the fourth quarter. The acquisition of Tesco's tubular services business has given us immediate scale in key markets such as Saudi Arabia and the U.S. We also now have a presence in several offshore markets. We remain confident in our $100 million annualized adjusted EBITDA target for this segment by the fourth quarter of 2018.

The Rig Technology segment, representing Canrig and the 2 technology developmental efforts, dropped from negative $4.3 million of adjusted EBITDA to negative $8.7 million in the first quarter. Given the underlying cause of the situation, we now expect the second quarter to be positive for this segment as deferred deliveries occur. We expect adjusted EBITDA for this segment to exceed $10 million by the fourth quarter of this year. We anticipate our rotary steerable solution and Canrig robotics technology division being positive contributors to this segment by year-end.

Now let me review our liquidity and cash generation. Net debt increased by $200 million in the first quarter, which was $100 million more than anticipated. The timing of our semiannual major interest payments was expected to weigh in the first quarter's cash flow. But other items that should not recur in the second quarter such as an increase of working capital associated with the initiation of SANAD operations, transaction costs and slower collections related to the Tesco acquisition, annual bonus incentive payments and fees associated with our bond issuance, also played a role.

CapEx for the first quarter was $84 million. We are still targeting CapEx for 2018 of around $500 million. But we would consider undertaking additional upgrade projects with customer prefunding for the upgrade expense, long-term commitments and high return on capital invested.

We still expect positive cash flow for the full year 2018. With the possibility of closing the sale of our jackups this quarter, we would receive about $90 million split, 75% cash and 25% stock, with the stock subject to only a 3-month lockup. Excluding proceeds from a potential jackups sale, we expect the second quarter operating cash flow to be positive.

With expanding U.S. margins and international activity, the start-up of MODS 400, along with continued growth in Drilling Solutions and recovery in Rig Technologies, we expect to exit this year generating strong annualized cash flows. The next few years should bring material cash flow generation, which will be allocated primarily to debt reduction. This is our top priority, and we're very much aware of its critical importance.

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 noted, generating positive free cash flow during 2018 remains our top priority for the remainder of the year. With increasing operational results, minimal cash interest expense and contained working capital, we anticipate positive cash flow next quarter, exclusive of any potential proceeds from a jackups sale.

Our U.S. Drilling business clearly has undergone a rapid improvement. We expect this upward trajectory to continue the sizable incremental adjusted EBITDA contribution year-on-year. Meanwhile, although we have yet to see pricing increases internationally, the recent uptick in tenders that is now converting into contracts gives us confidence that this bedrock business is approaching the point of inflection. Getting incremental rigs to existing, sometimes underutilized, regions provides us with outsized operating leverage to improving activity. We anticipate that pricing power will follow this demand growth much as we saw in the U.S. in 2017.

In summary, I see great things across all of our segments with best-in-class rigs here today and emerging downhole and topside technologies to drill the wells of the future.

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

(Operator Instructions) And our first questioner today is Ken Sill with SunTrust Robinson Humphrey.

I got a question on the 3D rotary steerable. It's good that you got the pilot test, another one is coming. Is this thing going to have an outsized impact on margins per day once it gets commercialized? I'm assuming that's going to be more tools coming out next year.

If you look at competitive offerings, I would say, absolutely, yes. You know what the day rates are today in the Lower 48 for rotary steerable tools are upwards of $16,000 to $20,000 depending on who and location-wise. And so a substantial part of that drops to the bottom line. Those markets basically are equal to the margin of a rig. So that's one of the reasons why we're focused on it to try and tap into that.

Okay. So yes, that's kind of what I was getting at. Those are going to be a really significant driver once you see deployment of those tools on top of everything else.

That's right. That's why [it turned out] our target (inaudible). Of course, we have a long way to gear up in terms of building a number of tools out, et cetera, but that's the objective here. And the integration into our rig control system is another point where we believe rotary steerable tool actually will be more effective with the Nabors rig (inaudible) and operating system, that will help guide it and help you with the wellbore placement. So that's another optimization feature that we're focusing on. That will distinguish our well fleet from other people.

Okay. And then just a follow-on question. Internationally, you guys are seeing some improvement in demand. You kind of call on the bottom on the rig count here. Is there any particular area outside of the Middle East that looks better or that might actually improve faster?

Well, as we indicated on the call, in the remarks, I mean, we did sign 4 contracts in Colombia, 1 in Mexico and 1 in Argentina, and in addition to Ecuador. So the Latin American focus has been -- Latin America has been very active. Obviously, Argentina, the Vaca Muerta play is looking for rigs. And the interesting thing about that search for rigs is they're actually looking for more U.S. style shale rigs, which actually will help drive incremental pricing because those rigs don't exist in country. And so, Colombia as you know, about what was it, 2 years ago, we relocated X rigs down to Colombia and improved that control, the U.S. X type rig really adds value in that marketplace. So I think that whole region is becoming more alert to the benefit of higher-performing rigs, which again, falls into our bailiwick.

And then what about the platform rig business? You shared offshore showing better. Is there any chance for that to upturn or is this kind of the offshore in general?

Well, I think it's true, there have been green shoots. We just extended 1 rig, our M200 and yesterday, and we signed a new contract for a previously stacked rig, a platform rig. So we are seeing some green shoots. And of course, we're obviously very excited, the M-400 is going on full rate and as of April 1, and so you'll see (inaudible) in our numbers going forward. So yes, I think the (inaudible) market is beginning to show some signs of additional green shoots.

And our next questioner today will be Marshall Adkins with Raymond James.

The Tesco integration, we had the little hiccup in Canada this quarter, but tell us how that integration is coming along? And then kind of adding to that, seems like this integration of the Tesco casing running stuff is a fairly big deal. So could you comment on the relevance of that going forward?

Sure. As we said before, our vision of the future for drilling is the rig as a platform. And we're looking at things that were -- that historically, because the industry was so solid approached on only services, never had the ability to integrate these services. So we believe that there's some logical services and casing running is one of them. Not just another service, but actually, it's part of the rig. And being part of the rig, that means you get economies in terms of people. So typically, 4 man crew, for example, we have -- if it's integrated rig, we think we can get it down to no more than 1 person and ultimately, maybe even without that person. Our new design Tesco tool that we'll be rolling out in the third quarter is streamlined to take advantage of the top drive -- takes advantage of the top drive, it reduces the CapEx, it reduces the number of moving parts. It's much more streamlined, faster to go on for ringing up, et cetera. And we think operators have historically had a view that automation of the casing process is slower than manual. We think we're going to be able to easily show them now that we have a way of proving that it's faster, or at least not as slow, and safer. So today, we're now on 17 jobs in Nabors rigs, which is around 15% of our rig count, and we have about 64 third-party jobs in the U.S. marketplace in Tesco. And in Saudi Arabia, we have a good position there on a bunch of rigs. So while we're focusing on the U.S, we also think we'll try to expand our position in Saudi as well. So that's the overall concept.

All right. And kind of a similar, I guess somewhat related question. Your costs came down a lot on the U.S. side, which is unusual since you were reactivating rigs. And we know across the industry, you've had these labor issues. How the heck are you getting costs down in this environment? It seems like most everyone else is going the other way. So give us some color on what's going on there?

Well, I'd like to say it was a bottom up -- it was a top-down approach. We -- I said that we had to do it, and the guys responded and they made it happen. I mean basically, we just had a mission for ourselves to really look at every piece of workflow in the company and all our infrastructure, and just start trying to simplify and taking as much out as possible. The person running the U.S. operations segment was head of our Global Supply Chain, so we moved him into the U.S. -- he's now running the U.S. Operations [Edgar Rakan], and he brought a real system to it and we've just really focused on it. As you see, we think we've nailed it. I think there's still some -- little more to go. Obviously, there's not low-hanging fruit at this point because we were so successful beyond, as we said before, our expectations. But that was the mission, Marshall. And I think the team delivered. And I would say that there's also some similar initiatives out in front in the company in other areas. So but that's our mission today. As I said on the last call, we're at the point in Nabors where I got -- we want to extract more from the existing asset base, and our total focus is on that. And that -- because doing the higher return of capital, we think, and more cash flow generation, and we think we have an unparalleled asset base right now. I think every -- in the U.S. our smart rigs are second to none and I think internationally, we've all known that we have the best franchise internationally in the marketplace. So what I'm interested in doing is milking that as much as I can and having the team extract everything we can from it, and that's where the guys' focuses are today.

And our next questioner today will be Marc Bianchi with Cowen.

Wanted to clarify just one thing first on the international guide. William, the $5 million, if you do get the jackup sale done, that is excluded from the commentary about margins declining similarly to what they did in the first quarter, is that correct?

I think that, that is what is driving the margin decline, Marc, actually.

Okay. But (inaudible)...

It's not a double whammy, it's just that is what is driving the decline for the second quarter.

Okay, okay. And then, I guess, that sort of implies that rig count is flattish or maybe just down slightly from where you were in the first quarter?

We're going to get some additional rigs in the second quarter, but the big growth is in the third and the fourth.

I think it's maybe 1 rig here in the second quarter, then those 8 contracts I referred to, plus the other one will be started in the third and fourth quarter.

Okay, okay. And Tony, that 1 extra rig in the second quarter, I would also be subtracting, I guess, 3 on a (inaudible) basis from that, right?

Correct. So that is in an average net number. The 1 plus, 1 point something, but that includes losing 3 jackups, right. So in reality, we are gaining rigs on land in the quarter.

That make sense, okay. And then on the cash flow comment, can you guys remind us what you mean there? Is that operating cash flow? Is that operating cash flow minus CapEx, EBITDA minus CapEx? Just define the vocabulary if you could.

For the second quarter?

Yes.

So we are shooting very hard to deliver stable net debt for the second quarter before the impact of a potential sale of the jackups in the second quarter.

Okay, okay. That's great. And if I could just one more. As we think longer term with the Saudi JV, any incremental CapEx and borrowing that occurs there as you consolidate the business? I suspect it would add to the spending that occurs. But I think it's occurring within the JV and any debt that occurs is going to be at the JV level and doesn't necessarily recourse to Nabors. Do I have that right or can you...

You have that right. But really, in our forecast, Marc, we're not seeing, over the next couple years, any need for debt. In fact, the JV is going to be quite flush in cash.

And the next questioner today will be Jim Wicklund with Crédit Suisse.

The free cash flow generation in the second half of the year and then 2019 is strong and impressive. I just look at the total debt load and wonder if it's enough or if there's anything you have to do. I'm thinking of how long the cycle would have to last before we roll over again, for you to generate enough cash to make a meaningful paydown. So I guess my question is, is there anything else you need to do or can do, assets you can sell, a deleveraging transaction? I'm just wondering if the only plan for the debt reduction is free cash flow generation over the next coming years.

I think the first thing I would say is in thinking about going forward, when you put together all the pieces today that we've outlined, and you see the direction of all the segments, I think we have laid out a roadmap where you can see that -- a 2019 year where we're going to have in excess of $1 billion of EBITDA, okay. That's point one. And with respect to the other one is I think there's obviously a host of other things that we're thinking about, but I'll let William go through them.

So I think that some of the things that we are working on, and obviously, we do that all the time, obviously is -- so we're looking at our shorter-term maturities and opportunities to term that out. We're also talking already to our bankers on potential extension and modification of our revolver -- revolving credit facility. So that takes part of -- it takes care of the, I would say, the more tactical parts of the equation. We do think that the cash flow generation of 2019, 2020, and we don't expect the market to roll over in those 2 years, are enough to make a meaningful dent in our cap -- on our net debt. I don't think we will reach our final objective, which is somewhere in the low $2 billion net debt over the next couple of years, but it'll certainly put our company in a situation that is much better over the next 2 years. As -- I mean we said before that we expect to deliver roughly $1 billion of free cash flow that will be allocated towards a debt reduction over those -- that 2-year period, James.

Okay. (inaudible)

Yes, and we're always looking at our portfolio to see what other things are logical for us to have in the portfolio versus not in the portfolio. We've had a track record of doing some stuff like that. So you can rest assured we are looking at things like that as well.

Okay. I appreciate that. That's helpful. And my follow-up, if I could, one of the biggest issues of course in the market these days is people and personnel. And I think this might be the first cycle in my history of doing this where we've actually lost $1 of revenue because we couldn't find people. Permian, Midland, unemployment is 2.1% and just paying people more doesn't solve the industry problem. I'm just curious to know what you're doing or how you're doing in terms of adding people? Everybody needs people. And if there is a solution to the industry as opposed to just individual companies by paying a little bit more to move people around, what do we do? And will the automation efforts that Nabors is trying to do on rigs, will that be soon enough to have an impact?

Well, obviously, one of the reasons why we're interested in automation is we'd like to open up a whole new access to a different kind of labor pool. Today, when one thinks about the drilling industry, for people outside, they have this big picture of a bunch of guys lifting heavy steel equipment, (inaudible) pounds on the rig floor, and they're full of mud and everyone thinks that's the industry. And so with automation, especially since then can get an automated drill floor, we think that's going to open up a whole host of different labor for us, which is why we're so keen about it. But in the meantime, attracting people is not so much a challenge. I mean, because you're bringing them in at the (inaudible) floor hand level, and there's -- we actually do the training ourselves. It's really training and retention is the issue. We can get people in the door, but having them motivated to stay and keep them trained and bringing them up to speed and make sure they're focused, that's the real challenge. And so things like -- apart from daily pay, work schedules matter, the other niceties of accommodations and stuff like that. And so you now turn to that, a focus on that as opposed to pure dollars, as well. And we will have some cost increases in the Permian, like other people have mentioned, as -- I don't know if it was in my prepared remarks or not, but we do have in our cost structure some amortization of costs that will roll out during this couple quarters. So we think the net effect of that will not be material on our numbers and plus in any way, in any event, the labor is passed through to the customers. But I think you rightly point out that the focus just can't be on pay, it has to be on retention, which is a much more costly feature of pay and on training and getting the right people. And that's why we are so interested in automation as the front for the company.

Okay. And then Tony, what's the year that we put out a rig that can be run by 1 person? That's a completely hypothetical question we'll never hold you to. But what year do we put out a rig that can be run by 1 person?

Well, I've never said it'd be 1 person. I think it will be run -- I think the rig floor itself will be run by a driller and there won't any need for anyone to touch the pipe. Tripping and casing, et cetera, can all be done on an automated fashion. And I'm hoping you're going to see that relatively soon. That's all I'll tell you. I mean I'm working on it and look -- and I would direct you to the 2 videos on the website right now, and you're going to see, one is a plan for an offshore rig 4 that's totally automated. I think as we announced in our prepared remarks that we had signed an engineering contract with a major North Sea operator to redo its platform rig along the lines of our automation concept. And that video illustrates what that looks like. And you'll see it's something that doesn't exist today. And then similarly, there's a video of a land rig with -- it's with a single but its technology is applicable to the doubles and triples, which also will show you how it will operate without. And that rig is actually in the yard right now, and we are talking to a customer. We're just doing some final changes on it. That's going to be out before year-end. So that rig that's in the video is the actual rig that's functioning, it's actually drilled (inaudible) in the yard. So we know it's real, we know the technology is viable. It's -- the challenge is to scale it, the challenge is to make it robust enough for the oilfield, those are the challenges. This is not rocket science. I would like to say this, but it's not rocket science. Every other industry is automated. Our entire industry is now focused on it. And I would say to you that it's kind of analogous to, why would you buy a new Mercedes without power steering and power brakes. I mean you just wouldn't do it. But today, you build a $400 million drillship, and there's no automation. It make absolutely no sense. But people are in the process right now of building new jackups. And you haven't re-thought the way you're doing things, and everyone has been doing things the same way for 20 years. So our mission is to try to change that. So but we'll see if we can scale it and get it out there. But that's where the focus is. So I'm not going to overpromise it. I'm just saying, that's where our focus is right now. And the videos are -- give you some idea of where we're at in the process.

And our next question today will be Colin Davies with Bernstein.

I was wondering if you can give us a little bit more color on the walk as we step up the margin in the U.S. So I think you said potentially over 10,000 a day by the fourth quarter. Trying to get some sense of how much you think that is Lower 48 pricing? How much you think it is ongoing cost improvement where you guys have, obviously, made big gains? And how much is it just a blend of the offshore rigs coming in? The platform rigs coming in.

I think you can separate out -- I think it's better for you to just look at Lower 48, what we're saying about Lower 48. Lower 48, the increase that occurred this quarter-to-quarter is about $500 worth of pricing and about $1,500 due to the costs, which brought us to our $6,900, roughly $7,000 number. And I think we are saying, the next quarter, we see an improvement to the low $7,000s, and the target is to the $8,000 number by the fourth quarter as an average -- of the fourth quarter, maybe a higher exit rate than that. And obviously, a lot (inaudible) the costs are going to have a diminishing role here, so we'll expect a lot more to come from the rollover of those older contracts we said to leading edge rates. So that's the plan.

Okay, that's helpful. And then just on solutions side. Any sense that you can give us as to how much of the growth over the next few quarters is coming from the acquired Tesco services and the growth of that into the Nabors rig portfolio? And how much of it is coming from the underlying NDS solutions that you're adding progressively onto the rigs?

I don't have the exact number, but my guess is around 20%, maybe, something like that.

Right. I think the Tesco casing running services should add something in the range of $15 million to $20 million of EBITDA year-on-year. And the rest is all organic. But a lot of it is expansion into international markets, as Tony mentioned. We are getting now our first paid jobs in Saudi Arabia for directional drilling and our performance off of it continues to expand internationally. And in the U.S, new products, new offerings, including the rotary steer will come in towards the end of the year.

Yes, so when you think about NDS, one thing I would observe is, we said the penetration 40% with (inaudible) services on our rigs, which really is the -- those are the rigs have contributed the bulk of that, 13, 15 a day. That 40% means that, on average, the rigs with those packages are actually adding about $3,500 a day. And so that's a pretty meaningful number. And our mission is to get that expanded as much as possible on other rigs.

So I'll tell you another statistic, which is quite interesting to me. We look at the last 10 contracts that are awarded in the Lower 48. And in the last 10 contracts, 7 of them had casing running services. So that's the kind of penetration that we're starting to see now on from the Tesco acquisition. That's why we're so excited about the acquisition and how we can integrate and pull through that revenue into our rig platform.

And the next question will be Tommy Moll with Stephens.

So first, just a housekeeping item on your outlook for free cash flow. Are you expecting positive free cash flow ex the jackup sale in both 2Q and for the full year?

Yes.

Okay, great. And then to round it out here with a macro question. It's good to hear you're increasingly optimistic on rig count in the Lower 48. Do you discern any difference in maybe adjustments to drilling plans on the public side versus the private side in terms of your customer base? And specifically on the public side, is your assumption on the rig count continuing to climb based on the CapEx budgets that have already been announced? Or more just folks who are looking at where WTI is trading today and maybe thinking about bumping that number up as we get into late Q3 or Q4?

Okay, so it's less based on CapEx and those sort of surveys than on specific market intelligence we get. We do have clients that together have -- account for over 1/3 of the rig count in the U.S., in the Lower 48. So and they give us good participation on our surveys. So we are projecting our own customer base to the total market. That's how we are reaching that conclusion.

So we'll wrap the call up now. Ladies and gentlemen, thank you for joining us and if you didn't get your question answered, feel free to email us or call us at your leisure. (inaudible)

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