Nabors Industries Ltd.
Q1 2017 Earnings Call Transcript

Published: 27 Apr 2017

[Operator:]

Good day, and welcome to Nabors' First Quarter Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Denny Smith, Vice President, Corporate Development. Please go ahead.

[Dennis A. Smith:]

Good morning, everyone, and thank you for joining Nabors' 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 perspectives on the results, along with insights into our markets and how we expect Nabors to perform in each market. 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're 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 Events Calendar submenu or you'll find them listed in Supporting Materials under the conference call listing. Instructions for the replay are posted on our website. With us today in addition to Tony, William and myself are Siggi Meissner, President of Worldwide Drilling; 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 be in regards to our forward expectations, they may constitute forward-looking statements within the meaning of the Securities and Exchange Commission 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 the presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA as that term is defined on our website 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, I'll turn the call over to Tony.

[Anthony G. Petrello:]

Good morning, everyone. Welcome to the call. We appreciate your participation as we review our operations for the first quarter of 2017 and our view on the market going forward. William will follow with a review of our financial results. I will then wrap up, and we will take your questions. First, let me start by saying that the financial results of the first quarter did not meet our expectations. As we noted at an industry conference a month ago, we had two issues that impacted our results. The first one, related to reactivating approximately 20 rigs in the Lower 48. The second, the structural work on rigs in a key international market. This quarter's results do not reflect the success we've had throughout the downturn at reducing and controlling costs. They also do not reflect the progress we've made deploying our SmartRig in the Lower 48 or increasing our drilling rig count in certain high-margin international markets. I will elaborate on the specifics later in the call, but what's important to know is that the majority of these cost items are related to specific issues that will largely be put behind us. We are executing our plans to reduce and eliminate many of these expenses while continuing to grow activity and roll to higher dayrates. With this execution, we expect steadily improving results, both in the U.S. and internationally throughout the remainder of 2017. Now, let's turn to our financial results. In the first quarter, Nabors generated adjusted EBITDA of $100 million and revenue of $563 million. This performance compares to $146 million and $539 million, respectively, in the fourth quarter. Revenues increased across the U.S., Canada, and other Rig Services segments. Revenues declined by just 1% in our International segment, even after significant revenue hits in the quarter from the structural work project. Our revenue growth reflects a continued strong increase in the North American rig count and further growth in our Nabors Drilling Solutions or NDS business. We grew revenues for two quarters back-to-back for the first time in nearly three years. We expect this trend to continue through the remainder of the year. Nabors worldwide rig activity increased to 201 average rigs on revenue in the first quarter from 177 rigs in the fourth quarter. The activity increase took place principally in the Lower 48 and Canada, more than offsetting modest declines in International, Alaska and U.S. offshore. For the full quarter, our average rig count in the Lower 48 increased sequentially by 29%, matching the rate of growth achieved in the fourth quarter. Our highest-specification rigs continued to work at full utilization. Our upgraded rigs have all immediately commenced work upon completion of their enhancement projects. Operators are realizing benefits from the efficiencies and consistent performance of our SmartRig operating system. We expect to have another 27 upgraded rigs ready to go to work over the next few quarters, along with seven previously announced new builds yet to be completed for a total of 100 SmartRigs at the end of the year. We had one new build PACE-X800 rig start on contract this month after commencing operations with new two new build PACE-M800 rigs in the first quarter. We added 19 more rigs in the Lower 48 in the first quarter compared to 14 in the fourth. We expect this pace to moderate a bit going forward, but with another double-digit increase in the second quarter. Subject to oil prices remaining above $50 a barrel, we expect continued growth in the Lower 48 rig count through the second half of the year as well. North American E&P budgets and continuing productivity gains at the wellhead appears to support this trend. The increasing sophistication of today's wells in the Lower 48 continues to generate increased demand for both our highly automated pad optimal SmartRigs and our NDS technology as well. In our International segment, the net average working rig count declined by approximately two rigs in the first quarter. On a net basis, our drilling rig count stays flat. Our lower margin workover rig count in Argentina declined by two rigs. The largest negative drilling rig impact was attributable to Algeria. However, this reduction was due to contract roll-offs that occurred late in the fourth quarter. We have a rig going back to work there in May. We also lost a rig in Russia, where we expect several rigs to begin work in the third quarter. On the positive side, we have our eight Colombia rigs back working at their contractual rates. We have resumed operations in Mexico, which has historically been a key market for Nabors. We now have two offshore platform rigs working there. The second of two new build rigs in Kazakhstan began working. We also added a rig in Kuwait and commenced operations on a rig in Argentina on April 1. We exited the quarter with 91 rigs working in our International segment, up from the first quarter average of 89.8 rigs. Our Canadian segment performed better than expected. We are pleased by the customer demand and pricing traction that is emerging there. Financial results in the U.S. Drilling segment declined even as Lower 48 activity increased. Our activity dropped by rig each in U.S. offshore and Alaska. We lost the benefit of a onetime favorable demobilization payment we received in Alaska in the fourth quarter. In the Lower 48, our quarterly rig count improved to 83 average rigs working from 64 in the fourth quarter, a 29% increase. However, adjusted EBITDA declined. Reactivation costs on about 20 rigs, lower revenue per day, and first quarter resets on various payroll burden and tax rates more than offset the increase in rig count. We finished the quarter at 90 rigs on revenue in the Lower 48. Today, that count is 93. Converting this higher utilization into higher margins is our primary focus in the Lower 48 going forward. Here is how we plan to do it. On the revenue side, we expect rigs on spot or short-term contracts to roll to higher rates. The current spot market rate for our SmartRigs is around $19,000 a day. This is higher than our current average revenue per day in the Lower 48 as the vast majority of these rigs are still working at rates well below the spot rate. Contracts with more than 75% of our Lower 48 rigs will roll within the next six months with 45% currently on workflow contracts. We anticipate rates for this group of rigs will exceed $20,000 starting in the second half of the year. We expect our revenue per day to inflect in the second quarter. The conversion of two Lower 48 rigs from stacked on rate to operating impacted first quarter margins, as did the roll-off of two above-market legacy term contracts. We no longer have any rigs stacked on rate in the Lower 48 and only one roll-off of an above-market term contract is expected in 2Q. This first quarter revenue legacy contract headwind will abate considerably for the second quarter. In addition to improving dayrates, there are some contractual provisions dating from the downturn that are onerous to the drilling contractor. Provisions covering the cost of rig moves are one example of this. We are restoring more neutral terms as the market rebalances. The cost side is where our primary focus lies. We are beginning to realize significant savings in certain expenses going forward. Frankly, the pace of rig additions in the fourth and first quarters were quicker than our expectations. The progression of our Lower 48 fleet during this time resulted in the scramble to put rigs back to work, causing reactivation costs to rise above our expectations. We have instituted process changes to better contain these costs going forward. In addition, our working fleet is now much larger, and we'll more easily absorb the reactivation costs for future quarters. The labor market has undoubtedly tightened for our industry. It's taken us more time and expense to recruit and train new hires as we complete our hiring bench. In the third quarter of 2016, 93% of our hires in the Lower 48 were former Nabors employees. In the first quarter of 2017, only 57% were rehires. We have also hired recruits well ahead of revenue to accommodate required training. This is the reality which we are managing going forward in this environment. The regions of growth did not match the footprint of our existing fleet. The Permian, SCOOP, and to a lesser extent, East Texas, drove an outside share of growth. With moderate growth in the Bakken at that time, we opted to relocate multiple rigs from there and the Marcellus to Texas. Now, with Bakken demand solidly on the upswing, we have an optimized, regionally balanced fleet, and do not plan to relocate additional rigs. These changes, combined with the larger overall working fleet, should result in declining per rig expenses in the Lower 48 beginning with the second quarter. Turning to International. Financial results in our International segment came in below the fourth quarter, primarily due to special expenses in Saudi Arabia and the absence of fourth quarter demobilization margins. These issues masked the additional contribution from several incremental drilling rigs with high margins. Reported daily margin in our International segment decreased by approximately $1,500 per day, again due primarily to the previously mentioned issues. As we noted in our market update provided March 27, accelerated recertification of key structural rig components in our largest international market affected our first quarter. Instead of recertifying our fleet throughout the full year, the client requested the compression of the schedule into the first quarter. The impact of this request, we estimate at that time, would be equivalent to approximately 20 additional rigs multiplied by an average of 20 days of lost revenue. The finalization of this maintenance program will undoubtedly have a substantial impact on our Saudi financial results. Future costs related to this project were compressed into the first quarter. We expect any additional costs from this issue to be minimal in Q2. Moving to Canada. Canadian activity and margins both came in above our expectations. Major operators are increasing their Canadian activity, while many of the efficiency gains we are seeing in the Lower 48 are benefiting Canadian drilling too. We have seen recently large-scale consolidation among operators. We expect post break-up drilling plans to continue this upward trend. After a difficult couple of years, we are finally feeling more optimistic regarding the Canadian market. Our fleet composition is weighted more towards the larger rigs versus super singles. Our Canadian rigs have performed well and are successfully drilling challenging wells in the resurgent Montney for major operators. Now, let's turn to Rig Services. The Rig Services revenue grew sequentially, primarily due to additional penetration in the NDS business. Canrig's activity is increasing with the path weighted towards realizing a higher-margin backlog towards the second half of the year. Our focus for NDS now runs from driving penetration to realizing margin growth. Customers are increasingly understanding the incremental value these integrated services provide. Let me provide you with some specifics on our activity. First, our global performance software installations increased by 17% from the fourth quarter with 27% of all installations on third-party rigs. Our directional drilling jobs nearly doubled again quarter-over-quarter, boosted by favorable customer reactions to the unique attributes of our AccuSteer wellbore placement tool. Also, other services continue to grow with BOP testing, choke rentals, and variable bore ram rentals, all increasing in activity faster than rig count growth. We are near or at capacity in multiple NDS product lines. While investing in new equipment, we have embarked on a concerted effort to realize enhanced margins through value pricing of these services. The pricing traction we envisioned on our previous conference call is now emerging. Certain products, most notably wellbore placement, are proving their value to clients over and above the standard offerings. I encourage everyone to take a look at our Analyst Day presentation and recent industry presentation on our website for details on these new products. The Q1 annualized run rate adjusted EBITDA for NDS was $12 million. We expect the 2017 full-year EBITDA for this business will be a multiple of that number with continued quarterly progression. I will now discuss our outlook. While rig demand ultimately depends on commodity prices, operators in the Lower 48 continue to add rigs at a rapid pace. We expect this trend will temper somewhat, governed primarily by the availability of the highest-spec pad optimal rigs. We'd remain confident that the market demand will be sufficient to absorb the fleet of 100 SmartRigs, which we plan to have deployed by year-end, along with 15 to 20 legacy rigs. The global oil market appears to be moving back into balance with the recent OPEC production cuts, even at a time of seasonally low global demand. We expect Lower 48 rig demand to keep pace with our upgrade schedule. In the Lower 48, customer interest has increased steadily with momentum in the Bakken, driven by ongoing efficiency improvements. We again surveyed our largest Lower 48 customers earlier this month. These clients represent over 13% of the total rig count. Of those, nearly 75% have plans to add rigs between now and then of the year for an increase of over 15%. Only one customer indicated a possible reduction of just one rig. This feedback would imply an industry rig count approaching 1,000 rigs by the end of the year. As of yesterday, our rig count at Lower 48 stood at 93 rigs, including 2 SCR rigs and 12 smaller-size AC rigs. We no longer have any rigs stacked on rate. We exited the first quarter with 90 rigs in total with no rigs stacked on rate. We expect the first quarter to mark the trough in Lower 48 margins. Sequential activity growth should continue as we are already 10 rigs above the first quarter average working rig count. We expect our financial results to improve even with an expected moderation in the pace of rig count growth. From the $3,278 margin reported in the first quarter, we expect an improvement as average revenue per rig day inflects a reactivation costs per rig day decline. International markets have some bright spots while some areas remained flat. First quarter was boosted primarily by rigs returning to work at restored dayrates in Colombia. The resumption of work in Mexico was also a welcome benefit. The impact of which will be more pronounced in the second quarter. Spud dates on rigs in Kuwait, Russia, and Algeria were delayed from the first quarter to the second quarter. We have drilling rigs back to work in Argentina and Kuwait, and one returning soon to Algeria. Algeria has been a difficult area for us since the end of 2016, but we expect to put several more rigs back to work there in the third quarter. We expect the first quarter to mark a bottom in our international rig count with a further increase in the second half. The international rig count recovery is gradually unfolding, and the OPEC production cut has delayed some tendering activity. However, we see incipient tendering activity pointing to a potentially more robust uptick in second half activity in the Middle East, North Africa, Russia, and Latin America. Integration of our Saudi Arabia JV remains on track, and we expect commencement of the JV entity in July. For our International segment, average rigs working totaled 90 in the first quarter. We expect to significantly improve upon the margins of the first quarter to at least the margins of the fourth quarter as the asset recertification process is completed and our rig count continues to trend upward. Finally, in Canada, Q2 typically marks the annual rig count trough due to seasonal break-up. This year's rig count and average margin at this point compares very favorably to last year's. Second half rig activity also looks promising. We look forward to Canada resuming its role as a meaningful contributor for the company. This concludes my comments. William will now review the quarter's financial results in more detail and provide additional thoughts on the outlook.

[William J. Restrepo:]

Good morning, and thank you for joining us today. First quarter financial results did not meet our expectations. First, we experienced higher rig startup costs in the Lower 48, as more rigs were reactivated during the quarter than we had anticipated. But also, our average costs of reactivation went up substantially. Second, the impact of our accelerated asset recertification was moved up to the first quarter in Saudi Arabia, materially affecting our results. Third, spud dates for several of our international rigs (21

[Anthony G. Petrello:]

Thank you, William. I want to conclude my remarks this morning with the following summary. We had an unfortunate convergence of two specific issues this quarter that meaningfully impacted our results. First quarter margins were not where we wanted them to be, but we have a clear path to improvement, not just later in the year, but now in Q2. The recertification expenses internationally are essentially behind us. The rigs are back and the fields working. We expect that the operational disruptions resulting from the special project are behind us as well. The bulk of expenses related to reactivation costs in Lower 48, we believe, has now been absorbed. The more measured pace of rig additions along with some steps we've taken are allowing a better controlled reactivation process. Numerous costly rig relocations from one basin to another are no longer required. Higher recruiting and training costs are not likely to go away soon. However, these will be less impactful on margins going forward with our higher operating rig count. We expect second quarter margins will exceed the first quarter's and the third quarter to exceed the second. The Lower 48 market continues to grow dynamically. With the industry's highest-spec rigs at full 100% utilization, we are seeing positive dayrate movement. Clients are executing on growth plans, and our upgrade program is finding the demand expected. Dayrates continue to increase, and our considerable spot exposure allows us higher margins through repricing at current rates. Our International segment has seen stable activity in pricing. With Saudi costs now substantially absorbed, International should exhibit growing EBITDA in the second quarter and increased tendering activity that bodes well for the intermediate and longer term. Finally, our NDS growth profile is on pace with the trajectory we laid at our Analyst Day. These products are allowing customers to drill more efficiently, safely and consistently, and earn a better return on their investment. Going forward, we expect to share in that value creation to a greater extent. That concludes my remarks this morning. Thank you for your time and attention. With that, I will take your questions.

[Operator:]

We will now begin the question-and-answer session. The first question comes from Marshall Adkins of Raymond James. Please go ahead.

[J. Marshall Adkins:]

Good morning, gentlemen. William, thank you for your detail on the costs. I just want to come back to that. It sounds like the abnormally high costs in the quarter were a combination of labor, maybe some rig upgrades, certainly parts in the rig moves. Was one of those was a lot more important or bigger than the others, and kind of break down the impact of each of those?

[William J. Restrepo:]

Sure. I mean, obviously, when we started bringing the rigs back, at the beginning, we have plenty of rigs in every single geographical location. But as we moved into the first quarter, the hotter places ran out of rigs, and we had to move rigs from the North, for instance. And I think the average, up moving rigs as you allocated overall in reactivations, they're somewhere in the range of $300,000 per rig. So, that's been the costs – the highest costs really and probably the highest variance versus our expectations. The second thing is, as you probably know, the more a rig fits, the more its inventory stock, which I mentioned to you, we're in the range of $500,000 per rig, gets used by the active rig. Obviously, it doesn't make sense to leave those inventory stocks sitting when you have other rigs that could use them. So, over time, those get depleted. And obviously, you don't deplete them all, but you have to spend more money to put those stocks back into the rigs. And we do expense those spares as we buy them, not as we use them. So, that has an immediate impact on our results. And then, of course, the longer a rig works, some of those certifications run or expire, so we have to do some inspection work. And that may lead to additional repair work, so that – those are some of the major components. I mean, compensation also played a part. But if I were to rank the costs, I would say that the highest was moved, followed by repairs and restocking. And then, finally, comp is the smallest amount. We think that the average that we're spending is in the range of $700,000 per rig reactivation. But some of them cost more than that, of course, depending on how much we had to spend on the move.

[J. Marshall Adkins:]

Sure, all right. Well, that helps. So, it sounds like what we're doing is bringing forward a lot of the costs. I didn't hear anything in your commentary that dissuades me from the same outlook in the back half of 2017 that I would have had before today. Is that fair? I mean, is the outlook looking out to the back half of the year changed? Or am I correct in assuming that we just brought all of these costs forward?

[William J. Restrepo:]

There's a couple of things that has surprised us, of course. I mean, the number of rig reactivations we have had to dephase so quickly, so 40 rigs over the past two quarters. So, yes, the cost – that has boosted up – and the cost, and you see the average margins that we have, we easily have well over $1,000 per day being absorbed by the rigs that are working. So, that's one thing that should dissipate over the second half of the year. But the other surprise is, of course, the rigs are coming quicker, so we expect in the second half of the year a little bit more volume overall than we expected before. And we are seeing a little bit better pricing than we were expecting before. So, those things surprised us for – to our previous anticipation.

[J. Marshall Adkins:]

Right. So, net-net, the back half is as good or better than we would have thought a month or two ago?

[William J. Restrepo:]

I believe so.

[Anthony G. Petrello:]

Yes. In particular, the U.S., Marshall, as you saw from the survey we did, just lends some credence to the fact that things seem to be continuing on track here. And as you can see from our numbers already, we're looking, in the second quarter, at almost 95 average (43

[J. Marshall Adkins:]

Well, that was going to be one other follow-up is your international outlook seemed a lot more bullish than most everyone else we've heard. Everyone's kind of guiding down international and talking about how it's very slow. Yours seemed a little more upbeat. You're getting a lot of bidding. Just give me a little color on that, if you would, on why you're, I guess relative to others, a little more optimistic on the International side.

[Anthony G. Petrello:]

Well, I think just going into the second quarter, we think the – we're pretty confident the average rig count is going to go up in the second quarter based on where we are right now.

[J. Marshall Adkins:]

Well, you would know because you're negotiating it now.

[Anthony G. Petrello:]

Absolutely. And so, that looks pretty good. And then, the third and fourth quarter looking out, there is activity that's in the pipeline for places like Algeria, Kuwait, Oman, Russia, and Argentina. And the question is, do those things get, in fact, get closed or is there any reassessment given what's happened? I would note that part of the drop, as William referred to in the financial (45

[William J. Restrepo:]

And by the way, I think some of the other feedback we're getting from some of our peers about international is significantly affected by offshore activity and Far East activity where we're not present currently. So, we do serve a different subset of geographies than, say, the Schlumbergers, Halliburtons, and Baker Hughes.

[J. Marshall Adkins:]

Right. That makes sense. Great, guys. Thank you all.

[Operator:]

The next question comes from Blake Hancock of Howard Weil. Please go ahead.

[K. Blake Hancock:]

Thanks. Good morning, guys.

[Anthony G. Petrello:]

Morning, Blake. How you doing?

[K. Blake Hancock:]

Doing well. On the international comment that we just kind of walked through, of things getting pushed to the right, I guess, Tony, last quarter, you kind of ventured to say that you thought maybe international EBITDA in 2017 could be on par, if not better than 2016. I guess kind of given what we saw in 1Q and the guide here for 2Q, it's probably fair to say that it's probably off the table, at least, for the time being. Or can you just help us how you guys are thinking about that now?

[Anthony G. Petrello:]

Yeah, it's going to be a reach, obviously, given where we're starting out, and so, I would say that. On the other hand, I'd also say that in terms of the base, the base is looking pretty good. And as I just said to Marshall, I think there are some prospects of incremental activity, similar to what's happened in the second quarter and the next couple quarters, whether that's going to be sufficient. I think before, we were thinking it would be more than moderate both in third and fourth quarter. But maybe that's been pushed to the right now, given what their overall macro.

[William J. Restrepo:]

I mean, it's fair to say, Tony, that there are some – in some of these countries, we have – I mean it can respond very quickly.

[Anthony G. Petrello:]

Yeah.

[William J. Restrepo:]

So, it could be very quick impact.

[K. Blake Hancock:]

Okay. No, that's great. And then, I guess, as we think about kind of the SmartRig and the base cost structure of that rig, can you help us think about just a daily op cost? Is there a change versus kind of a more standard AC rig using the SmartRig? Historically, call it, $13,000 a day or so. Is there any change there as we think about – as we look at normalized margins and cost within the Lower 48?

[Anthony G. Petrello:]

Our mission as a company to make all the smart features part of the base infrastructure of the rig. And so, we're working hard at making sure that happens. And if there is a difference, the delta is very minimal. So, that's the whole concept of the approach here. And obviously, the mission of the SmartRig is actually to drive down the overall – or drive up the overall efficiency, and hopefully that results in some other cost savings, at least to the operator, which should benefit us. So, the answer is the whole model is designed to not layer a whole other set of costs on it.

[K. Blake Hancock:]

That's great. I appreciate it, guys. Thank you.

[Operator:]

The next question comes from Ken Sill of SunTrust Robinson Humphrey. Please go ahead.

[Terry Starling:]

Good morning, guys. This is Terry Starling in for Ken. My question is more on – also on the international front. With the JV set to start in the Kingdom in the second half of this year, how would that be impacted with the OPEC cuts? Is the JV immune to any sort of cuts? Or is it – could we see it be pushed back?

[Anthony G. Petrello:]

I wouldn't say it's immune. I think it's – but I would observe that our 50-50 partner is going to be Saudi Aramco itself. So, you can draw your own conclusions as to how that might have turned to some thinking, but we're obviously not immune to the cut. And we're going to be subject to all the same market forces. And it's up to us to do a great job, to show them the value that in a downturn, we're still producing. So, there're certainly no underlying security from cuts – from effects of the OPEC cuts from the structure. But as I said, having them at the table as a partner, I think, is very useful.

[Terry Starling:]

Okay. Thank you. That's a good way to think about it. Thank you.

[Operator:]

The next question comes from Jim Wicklund of Credit Suisse. Please go ahead. James Wicklund - Credit Suisse Securities (USA) LLC (Broker) Good morning, guys.

[Anthony G. Petrello:]

Jim, how you doing? James Wicklund - Credit Suisse Securities (USA) LLC (Broker) Well. Thank you. The overreaction to your stock is extreme today, but then – down 2.5%, hell, everything goes to hell. With new contracts being signed at $19,000 and above, one would have to believe that over time, if this rig count holds up, then your margins, which have been below everybody else's for a while, should really start to roll up by the end of the year. And so, I'm kind of curious, are we signing term contracts? Are you basically all on spot? Because if you're on spot, you'll get there a lot quicker.

[Anthony G. Petrello:]

Yes. Well, I think that is an excellent point, Jim. I think the point we probably didn't make sufficiently clear that you've uncovered here is that the average dayrate of portfolio is less than the spot of the contracts we're now signing. So, that, by itself, means that's going to start to drive up our margins. And in terms of where those new contracts are, about 75% of our contracts are either well-to-well or expire next six months. And therefore, gives us great opportunity to do that. We are not locking in rates. We are not locking things long term unless – we really are not locking in long term, I can say right now. So, we have an ample opportunity to push the rates up. James Wicklund - Credit Suisse Securities (USA) LLC (Broker) So, by the end of this year, your margin profile could be very, very different from Q1, right?

[Anthony G. Petrello:]

It could. It could.

[William J. Restrepo:]

Yeah.

[Anthony G. Petrello:]

It should be, is the way, what we'd like to say it. James Wicklund - Credit Suisse Securities (USA) LLC (Broker) Okay. And everybody talks about super spec rigs and how many upgrades we can do to get to super spec rigs and Helmerich & Payne's actually putting walking systems on their rigs. So, the world has obviously changed. Do you really see that big of a difference going forward between the super spec rigs and a 1,500-horsepower AC rig with a half-pressure mud system? I mean, I guess for a super spec, you have to have all the boxes checked. But is it really that big of a dichotomy in demand out there today?

[Anthony G. Petrello:]

I think the demand is a huge dichotomy, absolutely huge dichotomy in terms of demand. And in terms of rate, I think the rate difference between $1,500 and $2,000 a day today, and I think that difference could expand in the future. James Wicklund - Credit Suisse Securities (USA) LLC (Broker) Okay, perfect. Guys, thank you very much. Appreciate it.

[Anthony G. Petrello:]

Thank you, Jim.

[Dennis A. Smith:]

Andrew, we're down to roughly five minutes. Let's take one more call, and wrap the call up, please.

[Operator:]

Okay. And that question will come from Ole Slorer of Morgan Stanley. Please go ahead.

[Ole H. Slorer:]

Thanks. You highlighted that you were running out of certain rig capacities within Nabors Drilling Services. Could you just specify a little bit more what exactly they are and where do you see the incremental growth opportunity coming within that segment of your business?

[Anthony G. Petrello:]

Okay. I think one of the primary ones is that obviously in our – new AccuSteer MWD tools, which I think we've made some industry presentations. There's been some customer comments about the unique features and benefits of the tools compared to the typical tools that are used today in the marketplace. And we're – the number of jobs we're running were running close to utilization, so we're trying to keep pace by building up some more systems there. That's one area. Second area is the CRT systems. We think there's room for us to grow there, and we need access to more CRT systems as well. So, those are two principle areas that would be, number wise, matter. On managed pressure drilling, we have been – we have a sourcing for the rotating heads, and clearly for the sourcing. And per prior announcements, I think you know that we're in discussions with Weatherford about working through a model. We've continued to work with them on an overall commercial technical framework, have an alliance between us. We've identified some commercial opportunities in the U.S. market. And we're starting to work on what we need to do for software integration of our rig control system into their NPV software systems. So, that's what's going on there. But those are the three areas I would say where the growth is, and capital assets are the other things are needed.

[William J. Restrepo:]

Ole, we thought we were going to be at about 24, 25 rigs with our MWD services. By midyear, we hit that mark in the month of February. So, we're ahead of schedule. And obviously, that has required us to ramp up our construction of MWD tools right now. So, that's....

[Ole H. Slorer:]

Okay. So, this is obviously in part also what's hitting you on the costs side. Because you mentioned a number of reactivation costs and other sort of non-recurring costs that has been accelerated. And I'm trying to sort of figure out how much of your earnings before tax of $163 million loss do you think was accounted for by costs that are not likely to recur once your business stabilizes?

[Anthony G. Petrello:]

I think we'll – you'll get the answer to that question when you see second quarter. But the wellbore placement was one of those areas. You've correctly identified, was one of those areas where there was a lot of extra costs, get things geared up to meet the – just like in the rig scenario, to get the systems out into the marketplace, et cetera. And all that stuff was expensed in the first quarter and absorbed in our numbers.

[William J. Restrepo:]

About $25 million, Ole.

[Ole H. Slorer:]

Okay. So, $25 million which means that your average pro forma revenue per rig, given 200 rigs, must increase about, say, $5,000 a day in order to bring you back to a breakeven. Is that realistic, you think, based on what you see in the business now with new products like NDS rolling out, being absorbed and some of the international rig pricing? How long time – what's the timeline do you think to get there to earnings before tax breakeven?

[William J. Restrepo:]

Ole, I think, volume will take us part of the way there in the U.S. And the pricing could go up by $5,000. Yes, it could. But the problem is we do have a fleet, though that the increase in the fleet's dayrates is not something that becomes automatic. I think you're waiting for – to go back to breakeven is probably unlikely this year.

[Ole H. Slorer:]

Yeah. Although I realize it's not – that spot pricing – or pricing is a gradual filtering through a contracted fleet but...

[William J. Restrepo:]

On NDS, we are seeing very faster acceleration in pricing and that's – we're not...

[Ole H. Slorer:]

Yeah, I mean (57

[Anthony G. Petrello:]

Yeah. Ole, it also depends on if we're successful getting even a small piece of an NDS (58

[Ole H. Slorer:]

So, what's the probability here of, say, being able to create an equivalent to maybe one STEM and the shape of one international land drilling?

[Anthony G. Petrello:]

One STEM with two...

[William J. Restrepo:]

(58

[Ole H. Slorer:]

One STEM is the Schlumberger (58

[Anthony G. Petrello:]

Yeah.

[Ole H. Slorer:]

So I was just throwing it out have also probability of doing something with another company. Anyways probably better for us for a different time. But thanks a lot. I'll hand it back.

[William J. Restrepo:]

Thank you.

[Dennis A. Smith:]

Thank you, Ole.

[Dennis A. Smith:]

Ladies and gentlemen, thank you for participating in our call today. If we didn't get to your questions or you have any questions, just feel free to call us or e-mail us, as always. And Andrew, could we close out the call, please?

[Operator:]

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