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Edited Transcript of NBR earnings conference call or presentation 31-Oct-18 3:00pm GMT

Q3 2018 Nabors Industries Ltd Earnings Call

HAMILTON Nov 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Nabors Industries Ltd earnings conference call or presentation Wednesday, October 31, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony G. Petrello

Nabors Industries Ltd. - Chairman, President & CEO

* Dennis A. Smith

Nabors Industries Ltd. - VP of Corporate Development & IR

* Edgar Rincon

Nabors Industries Ltd. - SVP of Operational Management

* Siggi Meissner

Nabors Industries Ltd. - President of Global Drilling Operations & Engineering

* William J. Restrepo

Nabors Industries Ltd. - CFO

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Conference Call Participants

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* Chase Mulvehill

BofA Merrill Lynch, Research Division - Research Analyst

* James Carlyle West

Evercore ISI Institutional Equities, Research Division - Senior MD

* James Knowlton Wicklund

Crédit Suisse AG, Research Division - MD

* James Marshall Adkins

Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research

* Marc Gregory Bianchi

Cowen and Company, LLC, Research Division - MD

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Presentation

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Operator [1]

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Good day, and welcome to the Nabors Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Mr. Denny Smith, Vice President of Investor Relations. Please go ahead, sir.

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Dennis A. Smith, Nabors Industries Ltd. - VP of Corporate Development & IR [2]

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Good morning, everyone. Thank you for joining Nabors' Third Quarter 2018 Earnings Conference Call. 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 quarter's results along with insights into our markets and how we expect Nabors to perform in these markets.

In support of these remarks, a slide deck is available both as a download within the webcast and in the Investor Relations section of nabors.com. Instructions for the replay of this call are posted on the website as well.

With us today, in addition to Tony, William and myself, are Siggi Meissner, President of our Global Drilling Organization; John Sanchez, our Chief Operating Officer for Canrig; and other members of the 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 risk 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 I will turn the call over to Tony to begin.

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [3]

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Good morning, everyone. Welcome to the call. We appreciate your participation as we review our results for the third quarter of 2018 and our assessment of the market going forward. Our results for the third quarter improved significantly, primarily reflecting the outstanding performance of our U.S. Drilling segment. The seasonal rebound in Canada and progress in Drilling Solutions also contributed to our improvement. As anticipated, the jackup divestiture impacted our International results. Rig Technologies was flat sequentially. I am very encouraged by the consistent upward progression in our quarterly results. We continue to deliver strong EBITDA improvement despite our International and Rig Technology segments not yet contributing to our growth.

EBITDA for the third quarter was $201 million, up 7% sequentially. This improvement maintains the trend that started in the second quarter of 2017. Although increased results in International should arrive early next year, we still expect our total company free cash flow to generate a positive trajectory in the fourth quarter and beyond. Continued improvement in U.S. Drilling, Rig Technologies and Nabors Drilling Solutions should more than offset any early upcycle softness in our International segment.

The main driver for our industry remains the favorable oil price environment. At current prices, operators industry wide indicate they have a strong incentive to increase drilling activity. We also see a constrained supply of the types of rigs, which are most in demand globally. In the Lower 48, strong customer demand for the higher-spec rigs continues to drive the upgrade cycle and a sustained shift away from legacy rigs. Internationally, we see increased demand in multiple markets, including Latin America, the Middle East and the Far East.

During the third quarter, we deployed 3 upgrades from our initial 6-rig upgrade plan for 2018. Since our last earnings call, we have been awarded 4 more multiyear contracts in the Lower 48 for upgraded rigs, and we have signed contracts for 5 additional rigs in International markets, which shaped our confidence for 2019.

In September, SANAD, our joint venture with Saudi Aramco, completed 2 major milestones. First, SANAD signed new 4-year drilling contracts on 20 rigs with Aramco. These rigs have been operating in the Kingdom under Nabors and managed by SANAD. Going forward, Nabors will lease these rigs to SANAD and SANAD will continue to operate them. Another rig from Aramco was just recently contributed to SANAD and has also been awarded a 4-year contract, which will commence this quarter.

Second, as previously agreed, Nabors contributed an additional 5 rigs to the JV. Aramco has subsequently matched the rig contribution with cash. These rigs have also been awarded 4-year contracts.

Third, the rollover of these contracts to SANAD at the new day rates will lead to considerable increase in free cash flow beginning in the first quarter of 2019.

Now let me detail the quarter's results.

Nabors worldwide rig activity increased by 10 rigs due primarily to the seasonal increase in Canada and additional units in International. Globally, we continue to see growing interest from clients for high- spec rigs. During the third quarter, we signed contracts for 5 additional rigs for work in Russia, Kazakhstan, Colombia and Argentina. In the Lower 48, we signed and deployed 3 upgrade conversions of PACE-B rigs to X750s. Another converted B rig will go out this quarter. This completes our program to upgrade 6 B rigs this year.

With the signed contracts we have in hand, we should see increases in activity over the next few quarters in the U.S. We should also see an activity increase in International aside from the sales of the workover rigs in Argentina. Beyond those, there are discussions for more across multiple markets.

Now let me drill down a bit further into each of our business segments. First, let's focus on the U.S. segment. Adjusted EBITDA for the U.S. Drilling segment of $99.4 million increased by 14%. The increase was driven by the Lower 48, which experienced strong margin improvement coupled with a fractional increase to rig count. Third quarter daily margin in the Lower 48 was $8732, a $1330 improvement over the second quarter. Just over $900 came from increased revenue per day while the remainder resulted from cost reductions and improved move performance. The revenue per day improvement reflects re-contracting rigs at higher spot day rates plus continued increases in term rates. Our most recent 10 super-spec rig contracts were all signed at day rates comfortably above the mid-$20,000 range.

Since the last earnings call, we were awarded multiyear work for 4 super-spec upgrades. These 4 rigs are destined to work for West Texas and South Texas with deployments through the first quarter of 2019. Together with the 3 awards I mentioned last quarter, these 4 make 7 total upgrades of our vital 1000-horsepower M550s to M750s. The upgrade design brings these rigs capabilities into the top tier of performers in the industry.

We currently have 110 rigs working in the Lower 48. This compares to an average of 106 rigs for the third quarter and 107 at quarter end. The current total includes 2 SCR and 14 legacy AC rigs.

In summary, we have a total of 12 super-spec upgrade rigs awarded to return to work by the middle of next year. Three of those are scheduled to commence work in the fourth quarter.

In addition to these rigs mentioned, we have approximately 45 idle AC rigs, which remain as candidates to upgrade each at a cost up to approximately $9 million. These include 6 1500-horsepower PACE-F rigs and the balance of 1000-horsepower PACE-M rigs. We only intend to upgrade these rigs within our CapEx target and based on customer contract. These conversions are the highest and best use of our capital in the U.S.

Next, I will share the results of the quarterly survey of our larger Lower 48 customers. We conduct this survey as each quarter ends. We think it is useful to pass along this information, which comes directly from customers and represents their views. These operators represent 35% of the Lower 48 land rig count. About 30% of these clients plan to add rigs. 15% plan to drop rigs. From our customer survey, we would expect the industry-wide Lower 48 rig count to add as many as 10 to 15 rigs through the end of the year. A significant portion of the increase is driven by one operator. Last quarter, the survey indicated operators would add 30 to 40 rigs by year-end. Since then, the rig count is up approximately 20 rigs.

Since last quarter, we have deliberately stretched our contract duration. At the end of the third quarter, approximately 25% of our Lower 48 fleet was contracted on term beyond 1 year. We expect the trend toward longer contract durations will continue.

What does all of this means for Nabors? Our margins are poised to expand further, and we are in discussion with customers for even more rigs as they begin to formulate their plans for 2019.

For the fourth quarter, we expect to average approximately 112 rigs working in the Lower 48 and exit the quarter at 114. Our Lower 48 business is starting to show its earnings power. We think there's more to come. Discussions are ongoing with several operators for additional upgraded super-spec rigs. The fleet average pricing is still below the leading edge and continues to strengthen. We expect our Lower 48 margin to continue to improve and to exceed our previously guided $9000 exit rate for 2018, setting us up for a good 2019.

Now let's turn to the International drilling segment. Net average rig count increased by 3 rigs from 93 to 96. This increase is net of the loss of 3 rigs from the sale of the jackups. The average margin declined by approximately $1300 per day. This decline resulted primarily from the sale of the jackups in Saudi Arabia and cost increases in certain markets. Some of these increases relate to ongoing operations, while we also absorbed significant amounts of pre-revenue reactivation cost. The increase in rig count in the third quarter was due primarily to the late second quarter commencement of rigs in Colombia and an additional rig in Russia. That increase was partially offset by the sale of the jackups. In the next several quarters, we expect to put 2 offshore platform rigs back to work in Mexico as well as rigs in Colombia, Russia, Argentina and Kazakhstan. The higher-margin rigs in Mexico have slipped somewhat due to operator timing and are expected to be deployed early next year with no impact on our fourth quarter margins as previously expected.

In Saudi Arabia, under the terms of the JV agreement, our partner was originally to deliver 5 rigs as part of its contribution. The operational startup of 2 of these rigs has been delayed continuously versus expectations. One is now scheduled to start during the current quarter and the other in 2019. These delays have had a negative impact on the International segment's margins as well as EBITDA. They have also placed a drag on our expectations.

Our International daily gross margin is likely to decline further in the fourth quarter, primarily as a result of the Mexico delays and additional reactivation costs in various markets. This decline reflects the reduction in recognition of deferred margin as multiple contracts with material upfront payments expire in the quarter. The decline also reflects the delayed contribution from the rigs in Saudi. Aside from this impact, we maintain earnings visibility with additional rig contracts in 2019. As previously mentioned, the newly negotiated rollover contracts will provide considerable increased free cash flow starting in the first quarter of 2019.

Now let's turn to the Canadian drilling segment. The third quarter normally reflects a seasonal improvement in the rig count in Canada. Our rig count there increased to 18 in the quarter from just over 10 rigs. Margins declined sequentially due to fleet mix. Lower-spec doubles tend to see increased utilization as the rig count increases. At this point in the fourth quarter, our rig count stands at 23. We expect to average 22 to 23 rigs in the fourth quarter, up more than 50% versus the fourth quarter a year ago, and our daily margins should improve as we approach optimum utilization for our direct overhead structure.

Now I will discuss Drilling Solutions. Adjusted EBITDA in the third quarter was $16.1 million, $1.4 million above the second quarter results. Revenue was up slightly. Profitability and activity of tubular services showed marked improvement, especially, in the International markets. The expected growth in wellbore placement only kicked in later in the quarter with limited impact on this quarter's results.

Although, our performance software and tubular running services have improved significantly, our wellbore placement results have lagged. As we have increased our penetration, we have faced challenges in our ability to support the increased activity levels. This has resulted in increased cost and some reduction in revenue per job. That being said, we are currently at our highest market penetration since we created Nabors Drilling Solutions.

In the Lower 48, we expect a significant increase in wellbore placement activity during the fourth quarter but are approximately a quarter or so behind our initial plans for this year. Casing running should continue to strengthen significantly with increased activity and the continued capture of synergies from the Tesco acquisition.

Internationally, we are scheduled to begin another directional job in Saudi Arabia. We also saw a strong growth in the tubular services business in the third quarter in Saudi. We remain confident in the growth potential for the entire NDS portfolio in our International markets. We expect adjusted EBITDA in the fourth quarter to exceed $20 million. That performance would equate to growth of over 60% year-over-year. This will likely be short of our $25 million target, which was 100% growth. We expect to close that gap in coming quarters.

Finally, let's turn to Rig Technologies. Results remain positive despite the decline in revenue. The revenue mix improved in favor of third-party delivers and high-margin aftermarket sales. In addition, our initiatives to improve the cost structure, including the capture of Tesco synergies enabled bottom line growth even as the top line contracted. Adjusted EBITDA was approximately flat and just above breakeven. For the fourth quarter, we expect increase in equipment deliveries to external customers and stronger service and rental revenue.

Before I turn the call over to William, I would like to make one more comment. The sequential improvement in our overall results is occurring even as the International business confronts the lingering effects of the downturn. We believe the International markets are gearing up and beginning to absorb available rig capacity. Our position in the high-potential International markets is strong. As pricing firms, we expect results to accelerate throughout 2019. Then, we should be in a position to more fully realize the earnings potential in our business portfolio.

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

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William J. Restrepo, Nabors Industries Ltd. - CFO [4]

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Good morning. The net loss from continuing operations attributable to Nabors of $105 million represented a loss per share of $0.31. Results from the quarter included a loss in the redemption of our 9.25% notes of $10 million or $0.02 per share after tax.

The third quarter results compared to a loss of $202 million or $0.61 per share in the second quarter. The second quarter results included a loss related to the sale of our jackup rigs of $63.7 million or $0.20 per share after tax. Revenue from operations for the third quarter was $779 million, a 2% improvement compared to the second quarter. The higher revenue was driven mainly by a 6% increase in the Lower 48 market and the seasonal recovery in Canada, up 53% sequentially.

Revenue in Rig Technologies declined due to lower intercompany shipment of rig components.

U.S. Drilling revenue increased by 4% to $274 million, reflecting higher day rates in the Lower 48. Average rig count for the U.S. Drilling segment at 112 was in line with the prior quarter as a fractional increase in the Lower 48 was offset by a similar decrease in Alaska.

International revenue was essentially flat at $377 million. Rig count increased sequentially by 3 rigs despite the absence of the jackups, which were sold in June. We would point out, though, that the divested assets generated significantly higher revenue per day than the new rigs added to our working rig count.

In Canada, revenue increased by 53% to $27 million, driven by the seasonal rebound in rig count. The 75% increase in average working rigs was somewhat offset by a $2500 decrease in revenue per day, mainly the result of mix as our smaller rigs returned to work.

Drilling Solutions revenue increased 2% in the quarter to $61 million, reflecting increases in performance software and well replacement in the Lower 48 market..

Rig Technologies revenue decreased by 22% to $64 million. The decline reflected lower internal sales of rig equipment and somewhat lower external equipment sales. The second quarter results benefited from shipments of delayed Tesco equipment.

Adjusted EBITDA grew for the sixth consecutive quarter to $201 million compared to $188 million in the second quarter. Since the cyclical bottom in the first quarter of 2017, EBITDA has more than doubled. EBITDA margin increased to 25.8%, a 120 basis point improvement over the second quarter.

U.S. Drilling EBITDA increased by $12 million driven by the significant improvement in Lower 48 margins. Lower 48 adjusted EBITDA rose by $14 million as daily margins increased significantly. Our Lower 48 EBITDA margin for the quarter improved to 33.4%, a 450 basis points improvement.

Daily margins for the Lower 48 were up from $7,400 per day to more than $8,700. Last quarter, we set an $8,000 mark as the minimum target for the fourth quarter. While the average contracted day rate for a fleet increased by more than $900 sequentially, as we expected, our repair and maintenance spending also contributed a $400 per day decrease in daily operating expenses. We expect daily margin to continue to progress higher in the coming quarters, but not at the same sequential increase we reported for the third quarter as we anticipate additional improvement in market pricing, and we have the opportunity to reprice multiple rigs at the current levels. We would expect margins for the fourth quarter to fall within the range of $8,900 to $9,100 per day.

Our rig count for the Lower 48 should increase to approximately 112 rigs in the fourth quarter. Alaska and the U.S. offshore markets should add an incremental rig between them.

International adjusted EBITDA declined by $6 million to $117 million in the third quarter. This decline reflects the absence of Saudi jackups, which were sold in mid-June, as well as higher expenses in Saudi Arabia and Mexico. In addition, a significant number of rigs were brought back in the quarter, which resulted in an incremental cost before the startup of operations. The addition of rigs in Colombia, Russia and Argentina accounted for the [3-rig] increase in the quarterly rig count more than offsetting the jackup divestiture.

International margins were $15,003 per day as compared to $16,349 in the prior quarter, driven partially by the sale of our higher-margin Saudi jackups, which were replaced by smaller lower-revenue rigs.

Higher overall cost also impacted our margins. We recently divested our 6 active workover rigs in Argentina. Our rig count for the fourth quarter should benefit from 2 additional drilling rigs, partially offsetting the sale of the workover rigs.

Deployment of the 2 high-margin platform rigs for work in Mexico has been delayed until the first quarter of 2019. Consequently, we expect fourth quarter daily margins in the mid-$1,400 range. Canada adjusted EBITDA increased to $7 million from the seasonal low of $5 million in the second quarter. While rig count increase by almost 8 rigs to 17.9 in the quarter, daily margin decline is expected to $5,352 per day.

As activity picked up seasonally, we reactivated smaller less capable rigs. We expect to add 3 to 4 more rigs during the fourth quarter, however margin should improve by $200 to $300 per day.

Drilling Solutions posted adjusted EBITDA of $16.1 million, up from $14.8 million in the second quarter. We expect an increase in wellbore placement results in the fourth quarter as well as improvement in the other service categories. We are targeting adjusted EBITDA of more than $20 million for this segment in the fourth quarter of 2018. The Rig Technologies segment representing Canrig and 2-technology development efforts, reported adjusted EBITDA just about breakeven for the third quarter, approximately flat with the second.

In the fourth quarter, we expect a significant increase in external sales of rig equipment as well as higher service and rental revenue. EBITDA should increase to mid-single digits.

Now let me review our liquidity and cash generation. During the quarter, we restructured our credit facilities to provide us with $1.27 billion in a new facility expiring in October 2023 and with $666 million from our original facility expiring in July 2020. The 5-year facility includes enhanced credit protection for our lenders, including subsidiary guarantees and an additional covenant. Our original facility is essentially unchanged except for the reduced amount.

Net debt increased by $167 million in the third quarter. The quarter included the contribution of 5 rigs to SANAD from Nabors and 1 from Aramco, with offsetting cash payments between Nabors and Aramco. The net payment into Nabors from Aramco for $157 million, expected before quarter end, only arrived on October 4. The increase in net debt resulted, in part, from semiannual interest payments on the debt and the premium on the 2019 notes, which were redeemed in July.

In addition, we consumed some $60 million more than anticipated in working capital due mainly to a reduction in our payables. This was mainly a reduction in employee payables. The third quarter had an extra payroll cycle equivalent to approximately $25 million and an additional $25 million in nonrecurring employee payments for accrued end-of-service benefits related to our transfer of Nabors early employees to SANAD. We expect a strong reduction in net debt in the fourth quarter as our operational cash flow increases.

Cash outflow from Capex remain contained. Interest rate payments are negligible and the Aramco payment adds to our quarterly cash flow.

CapEx for the third quarter totaled $120 million. We are targeting Capex for 2018 of approximately $500 million, which translates into fourth quarter expenditures in the neighborhood of $170 million. The majority of this CapEx is expected late in the quarter with actual payments slipping into 2019.

For the full year of 2018, we are targeting net debt in line with the end of 2017 excluding the proceeds from the equity issues in May. With that, I will turn the call back to Tony for his concluding remarks.

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [5]

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Thank you, William. I will conclude my remarks this morning with the following. What's unique about Nabors is our portfolio of businesses. Today, the size in all of them are leading to a positive outlook.

In the U.S. Drilling business, our track record this year shows the strength of our position and a clear path to increased forward momentum.

As demonstrated by recent contract awards, our Lower 48 super-spec fleet is second to none. Our customers' uptake of these rigs validates our strategy and execution. Our super-spec fleet and the entire team are delivering tremendous value to customers.

The offshore business has put up solid results in 2018. There are signs of additional improvements generally. We are well positioned in our unique niche to expand this business from here.

Internationally, we have 11 rigs signed for deployment in 2019. There are many additional discussions ongoing. The excess rig capacity is shrinking. Consistent with comments from the largest service companies, we see a path for pricing to turn up in 2019.

In drilling services, customer reception of our services is positive. We have a robust pipeline of additional content to market. We continue to make strides towards our goal of long-term growth and improving returns on capital in this segment. The Rig Technologies segment should benefit from increasing activity in the U.S. and International markets. The rising rig count drives aftermarket activity, increases the volume of inquiries for new equipment and ultimately drives higher fulfillment.

In sum, we continue to improve each quarter without a full contribution from 2 of our largest segments mainly International and Rig Technologies. We see steady improvement in free cash flow in the fourth quarter and beyond as increasing worldwide activity drives these segments as well.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Marshall Adkins with Raymond James.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research [2]

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I'm going to hone in on the International side. I don't know if Siggi is there, but I know there's a lot of noise this quarter and next quarter in terms of getting a few of these things going. But I'm more curious about the full year outlook not only for '19 but going into '20 since that is -- tend to be a longer lead time business. Siggi, how are your conversations with customers going looking out for the full year? Talk a little bit about pricing. And then finally, you've got -- I think you've got 100 rigs running internationally, you got another 50 that aren't. Is that going to cost a lot to upgrade those? Or what's the outlook for those other 50 rigs? So I know there's a lot in there but just a generic outlook in International.

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [3]

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Yes. To set the stage for Siggi, just so it's clear. We're at a 96 rig count today and, in hand, we have contracts signed for 12 rigs -- actually not 11, 12 rigs to deploy during the next quarters through September 30. That's what's in hand right now, Marshall. And there are robust discussions, I'll let Siggi add some more color to it, talk about where the markets are.

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Siggi Meissner, Nabors Industries Ltd. - President of Global Drilling Operations & Engineering [4]

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So there's, obviously, idle rigs in the area, and those rigs were going to work with relative low CapEx. And then with the other ones go first, but initially, I expect also, some pricing pressure for those rigs. And then you have markets like Argentina, for example, where you need high-spec rigs and we see a strong interest in rigs that we have the upgrade in there so even newbuilds that we move into those markets. So I think as the -- there's a strong potential to see a lot more rigs going.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research [5]

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And are those -- is that going to be pretty high mobe cost. Should we think about it that way or...

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Siggi Meissner, Nabors Industries Ltd. - President of Global Drilling Operations & Engineering [6]

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I mean, we've been going as, obviously, there is mobe cost, and yes, mobe cost and obviously CapEx. But we are negotiating so that we get the CapEx recovered in those deals.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research [7]

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Terrific. And last one for you, Tony. I've got you all generating meaningful free cash flow particularly as you go into 2020. What are you going to do with it? Is it just debt paydown or if the demand is there, do you accelerate your CapEx?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [8]

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Yes. I think right now, Marshall, as it comes -- I have got everybody around the company thinking about debt paydown and that's because I'm not interested in continuing to grow, I think. As you can see, we're really excited about our asset base right now and improving our asset base, et cetera, but we have to be measured in what we are approaching and so I want to get the very best of both worlds. I want to continue to pay down debt and yet be poised to take advantage of our install base and getting more assets to work. That's a balance but right now the bias is -- continues to be to pay down debt. That's the mantra right now, pay down debt. We do think -- the past couple of days have shown that the extra leverage does hurt our trading and when somebody gets -- when somebody gets pneumonia, sometimes we get a cold, which I think is what happened in the past 48 hours. But I think if you look at the debt market, look at how our debt trades and look what we just did with our banks, the job William did on the banks is fantastic. We basically -- we are treated almost like an investment-grade company. So I think, for all those reasons, I want to preserve that and write down the debt -- getting debt paid down and what we want to do is show to our customers the value proposition of our assets and get them to be a partner in deploying some of these things. One of the other interesting things happening Internationally is there is a tender coming out for rigs that will be asking for state-of-the-art unmanned automation rigging -- basically a manless rig concept. And those type of things I think we'll play [the word bellwether] if that is for a major Middle East operator right now. And -- but that's the kind of thing that we wouldn't want to participate in, but again, we want to see the operator participate with us in helping change the landscape. So all that said, I think debt paydown is the priority.

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Operator [9]

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The next question comes from James Wicklund with Credit Suisse.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [10]

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Internationally, we have seen KCA Deutag and Weatherford and we have seen rigs change hands, and scale obviously matters in your business. And I'm just wondering internationally how long before you have all of your potential upgraded rigs put back to work. Does scale matter with what's going on in Saudi? Does it make sense for you guys Internationally to be a bigger company, and the question really is, is this consolidation in International markets? Or will you just be satisfied with the organic growth over time?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [11]

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Well, I think you hit on a core point. I think it's a truism in International that scale does matter. And I think, historically, whether it's us and other people that have parlayed in International operations, where they do single-string operations, even if you've been in the country for 20 years, you start the single-string operation, nothing ever goes as good as your pro forma. That's one of the negatives about our business. You have a pro forma, your revenue is fixed, and then you have all these plans and the things that happen are usually negative on your cost side. And when you only have 1 or 2 rigs in a country, it's hard to get it right the first time and, therefore, the mishaps have a disproportionate effect. So scale does matter and that's why, Jim, we try to focus on markets that have the potential for scale. If you look at where we're spending most of our time these days, Colombia, Argentina, Saudi, Kuwait, Oman, parts of Russia, Kazakhstan, we think all those markets are places for potential scale and that does make a difference. It makes a difference also on your overhead because every country needs, in effect, its own small drilling company and that overhead is expensive. And that's why when you look at revenue overhead of companies in the International marketplace, including the big service companies, those numbers are higher. There's a reason for that. So all that really takes the favor of yes, growing and consolidation would be one of the ways to do that. You can assume we've looked at every deal that's out there. What we also have is the view that the International marketplace is about to go through the same kind of change that the U.S. marketplace has gone through in terms of the flight to higher quality rigs. And so when you evaluate a bunch of rigs out there, you have to be aware of 2 things. You have to be aware of what the SCR components are of those rigs. And number two, you have to look at how compliant they are with the various so-called schedule Gs of the NOCs, which have special -- and even when rigs are operating today on contracts, many people are not in compliance. So when we do a deal, there's like a $7 million -- it could be a $7 million hit just getting those schedule G compliance stuff. For the CapEx, there's basically a hidden CapEx on these deals. And -- I'm not saying it makes deals impossible but it just also has to be taken into account. And everybody has to be realistic about it. But yes, if there were a deal that fell into the things I've described and if it's accretive to Nabors' shareholders, we think it will be a win-win for us. And frankly, we think it would be really good for the industry, but the industry does need a little bit more of that internationally.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [12]

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I remember International operations, we had to put contingency on the contingencies and we were still low.

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [13]

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Yes.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [14]

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My follow-up, if I could, on the domestic markets, you've got 43 rigs that you can upgrade, and you say that this is the best use of your capital. You've got about 112 [in a low -- 110] rigs that will be working in Q4. How many years -- I mean, that's 3 or 4 years of incremental capacity that you can add to the market with the 43 rigs that you can upgrade. Are we not going to build any new rigs in this market even though you've got day rates above the mid-20s? Are we not going to build rigs for a while if we can economically highest-return upgrade the ones that are possible?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [15]

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I think you hit the nail on the head. I think -- and certainly from our existing fleet, we have an interesting position in that these 45 rigs, as we've indicated before, can be upgraded about up to $9 million. If an operator has some special thing that he wants on the top of that, that would be added to his price. But that's a pretty good number compared to what people will quote you today, including NOV for a new rig. So that we do think is the best use of capital. And of course, there are some of our competitors in the big 5 also have capacity. So it's hard to believe that people will reach out to new building. The other point I'd make is some competitors are talking about upgrade costs of $15 million. Well, if I use $15 million as an upgrade cost, Jim, the -- I also have legacy SCR rigs, but at that point, the $15 million, some of those actually will become candidates. So there's actually -- I mean -- and in answer -- a little bit because we're unique, because we have the internal capability to do this stuff. And in terms of our ability...

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [16]

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Yes, you can do it at your cost, yes.

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [17]

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Yes. And so -- but the other point is, in terms of our ability to execute, if there's operator demand and they're willing to put their money where their mouth is, and give us firm contracts that make them economic, we actually have the capacity to actually roll those out, I would say, in maybe 12 to 14 months, that many rigs. I mean, Canrig at one point was building 10 top drives, 14 top drives a month. So it's not like we can't do it, okay. But we need to have some alignment with customers, and customers have to be a little more forthcoming with their plans and be part of that process. And frankly, that's the kind of discussion we're trying to initiate with some customers now on large scale to do that. That would be good for everybody, and there obviously would have tremendous spillover for the Canrig part of our business, which hasn't yet benefited from seeing a lot of the building yet.

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Operator [18]

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The next question comes from James West with Evercore ISI.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [19]

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Tony and William, as you see this ramp, this continued ramp in the Lower 48, and I know it's coming in even stronger than you expected and it seems to be kind of a quarterly phenomenon, now that you're having conversations on '19, is there a sense of more urgency building with your customer base for upgraded rigs? Are they becoming concerned that, that supply that's out there is dwindling somewhat and that they need to make sure that they can grab a Nabors rig or maybe one of your competitors' and get in line quicker than, perhaps, 6 months ago?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [20]

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I think thematically, the answer would be yes, there seems to be an accelerating bias in terms of the super spec rig and holding on to a super spec rig. And if you recall back in the last conference call, when I mentioned that Permian -- our view on the Permian and I said to you when we surveyed our customers, we really didn't see a -- this big downside occurring. I mentioned it too that even when there's only 1 or 2 of the customers that we work for had any excess capacity issues and they said to us that they had that problem, they were actually going to transfer that rig to another area so they can retain it. So I think that is an indication of that kind of bias. But I'll let Edgar, who now runs our Lower 48, and let him talk a little bit because he's dealt with some customers recently, give his -- more idea about the sense of urgency. Edgar?

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Edgar Rincon, Nabors Industries Ltd. - SVP of Operational Management [21]

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We have been talking to customers recently, and in the context of our utilization that is almost 100% for Tier 1, they are engaging more and more in these type of conversations. And that is how we're getting the type of contract that we have been able to announce and sign recently. So yes, they want to secure the rigs. With the purpose of securing the rigs, now they have a willingness to put some capital upfront, and if not capital upfront, that the minimum -- the term that they're offering needs to be sufficient so we can guarantee the pay back on the investment. That is the strategy that we have been following and, so far, we have been successful with the rigs that we have announced recently.

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [22]

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And I think as you look at the economics for this stuff, I mean everybody talks about manufacturing drilling, but to get there, you really need a standard process. And the notion before of just getting the lowest cheapest rig available, doesn't really lend you to the -- to that. And this speaks well in terms of the consolidation that has occurred with the big 5. And I think it's a good sign and healthy for that -- those group of companies. But it's also good for the customer because he really does need to standardize to get in a mindset of manufacturing drilling and having these different versions of rigs that all don't have the same capabilities. I think it's not very good. From our point of view, of course, we're providing something beyond super spec, which is the SmartRigs, which we hope to tap another leg up in terms of capabilities. And that's the next thing we'll be focusing on with customers.

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Edgar Rincon, Nabors Industries Ltd. - SVP of Operational Management [23]

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I would like to add also that these rigs, when they are upgraded, they are extremely competitive. They're going to be fast-moving. They have all the characteristics of the SmartRigs. And I actually believe they're going to be a great success in the market. So going back to the conversation about new builds, I don't see a significant benefit on a new versus this M750 in the market. So my view is that the M750 will be preferred and they will need to be disposed before new builds are brought into the market. And that will show capital discipline on our side and the side of our competitors because it will not make sense for operators to make that investment, make that type of commitment unless the payback is less than what we're able to obtain with the M750.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [24]

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Okay, great. That's great color. And then just maybe for William on SANAD with Aramco, is that venture, now that we've done the first couple of moves, financial moves here and put cash into the venture, as you build out that rig fleet, are you now -- is it now self-sustaining at this point? Meaning -- do you need to [add cash or do you have] build cash?

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William J. Restrepo, Nabors Industries Ltd. - CFO [25]

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Well, actually right now, we have way too much cash in SANAD at this point. So we're discussing now -- there's a mechanism for flushing the excess cash out. And the discussions are more towards that than to the fact that SANAD needs to be funded. I think we've managed to, given enough of a head start in cash, to be able to start financing the new builds coming up. It's not clear yet when NOV will be ready to start delivering those rigs. But again, given our projections, I think -- or I believe that Nabors won't be required to fund SANAD in the coming years.

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Operator [26]

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The next question comes from Chase Mulvehill with Bank of America Merrill Lynch.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [27]

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I guess the first question, if I can kind of get the view on potential further asset sales to accelerate debt paydown, realizing there's no liquidity, no reason to bring cash in the door because you've got plenty of liquidity. But just kind of over the medium term, what's your view on further asset sales?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [28]

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We're constantly looking through the company for excess inventory, excess yards, excess antiquated equipment to monetize. And so that's an ongoing process. And that's -- but it's nothing really needle-moving, but it's just helpful day-to-day just to clean it all up and get everyone focused on the right thing. But yes, we continue to do that. There's tens of millions of that in the hopper probably during the course of a year.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [29]

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Okay. And then as it relates to that, how do you think about refinancing the 2020 and 2021 notes maybe over the near term or maybe medium term?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [30]

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William?

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William J. Restrepo, Nabors Industries Ltd. - CFO [31]

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We -- I'll answer that. I think -- it's William. I think that one of the things that Nabors has done over the last 4 years or so is to basically add sufficient capacity in the system so that we don't have to rush into the market at the wrong time to do our refinancing. And I think our -- all of our refinancings up to now, I think, have been a model of how to do it in terms of finding the right spots in the market. And I think that will not change going forward. I think we will look for opportunities over the next quarters to do some refinancing. But again, we're not going to rush into the market at the wrong time.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [32]

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Okay. I'm going to squeeze one quick one in really. The potential upgrades for Lower 48 for 2019, how many should we be plugging into the model?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [33]

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So right now, we have -- as I said before, we have 110 rig count today. And in the pipeline that are signed, in fact we've got 3 signed this morning, 3 more signed, so that now we have a total of 12 through September 30 rolling out of next year. And that's locked up right now. And as we said, there are discussions ongoing for even more. I think the...

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [34]

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What's the lead time?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [35]

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They start -- there's a couple that start in the second -- in the fourth quarter and then about 5 or 6 in the first quarter next year, and then after that, the second quarter of next year.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [36]

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And if you sign the contract today, how quickly could you put that out into the market?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [37]

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Maximum 5 months. And if we have some notice, we might be able to even accelerate that because once the machine is up and running, we actually can do it even easier, once we get some long lead items in the inventory.

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Dennis A. Smith, Nabors Industries Ltd. - VP of Corporate Development & IR [38]

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Phil, we're closing in on an hour long here. And let's just take one more question and we'll wind up the call, please.

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Operator [39]

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Okay. The next question comes from Marc Bianchi with Cowen.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [40]

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Maybe just real quick, the guidance for fourth quarter International rig count, I didn't quite catch that. Could you just repeat that, please?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [41]

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The -- what was it?

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William J. Restrepo, Nabors Industries Ltd. - CFO [42]

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Do you want me to cover that, Tony? I mean, I think -- we expect 94 rigs for the fourth quarter. That includes the divestiture. We are -- we have sold, in fact, the deal is already closed. Our long-awaited sale of our workover rigs in Argentina, which as you well know, given our operations and some of our constraints, was a very, very slim cash flow generating business. So that business is gone, and about 6.5 average rigs in the third quarter which will not be there in the fourth. But including that, we expect to have 94 rigs in the fourth quarter.

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [43]

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It's actually -- it's net 4 incremental rigs in the fourth quarter.

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Siggi Meissner, Nabors Industries Ltd. - President of Global Drilling Operations & Engineering [44]

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Because we're adding 2 rigs.

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [45]

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Because we're adding some rigs. And that net increase is actually of rigs that are actually contributing rigs as opposed to noncontributing rigs. So the mix, in other words, the mix of the portfolio actually improves dramatically.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [46]

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Okay. Siggi mentioned some pricing weakness. I think you probably meant mix being the reason there for pricing, but if you could just expand on that a little bit more.

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William J. Restrepo, Nabors Industries Ltd. - CFO [47]

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It's pricing pressure, Marc.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [48]

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There is pricing pressure.

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William J. Restrepo, Nabors Industries Ltd. - CFO [49]

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It is pricing pressure. So yes, what does that mean? That means that the recovery, first of all, is not uniform in all markets, right, as Tony mentioned. So some markets are more tight and more competitive than others. In other markets, we see no pricing pressure whatsoever. So -- but part of our additional rigs that we've added over the last, I would say, 6, 7 months, or contracts we've been awarded have been at lower prices that we could get in the past. So there's a mix issue, yes, but there's also some softness in certain markets that means we don't get the same kind of day rates we have back in 2014. In the current rig environment, with the amount of excess rigs that we still have and we still have to get rid of before we start seeing some pricing momentum. And Tony mentioned that we expect that to happen in 2019.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [50]

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Do you guys care to say, and I know it's maybe a little bit unpredictable, but where and when the International margin should bottom?

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William J. Restrepo, Nabors Industries Ltd. - CFO [51]

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So I'll answer that. And we have some expectations, which we are giving to our operational team. And I can say that I have a lot of faith in Siggi Meissner. He sometimes tests my faith but, in general, he's -- they've done a phenomenal job of taking what the market has given us this year and doing better than we should expect sometimes. But right now, we are working with our budget for next year. And I think it would be premature right now to give you that information given the mix. And it all depends on where we decide to apply and spend our dollars next year, and that is going to be a driver on what the margins will be next year. So until we have that budget process, where Siggi and his team come to us and say, "This is what we'd like to do. This is how much we're going to cost," it will be an interactive process, and then we'll take those decisions on what gets added and what gets cut. And at that point, we'll be more able to give you a number. But we do expect to see a better margin in 2019 versus 2018, and we expect to see higher EBITDA as well.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [52]

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Okay. Just if I could -- one more. The Saudi rigs, which are transitioning to a higher cash flow per day and that's hitting in first quarter, could you just help us with what the uplift there should be on a cash flow basis?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [53]

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It's a lot of money, that's all I will tell you. It's a lot of money, and it all comes in starting in full force in the first quarter. And that gives us a lot of the confidence why you're hearing that year-to-year International free cash flow is going to be up. Okay. So that's the way I would -- so in other words, when you're trying to look at gauging the effective margins, I'm just saying the bottom line with these rate increases, it's a lot of money. And free cash flow is going to be up year-to-year in International.

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Operator [54]

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This concludes our question-and-answer session. I would like to turn the conference back over to Denny Smith for any closing remarks.

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Dennis A. Smith, Nabors Industries Ltd. - VP of Corporate Development & IR [55]

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Thank you, ladies and gentlemen, for joining us today. And if you have a question we didn't get to, feel free to call us or e-mail us. And as always, we'll be available. Thanks, again.

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Operator [56]

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