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Edited Transcript of NBR earnings conference call or presentation 1-May-19 3:00pm GMT

Q1 2019 Nabors Industries Ltd Earnings Call

HAMILTON May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Nabors Industries Ltd earnings conference call or presentation Wednesday, May 1, 2019 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. - Senior VP of Corporate Development & IR

* 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 Marshall Adkins

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

* Kurt Kevin Hallead

RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst

* Sean Christopher Meakim

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Taylor Zurcher

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research

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Presentation

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Operator [1]

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Good day, and welcome to Nabors' First Quarter 2019 Earnings Release Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Dennis Smith, Vice President of Investor Relations. Please go ahead.

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

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Good morning, everyone. Thank you for joining Nabors' First Quarter 2019 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 various other members of our senior management team.

Since much of our commentary today will include our forward expectations, they may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may differ materially from those indicated or implied by such forward-looking statements.

Also, during the call, we may discuss certain non-GAAP financial measures, such as adjusted operating income, EBITDA and adjusted EBITDA. All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA as that term is defined on our website and in our 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. Thank you for joining us as we review our results for the first quarter of 2019. Before discussing those results, I will offer some comments on the macro factors at work during the quarter. These factors understandably had a strong influence on our customers' activity and forward planning. The first quarter began with 2 notable events. WTI was trading below $46, that was down more than 33% just during the fourth quarter.

Second, capital markets were severely limited for energy issuers at the end of the year. This backdrop weighed heavily on our customers as they completed their budgeting and planning cycles during the first quarter. The result was a mixed bag of outcomes. In some cases, their processes were delayed. Others reduced their planned activity. Some maintained their prior intention to increase drilling and we saw all that play out during the first quarter. The net impact through the industry during the quarter was a decline of 74 rigs.

In the face of an uncertain though improving environment, our operations performed well during the first quarter. Adjusted EBITDA totaled $197 million, down modestly from the fourth quarter. Once again, our U.S. Drilling segment and the Lower 48 in particular performed admirably. Average selling margins at our Lower 48 business exceeded $10,000 for the first time since late 2015. Our quarterly rig count in the quarter was up slightly, outperforming the broader market. Beyond the Lower 48, in the first quarter, we had more rigs working in Alaska and the Gulf of Mexico combined than in any quarter over the past 3 years.

Now let me discuss our view of the market. The Lower 48 average rig count during the first quarter was 1,011 rigs. More recently, last week, the rig counts stood at 960, that is down by 15 rigs from the end of the first quarter, which stood at 975. Since the beginning of the year, the rig count has declined by 89 rigs or about 8%.

A number of customers in the Lower 48 have followed through on plans to reduce their spending and activity in 2019. On balance, these reductions have resulted in a decreased industry utilization since the end of last year. Our customer base at Lower 48 tilts heavily to IOCs and major independents. These operators have been among the more resilient, increasing or maintaining their previous drilling activity. Once again, this quarter, we see this in our Lower 48 top-20-customers survey. The clients surveyed account for approximately 39% of the Lower 48 industry rig count. The results of this edition of the survey are mixed.

The survey indicates about a 20 rig or about a 5% decline in planned activity during the remainder of 2019. The largest planned declines are in 4 respondents. Although a large portion of respondents indicated planned declines, several larger companies anticipated increasing their activity. When we last shared the survey in February, it indicated a mid-single digit rig decline with activity reductions concentrated in 2 operators. The additional declines are a combination of deeper cuts than previously indicated at some operators and the finalization of reduced drilling plans at others. The previous survey was completed before our customers have finalized their budget plan.

The survey group accounts for 63% of Nabors' working Lower 48 rig fleet. Our exposure to the 4 operators, which are most significantly dropping rigs, is limited. It amounts to 4 rigs. We have demonstrated that we can place any returned superspec rigs quickly even in this market.

On the plus side, as of today, we hold signed 3-year contracts for 3 additional deployments with one of our customers. Those deployments are expected to occur during the second quarter.

The strength in our rig count is indicative of our performance in this market. We outperformed the industry during the first quarter as our rig count increased slightly. We are already on target to increase rig count during this quarter. We currently have 115 rigs working at Lower 48. That's up by 4 since the end of the first quarter. Within the industry, the upper movement in leading-edge pricing has paused for now. At the same time, demand for the most capable rigs remains strong, and pricing for our rigs remains intact. We continue to successfully reset closer to current rates rigs which have been working on contracts with below leading-edge pricing. Bottom line, our utilization of superspec rigs remains essentially 100%.

In our International markets, industry activity has continued to gradually improve though with uncertainty in 2 of our most important Latin America market. As is typically in our customer base in these markets, there is less sensitivity to commodity price volatility. Pricing in these markets has also stabilized, although at a lower level than prior peak. We have finished the process of rolling higher-margin legacy contracts to the current pricing environment. We absorbed the last significant pricing concessions during the first quarter. We expect gradual tightening in rig supply, as excess capacity is absorbed by activity increases, and we expect to deploy additional impactful rigs over the next year in select markets.

Now let me comment on our results on segment highlights. For the first quarter, consolidated EBITDA totaled $197 million compared to $202 million in the fourth of 2018. Revenue increased sequentially by approximately 2% to $800 million. Several factors drove our results for the first quarter. The U.S. segment continued its strong growth trajectory. The performance was driven by pricing and margin improvement in Lower 48 and increased activity in U.S. offshore and Alaska.

International results declined principally due to 2 factors. Several rigs in the Eastern Hemisphere rolled new contracts at lower current day rates. We also incurred market-related and operational challenges in Latin America, which have been addressed. In Canada, we had expected a seasonal increase in rig count, which did not materialize. The market there has become even more challenging as the peak drilling season disappointed.

We achieved several notable highlights during the quarter. First, our Lower 48 operation deployed 4 upgraded rigs in the first quarter. These deployments include the final 2 PACE-F rigs for our customer in West Texas and the initial 2 PACE-M750 rigs. One of the M750s went to work in West Texas and the other in South Texas. These deployments are excellent examples of our ability to cost-effectively upgrade existing assets to premium superspec rigs. These first M750s have performed quite well in the field, demonstrating the value we envisioned for our customers.

During the first quarter, we also installed the industry's first drill floor robot on a semisubmersible rig working in the North Sea. This deployment is an important milestone for Canrig Robotic Technologies and for the drilling industry. We also signed a contract for the first fully automated drill floor for a platform rig in the North Sea. Delivery of this comprehensive drill floor package should begin later this year.

During the first quarter, we added several installations of ROCKit PILOT, our automated directional drilling system. We were also awarded multiple installations for our Navigator software. Navigator automates directional drilling workflow. While Navigator determines optimal instructions for directional drilling, PILOT automatically executes those instructions. Fully automated directional drilling, which optimizes wellbore placement, is an emerging market, and we are at the forefront.

Finally, we completed additional successful commercial runs of the rotary steerable tool. With our successes downhole, we're now adding resources to achieve wider commercial acceptance.

Now let me discuss our segments in more detail. First, the U.S. We currently have 115 rigs working in the Lower 48. This compares to an average of 111 for the first quarter and 111 at the end of the first quarter. During the first quarter, average rig count increased slightly versus the fourth quarter. Our first quarter Lower 48 margin of $10,170 increased more than $700 sequentially. This increase reflected superb operational performance as well as the favorable pricing environment for high-specification rigs.

Next, International. Our International rig count for the first quarter averaged 90 rigs, up 2 versus the fourth quarter. That increase reflects rigs deployed during the fourth quarter in Colombia and Saudi Arabia. Those increases were partially offset by declines in Argentina and Venezuela. EBITDA for the quarter was impacted by market-related and operational challenges in Latin America and the Middle East. Revenue declined from the Eastern Hemisphere due mainly to rigs [going to] lower day rates were partially offset by higher revenue in Mexico.

In Canada, despite the weak market environment, our operations there generated healthy EBITDA. The Canadian drilling market has been severely impacted by a number of factors. These include wide basin differentials and government-mandated production curtailment. In the first quarter, the industry rig count declined year-over-year by approximately 1/3. Nabors outperformed. Our rig count declined by approximately 23%.

In Drilling Solutions, we continued to make progress in several product areas, most notably in performance software. During the quarter, performance software continued to increase penetration within Nabors and third-party rigs. The fourth quarter benefited from high year-end sales from the newly acquired PetroMar business.

In our Rig Technologies segment, results in the Canrig equipment operation improved sequentially. This improvement occurred despite the ongoing challenges to new equipment sales given the industry's rig count progression. This segment also includes 2 of our technology development initiatives, namely our robotics operation and the rotary steerable tool. Our engineering expenses supporting these efforts increased somewhat. The robotics operation took 2 significant steps forward during the quarter. The installation of the first drill floor robot was completed, and the first contract for a complete automated drill floor was signed.

Now let me discuss our outlook by segment. In the U.S. Drilling, for the second quarter, we expect our Lower 48 rig count will increase by 3 to 4 rigs from the first quarter level. This forecast is supported by our pending contracted deployments. Given our March exit rates and our most recent contracting results, we expect a modest increase in Lower 48 average day rates and a corresponding uptick in daily margin. Our rig count in Alaska is likely to decline modestly due to the seasonal wind down in that market. For the full year, we expect the whole Lower 48 daily gross margin above the $10,000 mark and to exit the year at about 120 rigs.

In the International segment, we expect an improvement in EBITDA in the second quarter. Our rig count in this segment should be essentially flat. However, we anticipate improved operational performance as well as some cost reductions in Latin America. For Venezuela specifically, we do not anticipate any change in activity levels during the second quarter. However, the situation in the country remains uncertain, injecting an element of risk into this outlook. All in, we expect International EBITDA to exceed $90 million in the second quarter.

In Drilling Solutions, we expect second quarter EBITDA to exceed the first quarter. This improvement is forecast across most of the major service line. We also expect this segment's results to increase throughout 2019 and to finish the year with an annualized run rate of $125 million in the fourth quarter.

Looking forward, we expect second quarter EBITDA for Rig Technologies to improve slightly versus the first quarter. While there are several moving parts in the forecast, the end impact is expected to be minimal. Later this year, we expect to begin recognizing revenue related to the rig floor automation project in the segment's robotics operations.

That concludes my remarks in the first quarter results and our outlook. Now I will turn the call over to William for a discussion of the financial results. After his comments, I will follow with some closing remarks.

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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 $122 million represented a loss $0.36 per share. The first quarter results compared to a loss of $188 million were $0.55 per share in the fourth quarter of 2018. Results in the fourth quarter included $52 million or $0.15 per share after tax in net impairments and other charges primarily related to our legacy rig fleet and other obsolete assets. The results also included a $52 million or $0.15 per share tax charge related to the establishment of a noncash deferred income tax valuation allowance in Canada.

The revenue from operations for the first quarter was $800 million, up $18 million from the fourth quarter. U.S. Drilling and Rig Technologies drove the sequential increase in total revenue, while Canada and International decreased sequentially. U.S. Drilling revenue of $320 million grew by $16 million, a 5% increase, driven by higher average pricing in the Lower 48 and strong seasonal expansion in Alaska. International drilling declined by $8 million or 2%, reflecting market-related and operational issues in Argentina and Venezuela. In addition, we absorbed the last of our negotiated pricing concessions and contract rollovers in the Eastern Hemisphere. Canada drilling revenue fell by $4 million or 13%. While the highly seasonal Canada market typically increased in the first quarter, our rig count declined due to weak market conditions.

Drilling Solutions revenue of $65.4 million declined by $1.4 million versus the previous quarter, reflecting high fourth quarter revenue for our newly acquired PetroMar business. Offsetting this sequential reduction was a $1 million revenue increase in drilling performance software.

The revenue in our Rig technologies segment increased by $10 million or 17% to $71.7 million. This increase was driven by improved sales of capital equipment and replacement parts as well as higher volumes of repairs and certifications. Capital equipment sales remains sluggish, reflecting the volatility in commodity prices and its ultimate impact on drilling-rig capital expenditures.

Adjusted EBITDA declined to $197 million compared to $202 million in the fourth going. An $11 million improvement in the U.S. market was offset by an $8 million reduction in International. Results in Latin America were affected by the U.S. sanctions in thermal in Venezuela as well as an activity drop in Argentina driven by the recent reduction in regulated natural gas prices. Operational issues resulted in downtime in both countries. Pricing concessions in the Eastern Hemisphere also had a negative impact.

Canada, down $2 million, was affected by falling rig counts and margins as the normal seasonal trend was overwhelmed by the currently weak market.

Finally, given the nature of our business, our drilling rig and performance software margins are highly correlated with the drilling days in each quarter. The 2% fewer days in the first quarter translated into an unfavorable sequential impact of approximately $6 million for the global drilling and Drilling Solutions business lines.

U.S. Drilling EBITDA increased by $11 million sequentially, driven by the significant improvement in Lower 48 margins and increased rig activity in Alaska. Lower 48 adjusted EBITDA rose by $6 million as daily margins increased by $742 to $10,170. The improvement was attributable solely to improved pricing as average leading-edge day rates for our superspec rigs remained above the mid-$20,000 range. Rig count improved fractionally as our deployments of upgraded rigs offset the increased utilization penalty between releases of rigs by customers and their subsequent re-contracting with other customers.

We expect daily rig margin to progress higher in the coming quarters, though not at the same sequential rate which we reported for the first quarter. Since we still have the opportunity to reprice multiple rigs to current leading edge day-rate level, we would expect margins for the second quarter to exceed the first quarter level. Our rig count for the Lower 48 should average 114 to 115 rigs in the second quarter. The Alaska market is expected to shed an incremental rig or so as the seasonal decline impacts operations there.

International adjusted EBITDA declined by $8 million to $86 million in the first quarter. This decline primarily reflects the last of the pricing concessions granted on the rollover of a number of contracts in the Eastern Hemisphere, which have been removed with pricing more reflective of current market pricing. We also experienced activity decreases and interruptions, including operational issues in Venezuela and Argentina. Following these issues, we have adjusted our cost structure, pending the return to normal conditions. We also expect Argentina rigs to return to operations shortly as the market re-absorbs the rigs released due to the reduced natural gas subsidized pricing. We currently expect our International EBITDA to improve some $4 million to $5 million as compared to the first quarter results.

Canada adjusted EBITDA decreased to $7 million from $9 million in the fourth quarter. Rig count at 16 rigs was 2 rigs lower, and daily margin decreased about as expected to $6,055 per day. After the atypical decline in activity in the first quarter, we expect a further reduction in the second quarter as the spring breakup impacts rig count.

Average Q2 rig count should decrease between 6 and 7 rigs sequentially. Margins should hold up as our rig mix during breakup tends to be favorable.

Drilling Solutions posted adjusted EBITDA of $21 million, down from $23 million in the fourth quarter. Most of our product lines were stable, with the exception of our performance software, which grew by $1 million compared to the prior quarter.

In our recently acquired PetroMar business, project-related revenue in the fourth quarter did not repeat in the first. For the second quarter, we are targeting an increase for NDS-adjusted EBITDA of $2 million.

Rig Technologies reported an adjusted EBITDA loss of $2 million in the first quarter, slightly below the fourth quarter loss of $1 million. It incurred higher expenses in our tunnel vision technology development initiative as we ramp up towards commercialization.

EBITDA in the core Canrig business was again positive and increased from the fourth quarter.

For Nabors as a whole, we would expect EBITDA to be on the range of $200 million to $205 million in the second quarter, with the improvements in most of our businesses partially offset by seasonal declines in Canada and Alaska.

Now let me review our liquidity and cash generation. In the first quarter, net debt increased by $104 million towards the upper end of our expectation range. Several items normally impact cash flow in the first quarter. The net debt increase in Q1 includes $81 million in interest payments, which are concentrated in the first and third quarters. In addition, we incurred several annual payments at the beginning of the year that include property and other taxes as well as employee incentive bonuses. These payments, which will not recur during the remainder of the year, amounted to approximately $50 million.

Finally our dividend payments will fall by $18 million in the second quarter. We also funded capital expenses of $140 million in the quarter as our deployment schedule for upgrading rigs is weighted towards the first half of the year. We expect CapEx to decline sequentially each quarter this year and to total approximately $400 million.

During the second quarter, we expect our cash consumption from interest and dividends to fall by about $100 million and CapEx to decrease by approximately $40 million. EBITDA improvement in the absence of beginning of the year payments and working capital reduction should also help us to arrive at the midyear point with net debt below our year-end 2018 level.

We remain focused on addressing our liquidity and leverage. We maintain our commitment to reduce net debt by $200 million to $250 million this year and total reduction of $600 million to $700 million through 2020.

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. During the first quarter, volatility in the energy markets declined and commodity prices increased significantly. Through this period, our drilling business in the U.S. performed exceedingly well. Our financial performance in the first quarter exceeded our internal expectations. Our focus on expense control is unwavering. We remain committed to maximizing the value in our existing asset base. In the Lower 48 market, this recent volatility has tested our strategy.

Our financial performance during this period demonstrates that we are bringing the best rig to the industry's most demanding customers. Our working percentage of superspec rigs is among the highest in the industry. Our field performance, measured across KPIs, is top-notch and the customer base is taking notice. With 3 contracted upgrade deployments pending this quarter, we have visibility to further growth.

The U.S. offshore business accounts for more than 10% of total EBITDA. Our platform rig designs are best in class. We are well positioned for any upturn here. Internationally, our land rig franchise is unmatched in the industry. We hold significant share in major markets across the globe. We have more deployments scheduled as we move through 2019. Through our discussions for even more rigs underway, we believe the first quarter marks the bottom in financial performance, and we expect to show improvement as we move through 2019.

In our technology businesses, we believe that we are entering the commercial stage. Our recent market success in robotics is encouraging. Meanwhile, our entire portfolio of performance software, tubular running services, downhole tools as well as drilling and rig automation is unique and customer adoption is growing.

At our analyst meeting in 2016, we unveiled our vision to change the way wells are drilled. At that time, we suggested that existing AC rigs could soon become legacy rigs. We defined the pad-optimal superspec rig, which has now become the generally accepted standard. We also outlined our belief in the industry's need to embrace process automation and robotics and use the rig as a platform to deliver services around the well while generating superior return.

We have been hard at work since then executing on our vision. The merits of that vision have largely been validated by events since that time, including by the number of service providers now trying to replicate similar objectives. We believe our current rig designs are second to none and we have the sector's most robust portfolio of performance software tools which utilize the rig as a delivery platform. We are focused on exploring this portfolio to drive superior performance for our customers and enhance returns to our shareholders. I fully expect to report improvement on both fronts as we move through the year.

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 Kurt Hallead of RBC.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [2]

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Maybe, Tony, I'd want to start off with a question for you. You mentioned the 2016 Analyst Day, and at that point in time, you kind of -- part of your vision you outline on Drilling Solutions, you had a target of getting to about $250 million, I think, of annualized EBITDA by the end of 2020. It looks like your commentary regarding the exit rate for '19 will get you halfway there. Can you just give us some insights on some of the update and the drive to commercialization and kind of where you think Nabors sits in getting the industry to adopt these processes?

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

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Sure. As I said in my opening remarks, I think that the move that we've had has been embraced by many of our customers. Everyone realizes that to get to a new level of efficiency, we have to change the way we did things in the past, which means changing workflows at the rig site.

Typically, the way the operators lower their BOE cost historically has been basically counting on each individual vendor and getting cost reductions, but that has the law of diminishing returns. So if operators are truly interested in getting to a better level of BOE cost more efficient, I think you have to put on the table we're doing all the change in workflows. And that was the strategy we outlined in 2016 with NDS.

Today I think quarter-to-quarter, I think basically, we have about 46% of the rigs in Lower 48 now running about 5 NDS services, which is up a couple of percent from last quarter. The reason why NDS services this quarter was down a little bit was because of churn.

As you know in this market, there is a lot of churn that was going on. And you've got to realize, NDS services, about -- almost 30% of it is actually performance on third-party rigs. So that's not the point. The effects on churn -- when churn is probably a little greater on third-party rigs than it is for neighbor's rigs for the other reasons that we outlined.

In terms of our plan, I think, as I said, the portfolio, we feel very good about the performance tools. I think our ROCKit product has been known in the industry as industry leader for oscillation, and we're building on that with wellbore placement products. We think that's a real growth market today. More than half of our installs of ROCKit Pilot are using no directional driller at the rig site, which is a big change. And I think that as customers get more and more comfortable with that, that will accelerate.

I think the tubular running services business part of the markets, where we've introduced a way to run casing on a more integrated fashion, that's getting traction as well. And wellbore placement, we've actually improved. We worked down our cost structure, which was, as I said in prior quarters, was a bit of a problem. We're starting to improve our gross margins and the wellbore placement as well. We actually tested our rotary steerable tool.

This past quarter we had a good trial run. We'll do a bunch more trials throughout this year to get geared up for its full commercialization beginning of next year. And that, of course, has a big upside. And then finally, we introduced the technology called PetroMar, which is -- PetroMar technology, which is actually a new tool that's designed to help operators understand their wellbore.

And it's interesting that today when you think of -- when people talk about completions, which account for more than 50% of well cost, most completions today are done kind of brute force. You put a bunch of the stages X feet apart, and then you just hope -- and you frac them, and that's basically the way it's done.

There's no real intelligence about how to locate the stages. What our new tool does is it actually can take out a sonic log during the drilling process, so when we complete our drilling, we can hand over an image of the log to the operator, which then allows them to understand where his fractures are so he can better place his stages in the fracture. So this is a new technology we rolled out.

We made -- you'll see some spotty sales until we get some acceptance stable. We're pretty excited about it. The image, by the way, that this thing produces is best-in-class and compares to the big 3s' imager that cost maybe 5 to 6 times the cost of what this service provides by the way we deliver it. So we're pretty excited about that.

So when you take all those services together, that's where we think the growth is going to come from. I think you correctly pointed out the growth aspirations to get there. We're maybe a little behind track by 2020, but we'll see if we can accelerate it as we go through the year. And I think some of these new data I've talked about have very large upsides, so it's up to us now to just exploit them and get them out to the marketplace.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [4]

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That's great color, Tony. And maybe one follow-up for William. In the context that you mentioned $200 million of net reduction targets for this year, and then I believe you said $600 million to $700 million in 2020. So first along those lines is the $600 million to $700 million in 2020, is that a cumulative effect? And then separately, I think the investor base has really been wanting to see some consisted level of free cash flow generation, so I wonder if you can give us some general sense on, I guess, the forward predictability of that free cash flow generation.

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William J. Restrepo, Nabors Industries Ltd. - CFO [5]

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Sure, Kurt. Yes, the $600 million to $700 million is the combined for 2019 and '20. But we won't stop there. I mean the end objective that Tony and I have repeatedly stated is that we want to get to the low $2 billion mark in terms of net debt, so we still have a ways to go. So in the first quarter, I mean, as you've seen in prior years, our cash flow for well, of course, is fairly seasonal.

Last year, in the first quarter, we had about over $200 million of net debt increase. This year, we pared that to about $100 million. In the first quarter, we do have a significant amount of expenses that don't recur in the remainder of the year, as I stated in my prepared remarks.

If we take out in the second quarter the $80 million of interest expense, $80 million of dividend, reduction in CapEx, the absence of those one-time events in the first quarter plus the improved EBITDA, we think, just those things give us an improvement of $200 million over the first quarter. And then we also are counting and targeting some working capital reductions.

We have made some efforts to reduce our receivables, we saw some of that in the first quarter, but we expect to get much more in the second quarter. So all that together means that we feel that we'd be in a very good position in midyear. Basically on the plus side, that is reducing net debt by -- somewhat versus the end of last year.

And then in the second half, we expect a very strong cash flow as our results continue to improve. And again, we expect a very strong quarter like we did last year. If we compare this first quarter to last year's first quarter, just to give you an idea of the progress we've made there, Kurt, our operating cash flow from the cash flow statement, as you will see the Q, is about $150 million better than last year.

We did spend a little bit more of CapEx this year than the first quarter of last year, maybe some $50 million. But again, that's just related to our plans for the year, where we had targeted about 7 to 8 -- or a total of 9 operations in the first half of the year and 9 in the second half of the year. So you will see the second quarter have a very, very strong cash flow generation and we expect to deliver for the full year.

Again, the fact that our interest payments our semiannual, first and third quarter, doesn't really allow us to have like a smooth quarter-on-quarter cash flow generation, but again, if you take that into account, you'll see that our operating cash flow is progressing and should be stronger by the end of the year.

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Operator [6]

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Our next question will come from Marshall Adkins of Raymond James.

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

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I do want to hone down on the U.S. guidance a little bit more. What I heard was -- that you have -- you're going to hold up pretty well on the second quarter despite your customer survey that's kind of actually what we've heard from other of your peers that Q2 is going to see a reduction. But your full year guidance suggests maybe you see modest improvement in your fleet through the rest of the year. So give me a little more color on that? I presume obviously, you had some contracted rigs coming online. It's customer mix in Q2 that's causing you to outperform peers. But just making sure that I heard that right. And could you comment a little bit on your thoughts on the second half of the year?

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

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Sure. So today, as we said, the rig count is 115 that we're at, and we're still in the process of deploying the 3 additional contracted rigs on top of that. So that gives us some confidence that the rig count is going to be quarter-to-quarter up 3 to 4 rigs with the first quarter. And if you look at our fleet, the contracted fleet, there's probably about 20 rigs in the fleet today of superspec rigs that are still on old day rates that are rolling. And so that gives us the ability to move them to market. And as we said, we don't see the leading-edge market moving up right now. But because we have 20 rigs that we can reprice to current rates, it also gives us some potential of some additional margin improvement.

So that combination, I think that's what's giving us some comfort. And looking toward the end of the year, I think we still believe that we should be able to exit at about close to 120 on the rig count. Obviously, it becomes difficult as people turn more and more and the pressure will mount. But right now, we're feeling pretty good about that, Marshall. So as we said, so the next quarter, you're going to see an increase in average rig count. We think -- and also, you're going to see a slight increases in daily margins as well.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [9]

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Great. And William, shifting gears to International, we're looking at an uptick on International. Could you help us bridge the improvement in EBITDA? How much of that is kind of pricing versus utilization versus like [mod] cost going away, stuff like that?

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William J. Restrepo, Nabors Industries Ltd. - CFO [10]

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On the next quarter, Marshall, we -- in reality, we just have a couple of more rigs coming on that should add some incremental margin. But a lot of what we experienced in the first quarter was related to interruptions on and off, start and stop in Venezuela, where we had to keep our resources waiting for the activity to resume. And we also had some temporary debt reductions in rig activity in Argentina as well that we have to cope with. That was pretty significant.

So we had some extra costs in there that we have addressed in those 2 specific markets. So we feel comfortable that this coming quarter, we should beat that or meet that guidance that we gave. So it's a couple of items, I would say that -- again, one is rig count and the other one is just taking care of some cost in Latin America, given the volatility that we're seeing in the activity.

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

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And looking out a little longer, Marshall, I think what gives us some comfort here as to why we think we're in an upward trend from where we are today is as we said before, we have visibility on additional 7 rigs to go to work in International. Those are in -- that includes -- that's in the second -- later part of the second half of the year. Two platform rigs in Mexico. We have rigs in Argentina, Algeria, Russia and Italy also to go to work. And so we have some visibility right now in the pipeline.

And as we also commented in the remarks, the renewals that were actually depressing margins have basically been all now reset to market, so that kind of overhang is behind us. And finally, the commodity price environment, as you all know, is definitely better than where it was. So you pull all that together, that's why we feel we've got some good visibility, and I'm confident we'll see some growth from where we are today.

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Operator [12]

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The next question will come from Chase Mulvehill of Bank of America.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [13]

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I guess I want to follow up on Kurt's question about the net debt reduction. Is there any divestitures that are included in that net debt reduction?

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William J. Restrepo, Nabors Industries Ltd. - CFO [14]

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None.

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

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None.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [16]

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Okay. So it sounds like that you've got some pretty positive outlook on free cash flow next year. So I guess maybe also kind of help us understand what kind of CapEx is kind of implied in that target number of net debt.

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

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We're targeting around $400 million.

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William J. Restrepo, Nabors Industries Ltd. - CFO [18]

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For 2019 and 2020, a slightly higher number than that.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [19]

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Okay. All right. And then if we come to Lower 48 and think about your cash margins and the performance of cash margins, you've had some good performance there. Can you maybe talk to how much digital or software-app revenue you have flowing through there? And then what kind of adoption rate you're getting at some of that?

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

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The thing you have to understand about our numbers is, with NDS, we totally separate out those 2 segments. So in other words, our rig margins are pure rig margin only. It doesn't include any performance software, it doesn't include any tubular services, like some of our other competitors. That's not subsidizing our rig margins. It's a stand-alone. All that margin for software and other applications is all in NDS. So if you really want to get apples-to-apples, you have to take the NDS numbers, divide it by rigs, and then you add it to the U.S. margins to really understand compared to some other people, and you'll see how well the company is actually doing. But it's important to understand that our rig margins do not include any of those revenues.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [21]

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Okay. And then -- so just maybe on the software-app side, could you maybe just quantify how much of revenue that you're generating from the digital and software apps? And then what kind of penetration you have across the fleet?

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

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Well in terms of penetration, we have 97%, 98% of all of Nabors' rigs have one of the software products -- at least one of the software products out today. So we have great penetration, Nabors rigs. We have a new version of the software that actually will work on -- it actually works on third-party rigs, with Canrig or Tesco's top drives. We now have a version of software that works on third-party rigs with NOV top drives, and that's being -- making some headways into that market as well. So we're pursuing that third-party market as well. In terms of overall value, we don't disclose the breakout, but it's substantial. I will say it's substantial.

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William J. Restrepo, Nabors Industries Ltd. - CFO [23]

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What I could say, on an average basis, in the Lower 48, maybe it's about $1,000 per rig per day. Now the new software, we haven't disclosed anything yet. It's just the legacy software.

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Operator [24]

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Our next question will come from Sean Meakim of JPMorgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [25]

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So I guess -- I appreciate all the detail and the feedback around the progression that you see in International. As we think about the second quarter and going beyond, given that the contract overhangs, and that's in the past, as Tony said, were in upward trend, generally from an activity perspective, just give us some of the funkier parts of the portfolio that are a little bit harder for us to see on the outside, so things like Venezuela. How confident are you on being able to call 1Q a bottom then for International margins? Are we highly confident? What are the caveats that you would put to that? Any kind of parameters or numbers you can provide, I think, would be helpful.

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [26]

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So you want my firstborn here? What do you want? I mean, look, calling a bottom – everyone is always reluctant to call it a bottom, so I can just give you context. The context is that, for all the reasons I mentioned before, which is increasing visibility and the fact that we think we've killed whatever fires there were from some of these operational one-off issues as well and the commodity price environment and the fact that the burden of resetting contracts is off of us. For all those reasons, it looks like it's a bottom.

Can I guarantee that Venezuela is not going to blow up in the -- by the third quarter? Obviously not. And obviously, some NOCs that we have large exposure to, which is good exposure, good upside, have their own drivers. And that's the problem with the International business, where you're subject to the NOCs and their own timetables and how they do things. So when you look at Mexico, for example, they could decide for cash flow reasons or budget reasons or something to defer a project a quarter or 2.

I think the main point here you have to look at is the direction. I think the direction is all heading in the right direction here. And all the factors that support that are heading in the right direction. The fact is, unlike the U.S., where there's excess capacity of rigs internationally, as you know and you've heard this before from other people, in the Middle East, for example, incremental gas rigs, there is no -- there's very little excess capacity, so the market is pretty tight. And if there's an uptick, that should have an effect on pricing and you start to see pricing increase as well. So those are the reasons why. But I can't give you my firstborn, I'm sorry.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [27]

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Right. Happy to have your firstborn stay on your side.

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William J. Restrepo, Nabors Industries Ltd. - CFO [28]

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Sean, if you put the gun to my head and I have to say something, yes, I would say that it is a bottom. But again, like Tony said, there is some exposure in Venezuela.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [29]

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You guys have really raised the stakes at this call just now, both of you. I guess yes, that's helpful. I think really, Tony, what I am looking for is the context. And so is there more -- how much sizable risk is there in Venezuela? And I think the other piece that, I think, we have trouble from the outside, is how mix shifts among the rigs -- active rigs on a margin basis can have an influence quarter-over-quarter? Those are the points that I was trying to get better understanding around.

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

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Sure. I think you missed something when you looked at rig margin internationally because the mix shift can move even though the -- and EBITDA can go up. So I wouldn't get -- and that's why we've been very clear in what we said to you today that we think we're going to be in the low 90s. But I would not necessarily focus on average margin for that reason. The large platform rigs, for example, coming in and out of the fleet have a big effect on margin.

And because these are very large gas rigs compared to conventional 1,500-horsepower rigs, there's also a delta there, so I wouldn't get hung up on the margins. Because each of the markets internationally is basically a separate market. There's like 15 different markets with their own drivers. So you have to be at a higher level than that. And I'm saying when you cut through it all, on balance, we see that, yes, and there are headwinds in places like the countries I just mentioned, but on balance, we still think directionally, it's going in the right direction.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [31]

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Right. Okay, that's all fair. And we talked a lot about cash and your expectations there. William, how about on the balance sheet? If we're able to execute in terms of this cash generation in next several quarters, what are the latest thoughts around maturity cadence in the beginning of 2020, and how do are going to look to address that over time?

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William J. Restrepo, Nabors Industries Ltd. - CFO [32]

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So obviously, ideally, we'd like to refinance some of that using the capital markets and the bond market. And we are very focused on those markets and monitoring those to make sure that we don't miss an opportunity. Frankly, right now, even though our yields have gone down by over 400 basis points from the beginning of the year and we've made a lot of progress in that sense, I don't think the markets are -- although all of them are open, I wouldn't classify them as attractive right now. So -- but we will keep on monitoring and making sure that we don't miss an opportunity for refinancing. In the meantime, we have been paring down those sort of maturities using our cash balances and cash generated by the company, and we will continue to do so. Whenever we get surplus cash, we'll apply it to those early maturities. And once we see an opportunity in the bond markets, we'll probably go into the bond markets and refinance some of those early maturities.

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Operator [33]

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Our next question will come from Taylor Zurcher of Tudor, Pickering & Holt.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [34]

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Not to beat the International margin question into the ground, but just to follow up on Sean's question. If we think about the 7-or-so rig deployments that you have visibility towards over the back half of the year, Q2 and beyond, I know the Mexico platforms would be accretive to the mid-$12,000 a day margin that you're doing now. But is it fair to assume that those other 5-or-so rigs would also be accretive to that mid-$12,000 a day run rate?

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William J. Restrepo, Nabors Industries Ltd. - CFO [35]

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For the average of those, yes, it will be accretive.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [36]

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Okay. Okay. And then a follow-up just on the robotics business, and clearly, you have seen success with that technology in the North Sea. Is there any way to frame for us what sort of EBITDA or cash flow potential that business might have moving forward? I know it's a small piece today, but maybe on a per installation -- from a per installation perspective, how much EBITDA potential is that business is going to amount for you moving forward?

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

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I think it's too early to do that right now. I think let's get one of these out now and installed. In this way, we'll have a better idea of what our cost structure is, et cetera. But obviously, if this concept is viable, I think it gives people in the industry a new choice to move their redoing of their drill floors to a new level, and you could just let it (inaudible) I'll be in charge to those kind of packages. And we have to be at least at that order of magnitude -- level or more because the value this stuff creates in the market is fairly substantial if it's successful in the offshore market.

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Operator [38]

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Our next question will come from [Doug] of Howard Weil.

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Unidentified Analyst, [39]

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So I just want to make sure of a few things on the cash flow. So the way if I think about EBITDA to free cash flow, basically, what you -- if I'm not mistaken, what you guys are saying is, let's say, I take $205 million of EBITDA, there's no interest payment. There's maybe $100 million of CapEx, $5 million of dividend. And whatever is remaining, that should go towards reducing net debt. Is that where you're thinking about it?

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William J. Restrepo, Nabors Industries Ltd. - CFO [40]

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Yes. I mean the way we look at it, though, is we look at the last quarter and we have lined up in my script and in other comments that roughly $200 million worth of improvements versus the cash flow of the first quarter. And in addition to that, we have some working capital target -- reduction targets. So that's where we're coming from. We think we are going to be, just on the items that I mentioned, some $200 million better than the first -- than the first quarter. And then the remainder will come with some working cash flow improvements, which I didn't quantify, but we have some targets for the second quarter.

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Unidentified Analyst, [41]

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Okay. And anything that I need to think about SANAD, how that goes into or helps you guys from a cash flow perspective?

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

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Again, SANAD right now is sort of imbalanced. We are -- we have some significant commitments, which is part of the reason we're being very disciplined in terms of CapEx outside of Saudi Arabia. Because a lot of our CapEx commitments going forward are going to go towards ramping up our fleet in Saudi Arabia, which means we have to be more disciplined in other countries in the area.

So SANAD is just part of our targets, so the $400 million, $500 million of CapEx that we have. And we think SANAD will be nicely self-funding, despite the big ramp up of rigs that we expect to see in Saudi Arabia over the next 10 years. And then over time, and I think -- but it won't be before, I would say, 2022, then we'd start seeing significant cash flow outflows that's being generated by SANAD.

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Unidentified Analyst, [43]

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And last one, if I may, Schlumberger's announcement with Arabian Drilling Company, how does that play vis-à-vis SANAD? Is there any impact, any color that you can provide of how should we think about that?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [44]

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The transaction is consistent with the trend we see on the region of several rig fleets changing hands. We don't see the immediate impact on SANAD since Schlumberger's rig went to into region but not in the kingdom. It does change ADC, though. These rigs are not new to the market, but we don't really compete with ADC, of course, with SANAD, or we don't compete for IPM contracts with Schlumberger either. So we don't really run into them much. So I wouldn't say there's much of an effect at all.

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Dennis A. Smith, Nabors Industries Ltd. - Senior VP of Corporate Development & IR [45]

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Allison, with that, we'll end the call.

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Operator [46]

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Yes sir, thank you.

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Dennis A. Smith, Nabors Industries Ltd. - Senior VP of Corporate Development & IR [47]

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We want to thank everybody for participating. And if we didn't get your question, feel free to call us or e-mail us. Allison, you want to go ahead and close it out, please?

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Operator [48]

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Yes sir. Thank you. The conference has now concluded, and we thank everyone for attending today's presentation. You may all now disconnect your lines.