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Edited Transcript of NBR earnings conference call or presentation 23-Feb-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Nabors Industries Ltd Earnings Call

Houston Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Nabors Industries Ltd earnings conference call or presentation Thursday, February 23, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dennis Smith

Nabors Industries Ltd - Director, Corporate Development & IR

* Tony Petrello

Nabors Industries Ltd - Chairman, President & CEO

* William Restrepo

Nabors Industries Ltd - CFO

* Joe Bruce

Nabors Industries Ltd - President and CEO Nabors Canada

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Conference Call Participants

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* Chase Mulvehill

Wolfe Reasearch - Analyst

* Sean Meakim

JPMorgan - Analyst

* Marshall Adkins

Raymond James & Associates, Inc. - Analyst

* Blake Hancock

Howard Weil - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Nabors fourth-quarter earnings conference call. All participants will be in listen-only mode.

(Operator Instructions).

Please note this event is being recorded. I would now like to turn the conference over to Dennis Smith. Please go ahead.

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Dennis Smith, Nabors Industries Ltd - Director, Corporate Development & IR [2]

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Good morning, everyone. And thank you for joining Nabors' earnings teleconference to review our fourth-quarter and full-year 2016 results. Today we will follow our customary format with Tony Petrello our Chairman, President and Chief Executive Officer; and William Restrepo, our Chief Financial Officer providing perspectives on the result along with insights into our markets and how we expect Nabors to form going forward in these markets.

In support of these remarks, we have posted some slides to our website which you can access to follow along with the presentation if you desire. They are accessible in two ways, one, if you're participating by webcast, they are available as a download within the webcast. Alternatively, you can download the slides from the investor relations section of nabors.com under the events calendar sub-menu, where you'll find them listed in supporting materials under the conference call listing.

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

As much of our commentary today will concern our expectations of the future as they may constitute forward-looking statements within the meaning Securities and Exchange 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 its 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. Operating income, loss and free cash flow. 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.

I will now turn the call over to Tony for his prepared remarks.

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Tony 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 fourth quarter of 2016. First, I would like to discuss how Nabors is executing on our vision to be the global driller of choice. William will follow with review of our financial results. I will then wrap up and we will take your questions.

In November, we rolled out our 20/20 vision at our Analyst Day in Houston. In it, we unveiled some exciting new technology. We also detailed our plan to generate growing levels of free cash flow and dramatically improve returns on capital. While we are a long way from reaching our 20/20 goals, we have already achieved several key milestones in the last few months.

We are currently on track to meet these ambitious targets with continued focus and execution. First we have achieved 100% utilization on our industry-leading smart rigs. These rigs targeted primarily at lower 48 market go beyond super-spec pad outflow capabilities by leveraging the Rigtelligent operating system, they can deliver more efficient, more consistent results for our clients through the benefits of automation.

Next, we have made great progress in our Nabors drilling solutions division. The fourth quarter set new high watermarks for a customer penetration across multiple product lines. Customer acceptance of our technology solutions is increasing every day. I'll share a couple of examples that later in the call.

Finally we signed one groundbreaking joint venture agreement. Our joint venture Saudi Aramco will result in a best in class drilling company in the region. That joint venture is a robust platform for long-term growth in one of our most important markets. The foundation for its growth prospects is a highly capable national workforce which will also grow over time.

The joint venture will benefit in the coming years as Saudi Aramco transitions much of its current spending to in-country suppliers. This milestone highlights our unique international business and further positions us to succeed across multiple markets in scenarios, even in the case of volatility of US market.

To summarize, 2016 was a tough year financially as it was throughout the oil patch. But, during this challenging year, we managed to continue providing positive cash flow and we also executed several major strategic game changers.

Though we have to make many difficult choices over the last two years, we did not walk away from our crucial, long-term R&D initiatives. We introduced new technology to the oil field both the lower 48 and international markets validated our technology direction, and we built the framework for future profitable growth in the years ahead.

Now let's turn to our financial results. In the fourth quarter, Nabors generated adjusted EBITDA of $146 million on revenue of $539 million. This performance compares to $149 million and $520 million respectively in the third quarter. This marks the first quarter revenue has increased in 2 1/2 years.

Our fourth-quarter results reflect an acceleration of the rig activation trend, which we saw beginning in the second quarter. For the full quarter, our average rig count in the lower 48 increased sequentially by 29% compared to 13% in the third quarter.

More significantly, our average working count for highest spec PACE-X and PACE-M800 rigs increased by 41% with both rig types reaching full utilization. This outperformance indicates operator preference for the most capable and automated rigs currently in the market, a trend that continues today.

Our lower 48 customers increased their activity levels in the fourth quarter benefiting from growing confidence after the OPEC production cut announcement. We believe this increase reflects relatively stable commodity prices, continued efficiency gains both in service companies and EMPs and a favorable cost structure.

It's important to note, however, that while current margins are still well short of desirable returns, the trajectory for the highest spec rates is positive. We believe Nabors is best positioned to exploit this trend. Over 80% of our current working lower 48 rigs are priced at spot rates of relatively short durations. We expect have another 32 upgraded rigs ready to go to work over the next few quarters.

In our international segment, the net rig count declined by approximately 5 rigs in the fourth quarter. The largest impact was attributable to Algeria along with less significant declines spread across several markets. However, several rigs are starting up in the very near term in most of the same countries.

We commenced operations of our second Kazakhstan new-build rig in early January. We expect one of the offshore platform rigs to start soon in Mexico. Additionally, in the late fourth-quarter, we resumed operations on three rigs in Colombia with one more expected there this month. All of this bolsters our conviction that the international segment has bottomed and should exhibit growth in 2017.

Each market has its own unique demand drivers. We are capitalizing on our recovery in the hardest hit region of Latin America even while other regents continue to stabilize.

The pace of recovery on land appears to be proceeding modestly in the first half driven primarily by Latin America. Tendering activity points to a potentially more robust uptick in the second half activity in the Middle East, North Africa and Eurasia.

Now turning to our segment results. Let's start with US drilling. Financial results the US drilling segment improved as lower 48 activity increased. In the lower 48, the drilling business grew versus the third quarter.

The increased rig count more than offset the erosion in average margin. Our quarterly rig count improved to 64 average rigs working from 50 in the third quarter.

As anticipated, report of daily gross margin declined from $6,238 in the third quarter to $5,349 in the fourth. This decline was primarily due to the new contracts signed at spot rates signed below the average day rate for our fleet. We finished the quarter at 75 rigs on revenue in the lower 48 which has increased to 86 today.

Financial results in our international segment decrease modestly on an apples to apples basis giving favorable nonrecurring revenue in the third quarter. This decrease was primarily due to a net five rig decrease in activity along with an unusually large number of discrete maintenance projects in Saudi Arabia during the quarter. Reported daily margin in our international segment decreased by approximately $1,400 a day, which is about the level we expected a quarter ago.

Canada rebounded seasonally in activity at an average rig count only slightly below the fourth quarter of 2015 but that continued to improve in the first quarter. Nabors' total revenues for the quarter were up 4% sequentially. Worldwide rig activity increased to 177 average rigs on revenue in the fourth quarter from 164 rigs in the third quarter.

The activity increase was principally in the lower 48 and Canada, more than offsetting modest declines internationally. Consolidated adjusted EBITDA declined just 2% sequentially.

It is worth highlighting that adjusted EBITDA in our rig services segment, which includes Canrig and Nabors Drilling Solutions, contributed positive adjusted EBITDA in the fourth quarter for the first time in 2016. We're encouraged by the positive trajectory here and by customer adoption of many of the new technologies highlighted at our recent Analyst Day.

Next I will update you on several noteworthy developments since our last conference call. Our comprehensive rig enhancement program in the lower 48 is proceeding smoothly. When the program is completed, we will have a fleet of 100 of the highest tier 1,500 horsepower AC rigs all outfitted for the most demanding customer requirements today and in the future.

As of today, we have converted 11 Tier 1 rigs to smart rigs and completed 6 new PACE-M800 rigs, bringing the total of lower 48 smart rigs to 61. We expect to complete our goal of 100 smart rigs delivered and on contract by the end of this year. We continue to schedule our upgrade program around the higher than expected demand for several the rigs in our upgrade backlog.

Next we contracted the remaining two of our initial of tranche of six new-build PACE-M800 rigs prior to their completion in the yard. As of today all six of these rigs are operating in the field across various geographies.

Startup of these rigs has been quite smooth. They've enjoyed success with some of the most respected majors in large independents. The positive feedback an ongoing demand we have seen validates our strategy to keep improving our product offering even in the middle of a downturn.

Our focus on innovation does not stop with the rig itself. At our Analyst Day, we outlined our expectation that Nabors Drilling Solutions would reach $200 million to $250 million of EBITDA by the year 2020. We committed to providing more transparency and insight into our progress which starts today.

Our performance product installations increased by 25% from third quarter, with 26% of all installations on third-party rigs. Directional drilling jobs nearly doubled and have increased further this quarter. We are currently operating over 20 directional jobs.

Other services also showed strong improvement quarter over quarter with BOP testing and choke rentals also doubling. While NDS margins remain constrained we see some pricing traction emerging in subsequent quarters as the rig count marches higher.

The Q4 annualized run rate adjusted EBITDA for NDS was $10 million. We expect that the 2017 full-year EBITDA for this business will be a multiple of that number with continued quarterly progression.

We also recently announced the signing of an MOU with Weatherford. Our objective is to accelerate the achievement of our NDS financial goals and the adoption of our drilling solutions offering.

The agreement validates our vision of the smart rig, the rig is an essential platform to provide a wide range of value-added integrated drilling services. These services are currently offered by ourselves and by third parties with separate equipment and personnel.

Leveraging our NPD ready smart rigs, our performance software, and the augmented wetware system placement enables us to provide Weatherford's best in class capabilities clients. It provides Nabors with immediate access to Weatherford's NPD technology, LWD and multiple sizes of our rotary steerable tools and expertise. This ready access to NPD hardware, software and proven rotary steerable tools significantly accelerates the timeline for meaningful revenue generation for these services. I believe this alliance will help us accelerate the creation of a new integrated drilling model for delivering a drilled well to our customers.

Concurrently, we will continue development of our own proprietary rotary steerable tool. We expect our tool to become the low-cost solution for lower 48 drilling. Negotiations to formalize this alliance are currently proceeding. We expect them to conclude by the time of our next call.

Turning to international rig deployments, the first of two new rigs deploying to Kazakhstan operated successfully throughout the fourth quarter. The second rig went on rate in early January and we expect essentially a full quarter's contribution from it in the first quarter.

I will now discuss our outlook. While rig demand ultimately depends on commodity prices, operators in lower 48 add rigs at a rapid pace. We have visibility towards this trend continuing for at least the first quarter.

The global oil market appears to be moving back into balance with the recent OPEC production cuts even at a time of seasonally low global demand. We expect lower 48 demand to keep pace with our upgrade schedule.

In the US, customer interest has increased steadily across all major basins. We again surveyed the larger lower 48 customers following the beginning of the year. These represent over 25% of the total rig count in the lower 48. Of those almost 60% have plans to add rigs between now and June 30. None indicated a reduction.

More tellingly, the confidence indicated by our customers is evident in our continued increase in market share during the quarter. We have seven pending deployments in this quarter already under contract. In addition, we are in advance discussions on several others, though we are actively trying not to contract too far in advance of deployment given upward day rate trends.

As of yesterday, our rig count in the lower 48 currently stands at 86 rigs including 3 SCR rigs and 2 rigs stacked on rate. We exited the fourth quarter at 75 rigs in total including 3 stacked on rate.

For the first quarter, we expect lower 48 margins to decline. Before this decline to be more than offset on an EBITDA basis by an increase in average rig count. We expect sequential activity growth to slightly exceed that of the fourth quarter on an average rig count basis, from the $5,350 average daily margin reported in the fourth quarter, we expect a declined to roughly $4,000.

In international markets, some customers remain challenged by the current environment. Although we are now seeing activity increases in Latin America. In Colombia, the rigs that recommence work late in the fourth quarter will have an impact on first-quarter average rate count. Additionally, these rigs in Colombia have had their contract day rates restored.

In the Eastern hemisphere, we see some variation by customer. Our rig count in Algeria declined with the expiration of some contracts as did our Russian rig count. Our second new Kazakhstan rig commenced operations in early January.

We have commitments to put rigs back to work in Algeria along with Kuwait and Russia. Although we have seen some deferrals, we are processing multiple tenders across several markets and anticipating more.

In Saudi Arabia, we expect formation of the JV entity at the end of the second quarter. At this point, we intend to consolidate the JV's results which will result in the addition of rigs contributed by our partner, Apollo Formation. We are honored to have received this vote of confidence from Saudi Aramco, the world's largest oil and gas operator. We also expect that new builds contracted to this entity will provide upside to our Analyst Day forecast.

For our international segment, average rigs working total of 92 in the fourth quarter. Given current trends, and our outlook, adjusted EBITDA of $128 million should represent the trough for this down cycle. We expect the international rig recovery will likely be slower and more enduring than the lower 48 although at much higher daily margins.

To summarize, several factors could impact our results in the coming quarters. First US customers are adding rigs at a rapid clip that has exceeded most observers' previous forecast quite frankly including ours. We will likely need to see a move above $55 per barrel of WTI to sustain the current pace of rig-additions beyond the first quarter. However, we remain confident that current trends along with the rebalancing of the oil market, are sufficient to take in our operator and limited new-build plan for 2017.

Rig costs make up just 10% plus or minus of the overall well cost including completions. Given this, the day rate inflection we have seen to date does not have a significant impact on the cost threshold for our well. But our costs for reactivating rigs, including moves, hiring and training crew as well as rebuilding inventories impact the fourth quarter results. We expect these costs will likely impact the first quarter as we put more rigs back to work.

Second, our international segment encompasses a number of different dynamics that vary by region and between NOCs and IOCs. We expect our rig count to move gradually higher in the first half and have some visibility to a more meaningful inflection in the second half of the year with outstanding tender activity. As is the case for the US, expanded customer plans are predicated upon commodity prices and the lower cost that this market has afforded them.

The unique value for our international franchise and the growth opportunities it generates sets Nabors apart from peers who depend more heavily on the US. Third, while the Canadian market has rallied seasonally to a much larger degree than last year, margins remain compressed.

We expect first quarter activity to increase seasonally from 13 to a 20 rig average. Finally, our backlog at Canrig nearly doubled during the fourth quarter to the highest level of 2016. This backlog is split roughly evenly between Nabors and third party customers.

With the turning of the rig cycle and the return of rigs deeper in the stack, Canrig's customers must re-certify and can no longer cannibalize older equipment. Equipment and systems manufacturing has been especially hard-hit by the downturn and we expect that this increased backlog will lead to a return to positive EBITDA at some point in 2017.

This concludes my outlook comments. Before I turn the call over to William for his comments, I would like to reiterate that cash generation and capital discipline remain top priorities and primary areas of focus. While William will provide detail, I would like to note how pleased I am with the success of our two recent unsecured debt and convertible offerings. These provide us with extensive liquidity, extended term and lower cash interest going forward.

I'm especially proud of the convertible deal, which priced at an interest rate of just 0.75 points and an effective premium of 75%. We believe that the yields at which all of our bonds are currently trading are a much more accurate real-time indicator of our financial strength than our current credit ratings.

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

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William Restrepo, Nabors Industries Ltd - CFO [4]

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Good morning, and thank you for joining us today. Our fourth-quarter performance was driven by several market related factors. Essentially a continuation of what we seen in the third quarter.

First, a strong sustained recovery in the US lower 48 with material spot pricing improvements, though still below the average day rate for a fleet. Two, a brisk rebound in Canada at an even faster pace in the US. Three, as anticipated, a modest reduction in our international rig count into the fourth quarter. Finally, increasing market penetration of Nabors Drilling Solutions with not only sequential drilling improvement, but also an increase over prior year levels in the face of a lower rig count.

Now to our financial results. Fourth-quarter net income from continuing operations was a loss of $331 million or $1.17 per share, as compared to a loss of $99 million or $0.35 per share during the third quarter. The fourth quarter loss included $245 million net after-tax charges primarily from massive impairment in other charges related to strategic initiatives. Excluding those charges, the fourth quarter loss was $86 million or $0.30 per share.

Revenue from operations for the fourth quarter was $539 million as compared to $520 million in the prior quarter, a nearly 4% improvement. Increases of $33 million in US drilling, $6.5 million in Canada and $4.7 million in rig services more than offset a $40 million decline in international. The US drilling revenue increased by 28% to $149 million, reflecting 29% higher rate count in the lower 48, along with a full quarter from our CDR3 rig rate and generally high revenue in Alaska.

Lower 48 revenue increased by 24% as the rig count increase was partially mitigated by a $700 reduction in revenue per day. This reduction was driven by the large number of new contracts and renewals signed at average spot rates that are somewhat below the average day rate for a fleet.

International revenue was $343 million, down 5.6%. The fourth quarter benefited from demobilization revenue of $7 million as compared to $12 million of favorable items in the third quarter related to Mexico and Yemen.

Excluding those one-time items, international revenue fell on a sequential basis from the idling of rigs in Algeria and Russia. These declines more than offset gains in Columbia.

Also of note in the fourth quarter was lost revenue in Saudi as we faced an abnormally high number of equipment recertification's during the quarter. We expect to finalize this maintenance exercise during the first quarter of 2017.

Canada revenue increased by 62% to $16.9 million, driven partially by the normal seasonal increase in rig count, but also by a strong turn of the cycle which has also improved pricing. Our Canadian rig count improved sequentially by 51%, our revenue per day was $973 higher.

Rig services revenue continued higher in the fourth quarter, reaching $53.7 million for an 8% sequential increase. Although Canada grew by 3%, this segment benefited primarily from growing customer demand for NDS products and services. NDS revenue reached $17.6 million, yielding 25% growth.

Our reported operating income improved slightly to a loss of $17.2 million from a loss of $72 million in the third quarter. The fourth quarter included approximately $4 million in demobilization margin as compared to $12 million of one-time operational gains in the third.

Adjusted EBITDA for the quarter was $146 million, as compared to $148.7 million in the second quarter. The previously mentioned exceptional operational items provided a net benefit of $8 million in the third quarter over the fourth. The sequential reduction in EBITDA was driven by a $20 million decrease in international largely offset by increases of $12 million in US drilling, $5.2 million in rig services, and $2.5 million in Canada.

The drop off international reflected the lower one-time items mentioned before. As well as the lower average rig count and the Saudi lost revenue.

US drilling improvement came from higher rig count, despite a material daily margin reduction and from the strong results in Alaska. Rig services benefited primarily from a healthy progression in Nabors Drilling Solutions.

NDS adjusted EBITDA reached $2.3 million for the fourth quarter, or 13% EBITDA margins compared to negative EBITDA in the prior quarter. SG&A which includes our research and engineering expenses was $61 million for the quarter, down $3 million sequentially.

For the full year, our SG&A reached $261 million as compared to $326 million in 2015, a 20% reduction. Although we will continue to focus on optimizing our overhead expenditures during 2017, we expect our first quarter compensation to increase somewhat in line with salary increases, after freezing their level since our last raise at the beginning of 2014. In addition, burden rates for compensation normally increased on January 1, to account for the reset of payroll taxes, target bonuses and 401K match.

Financial results for the quarter included $237 million in after-tax charges, primarily reflecting losses from fixed asset impairments, demobilization of idle equipment and yard closures. The majority of these charges were at $161 million derived from our 1,000 horsepower AC rigs many of which were built around a decade ago.

We also retired certain of our lower 48 SCR rigs resulting in a $60 million after-tax charge. However, we have not written off these asset classes entirely and see continued customer demand for both of them across numerous basins. As of yesterday we had nine 1,000 hp AC rigs and three SCR rigs working in the lower 48.

Let me turn to the main drilling rig business metrics from the fourth quarter. First, the US drilling business. Our lower 48 average rig count increased to 64 for the quarter, a 29% increase over the prior quarter. Our rig counts stood at 75 at the end of the fourth quarter as compared to 53 at the end of the third quarter and to 86 rigs as of yesterday.

While the Permian has been the strongest region, our increases in rigs have been widely based geographically and have reflected our customers' preference for the highest spec rigs currently available. Both our PACE-X and our PACE-M800, as well as our upgraded rigs, are currently 100% utilized. We expect to have 100 high spec rigs available and working before the end of 2017.

Drilling margins for lower 48 fell by $900 per day to $5,350. The reduction reflected a $700 per day reduction in revenue per day and a $200 per day increase in daily operational expenses.

However, compensation costs were essentially low at year end as we reduce fourth quarter written rates to match year-to-date cost. We expect compensation per day to increase during the first quarter as we reset for new rates.

Also as we continue to bring our rigs back up, we have and will continue to experience, increased costs of rig moves, early compensation before revenue starts and incremental maintenance costs including the build up of spares, inventories on rigs. Although we have manage this process well, the geographically uneven pace of growth will result in progressively higher rig move costs as we move assets from areas of lower utilization to faster growing basins.

In our international segment, fourth-quarter rig count averaged 92, down from 97 in the third quarter. The reduction was primarily in Algeria in Russia, while two rigs went back to work in the fourth quarter in Columbia. We believe our rig count has bottomed in the fourth quarter, although we expect to drop several workover rigs in Argentina with essentially zero margin, we also expect to see growth in Latin America, Kazakhstan, Russia and Kuwait, as well as in Algeria.

Daily margin for international decreased from $18,400 in the third quarter to approximately $17,000 in the fourth. Gross margin on a material demobilization was offset by downtime related to the maintenance project in Saudi Arabia. During the fourth quarter, as we conclude this maintenance program, we shall see a similar level of downtime.

Now let me make a few comments on our liquidity and cash generation. First, our financial transactions. Last November we closed a tranche of $600 million senior unsecured debt of 5.5%, 6-year senior note, maturing at the end of 2023. The note earning initial step in restructuring a debt maturity profile. The proceeds were used to repay earlier maturing debt.

The opportunistic transaction took advantage of a favorable market window. The coupon compares very favorably to our historical cost of debt.

In January, we executed on a $575 million convertible bond with a coupon of 0.75%. This 7-year note carries an exchange premium of 40%, which equates to a future stock price of $25.16. Simultaneously, we entered into cap call transactions to protect against dilution up to a 75% exchange premium or a $31.45 stock price.

As was the case with the senior notes, this transaction was opportunistic. We waited for an ideal market window of high convertible demand and executed at a time when our share price was just under its most recent highs. The robust demand we received from investors coupled with the strong performance we've seen from both securities in the market since they began trading, indicates confidence in Nabors as investment-grade entity. These two transactions helped us materially push out $1.1 billion in debt maturities.

CapEx for the fourth quarter was $161 million and $422 million for the full year, significantly below our initial $500 million annual target. For 2017, we expect CapEx in the range of $550 million.

Our maintenance CapEx will increase in-line with the significantly higher rig count in the US and Canada. We will also complete our smart rig upgrade program and seven new-builds in the pipeline, for which the majority of components have been purchased in 2014 before the start of the downturn.

The earlier than expected rebound in Canada will be addressed with low-cost upgrades in 2017, as compared to essentially no CapEx in the prior year. Finally the rapid market penetration of our NDS product line should require us to add more equipment than initially anticipated.

Despite increased working capital requirements as result of higher revenue, we ended the fourth quarter with net debt of $3.3 million essentially flat with prior quarter and our $2.25 billion revolver was fully available at the end of the year. For the full year in addition to over $50 million distributed in dividend, to paying premiums and debt buybacks and to incurring bond issue fees, we reduced net debt by about $100 million. In fact, we kept the commitment we made to our investors of remaining pre-cash flow neutral to positive.

Looking to the future, the recount trajectory in the lower 48 has led to some level of pricing traction for high spec rigs. And assuming oil prices stay around $55 or higher, we would expect additional increases for at least the first half of the year. Our latest contracts for high spec rigs have been signed at $18,500 to $19,000 per day.

Again absent a negative oil price surprise, we expect to average roughly 80 or 85 rigs in revenue in the first quarter with an upward slope in toward the period. As a reminder, we had 86 rigs on revenue in the lower 48 as of yesterday.

Average margins are expected to deteriorate to the $4,000 per day range, as our average revenue per day falls in the first quarter versus the fourth. We also expect the reset of the compensation burden to cost us $300 per day and rig move and startup costs to account for another $300 to $400 per day in on a fleet-wide basis.

Our international rig count should have bottomed in the fourth quarter and is currently beginning a gradual recovery. With a slight increase in activity and margins in the $17,000 range, we would anticipate our international adjusted EBITDA to improve in the first-quarter by no more than 5%.

Assuming the weather helps, and March rig count remains constructive in Canada, we expect average rig count at close to 20 rigs for the quarter with that margins similar in the lower 48. Alaska should fall significantly as rig count has already dropped by one rig and more could follow. US offshore will likely decline somewhat with the one rig that occurred in lower fourth-quarter and no prospects for near-term recovery. And finally, rig services should continue to improve primarily from continued growth in Nabors drilling solutions as these services continue to benefit from our higher rig count and better market penetration, particularly in well bore replacement and performance software.

With that, I will turn the call back to Tony for his concluding remarks.

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [5]

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Thank you, William. I want to conclude my remarks this morning with the following summary. The lower 48 market has increased dramatically in recent quarters and our highest spec smart rigs have reached full100% utilization. In the international business, we expect our rig count to increase gradually in the first half of the year and begin accelerating higher by midyear.

I also want to note two things. First, we expect average rig margins in the lower 48 to trough for the first half of 2017. On the average, current spot rates, though moving higher, remain lower than the average day rate of our fleet.

Additionally, the upfront cash required to crew up and bring rigs back to service presents us with a headwind. Nonetheless, it's important to continue placing our rigs into the market while staying short on duration. This preserves our ability to increase prices in the near future as utilization warrants.

Second, we are dedicated to providing more value per dollar to our customers even while day rates increase. Our new rigs, systems, and equipment provide higher rates of penetration, enhanced resource recovery, and perhaps most importantly, increased performance consistency.

Despite the discussion of shale drilling transitioning to a manufacturing process over the last few years, there's still tremendous variation in performance across many aspects of the drilling operation. Our aim is to reduce this variance to within top decile of current performance across all operations and make shale drilling a truly predictable, consistent manufacturing process.

While we maintain our focus on execution in this early recovery, we also want to reflect on the lessons of 2016. Our extreme focus on cash generation led us to take many difficult steps but has also maintained our financial strength and liquidity. One step we did not take was to shut down our R&D program for the benefit of short-term cash flow.

Rig four automation and downhole integration are essential to the future of the industry. Drilling contractors who embrace and conquer these challenges we believe can add tremendous value to their customers and break free of the dumb iron legacy portrayed by some technology providers. We believe the smart rig pared with our NDS technology is a key platform to provide the safest, most efficient, most cost-effective drilling solutions to our customers.

The accomplishments of 2016 and the further initiatives we have underway, give us confidence we have the right path toward achieving this vision. As always, I look forward to updating you on our continued progress going forward.

This concludes my remarks this morning. Thank you for your time and attention. Without I will take your questions.

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Questions and Answers

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Operator [1]

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We will now begin the question and answer session.

(Operator Instructions)

The first question comes from Chase Mulvehill at Wolfe Research.

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Chase Mulvehill, Wolfe Reasearch - Analyst [2]

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Good morning.

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [3]

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Good morning.

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Chase Mulvehill, Wolfe Reasearch - Analyst [4]

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Good morning, Tony. I'll start on international. Could we talk about cash margins a little bit? I think if I heard you right, $17,000 per day is kind of what you're expecting for cash margins in the first-quarter.

Can we talk about you know -- can you confirm that? And then what you see cash margins as we kind of go into Q2 into the back half of the year?

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [5]

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I think cash margins -- yes, definitely would be above where they were in the fourth quarter. There's a mix in rig count in the first-quarter that will be roughly the same average rig count as in the fourth quarter. We mentioned that we had rigs coming down, we have rigs coming up this quarter.

There's a couple workover rigs that William alluded to. But the mix in change of rigs is actually improved. So I think the net is expected of 2 1/2 to 3 increase if three -- drilling rigs account for the third -- first quarter. The next change is I think the margin will improve.

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Chase Mulvehill, Wolfe Reasearch - Analyst [6]

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Okay. All right that's helpful. And so for the Argentina workover rigs, how many of those go down?

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [7]

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Two or three.

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Chase Mulvehill, Wolfe Reasearch - Analyst [8]

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Two or three. And you have a total of 12, if I remember correctly? Is that right?

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [9]

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That's correct.

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Chase Mulvehill, Wolfe Reasearch - Analyst [10]

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Okay. All right. Last one and I will turn the back over. Could you talk about you know how you're thinking about M&A and acquisitions in this market?

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [11]

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I think -- I think they're difficult. I think we've looked at them. A number of other companies and most of transactions out there frankly, are not accretive in terms of asset acquisition to where we want to go with the asset quality.

And therefore it's hard -- it's hard to justify paying, especially for public company deals, a premium price to something when the assets you're requiring are actually less -- are priced more than replacement cost. Given our intention of having comprises new platform which the call the smart rig, it's hard to see you know deals can work.

Obviously deals that bring synergies or customers, we're always looking at every possibility there. On the other hand, I think there could be some acquisition opportunities. Two things that would fold into the NDS portfolio of services, we're open to that.

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Chase Mulvehill, Wolfe Reasearch - Analyst [12]

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Okay. That's helpful. I'll turn it back over. Thanks, Tony.

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [13]

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Let me just add one further comment. I think it was inspired by your write up actually. In terms of our press release being the rate as pricing goes, the commitments for new-builds, I think the press release said 9 out of 10 community new builds were in the low 20s.

I think it's more accurate to say the average rate of those nine where in the low 20s. Two of that group were in 2016 when the market meaningfully less than 20,000. So I just want to clarify that.

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Chase Mulvehill, Wolfe Reasearch - Analyst [14]

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Okay, thanks.

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [15]

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Yes.

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Operator [16]

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The next question is from Sean Meakim, JPMorgan Securities.

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Sean Meakim, JPMorgan - Analyst [17]

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Hi, good morning.

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [18]

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Good morning.

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Sean Meakim, JPMorgan - Analyst [19]

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So we have another step down in the first-quarter for US margins, transitioning costs go from negative mix on the day rates. I think you noted that in the prepared comments first half of market bottom to margins, just was curious how confident you could be in a Q1 bottom or another way of saying this is, how much risk you think there's at this point for another material step down in Q2 or are the two fairly, in your model today fairly similar?

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [20]

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Okay. William.

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William Restrepo, Nabors Industries Ltd - CFO [21]

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So basically it is pretty certain that we'll see a reduction in the first-quarter of course. We basically -- we have been signing contracts at the end of last year and early this year. And all the way between the $17,000 and $19,000 range.

And our average day rate is higher than that. So obviously we expect to see some reduction in average revenue per day in the first-quarter. We quantify this roughly $700 per day. We've think there's some positive impacts going forward in terms of cost, as we utilize the structure more efficiently when adding rigs.

However in the near-term, that's more than offset by bringing in new rigs. Sometimes those rigs need to be moved from certain areas to other areas. And we have to build up the spares inventory and the rigs and so forth. So we think that those will get us in the first quarter and that's why brought up those items.

I think in the second quarter, the erosion in our day rates will be much mitigated. I don't see a huge impact in the second quarter. If anything, we will see potentially some improvement. So that's why we think in the second, we will have trough in the first-quarter, and in the second we expect able to increasing improving margins.

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Sean Meakim, JPMorgan - Analyst [22]

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Got it. That's helpful. Thank you for clarifying that, William.

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [23]

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The other thing I would add to his comments is, about two thirds of our rigs are on terms less than six months. So as the market moves to these higher rates we have an opportunity obviously to push them up you know fits with the market. But two thirds of the portfolio today is less than six months which was deliberately structured for this --

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Joe Bruce, Nabors Industries Ltd - President and CEO Nabors Canada [24]

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Within petrol leaks.

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [25]

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And many of them are also well to well. That gives us further opportunity.

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Sean Meakim, JPMorgan - Analyst [26]

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Got it. Okay thank you. I guess that leads to my next question on the day rates. So the data points you gave us, sounds like leading edge for super-spec you put call it $18.5 million to $19 million. And then you've got some new builds in the low $20 millions roughly.

Just curious if you're seeing any significant variance by basin, the customer mix these days, in terms of the small folks versus the larger integrateds or large independents. Just trying to get a better sense of the mix of what you're seeing out there in terms of what's driving changes in day rates?

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [27]

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Yes, well first of all in terms of the driver of activity, obviously we've seen the biggest changes in the Permian and South Texas and East Texas and mid-con. And interestingly we're now starting to see East Texas and North Dakota as places for incremental activity.

I'd make a few comments here, the first one is you're correct about the rates, I think it's also the case that our new smart rigs should command close to the same numbers of new builds because the smart rigs are going to be the leading edge rig. And there really no difference between a smart rig and a newbuild today that are being outfitted.

And so the way I would describe it in terms of those newbuild, I think the rig today that will go to work in June or so, you look it above $20,000 or above as opposed to the number you are talking about. The rigs today, that are working today are obviously set as a result of prior discussion so that should probably make some sense there.

In terms of the Delta, I think it's the case of the mid-con rates are actually a little higher and North Dakota is a little higher than South Texas and actually even a little higher than West Texas. So that's what I'd describe it.

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Sean Meakim, JPMorgan - Analyst [28]

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That makes sense. Thanks guys, I appreciate it.

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Operator [29]

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The next question is from Marshall Adkins, Raymond James & Associates.

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Marshall Adkins, Raymond James & Associates, Inc. - Analyst [30]

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Hey guys, thank you all for the helpful comments starting out. Clearly your market share gains in the past even two months, have been much faster than the overall market's improving.

Is it just because you have more the super spec rigs available or are there other things playing into that, such as you're smart rig or packaging with the NDS or something that we can't see from the outside that's driving your utilization up a lot faster than the rest of the industry?

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [31]

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That's a great question. Actually, I'd tell you it's a multi-pronged answer, Marshall. The first is, I think it's becoming clear that our rig design technology is second to no one and we actually believe we're setting the pace for the agenda.

We actually have dialogue with customers and uniformly we've been receiving praise for the technology initiatives in terms of their rigs Nabors is doing. So that's the first point. The second point is, I think our crews -- we did an excellent job retaining our best crews during the downturn and they're the nucleus of the rigs coming back to work.

Even in the downturn we had another record safety year this year, for example. All these crews are coming back. I think the customers have great confidence in Nabors in the upturn here the sense that the nucleus of these rigs at least are the best in class people we left and they are forming the center of the estimate of the new crews maning these rigs going up.

The third thing I would say is the KPI information, which related to the information of the new systems that you alluded to that we have today. I think our KPIs and information about rig performance that we are making available to operators is unparalleled. I think it's part of our initiatives of not hiding the ball and being proactive on attacking areas of improvement and we're gaining a lot of momentum in that regard of just building a culture of performance and that really embraced by the operators.

And we are telling them things they really didn't know about, invisible downtime, where it's come from etc. That's one part of our new systems on the smart rigs.

And finally I'd say, the customer attitude about Nabors. I think there is hopefully a mind shift all around doing Nabors is more of a solutions provider.

We're looking for customer base that can take advantage of the full range of NDF services that we bring to the table and that US is a value-added partner, solution partner as opposed to a commodity rig provider. I think all those things are combining to make us a different proposition than we've been historically. It's a multi-prong strategy, Marshall.

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Marshall Adkins, Raymond James & Associates, Inc. - Analyst [32]

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The obvious follow-up for that is you all did a heck of a job in your Analyst Day showing your version of the rig of the future as we are starting to call it. Where do you see the competitive landscape for the type of thing you're doing?

Is anyone else even close to you in terms of providing that? Help us understand where the composition stands.

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [33]

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I would assume NOV is out there doing something with upgrading their ideal rig and trying to take their offshore technology and put into a land rig. I think there's no question the technology to do factory drilling exists. And [assorted] places, but we package it to be cost effective on land is the key.

And I think one of the differentiators of Nabors' strategy is this smart rig platform that were creating, will be able to be the rig of the future. Each one of these smart rigs was designed as I mentioned of the Analyst Day, four years ago with the view that there with this last stage of the last mile completed the last mile would be with the four automation. The rig is all set up to accommodate that.

So instantly when we make this available in scale we were be able to roll it out. I think no one else has that. And even if our leading service company competitor in spaces also, the value of the future, once they design it, they have to build them. They have to build 100 of them.

Where as today we already have100 rigs that we can just retrofit in the time-to-market will be -- a lot shorter. So from that point of view, I think we are in a unique space from a technology point of view, I think we have all the ingredients and as you saw at Analyst Day, we had the prototype of the Iraqer. We're shaking it down.

We are actually making some changes to it. And we will start in the second half with getting some customer sponsors of it. And like we said, our goal is by the end of the year to be commercial with the prospect of scale. On the NDS services side, that aspect of it, again -- as far as we know, there's not other people thinking about it is what we think about.

I think frankly, the school's out for everyone whether this (inaudible) are putting the NDS services in the rig makes sense. I think some of our competitors don't believe in it as a strategy. And don't think operators are that open to it or it's too hard, etc.

It's really incumbent on us to make sure the strategy works and to prove it up. I think I'm encouraged by the fourth quarter numbers as you heard NDS is gaining traction and in terms of penetration on the rigs, we are making progress there. So we have to make sure we push the numbers and that's what the mission is.

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Marshall Adkins, Raymond James & Associates, Inc. - Analyst [34]

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Thank you.

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [35]

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Thank you.

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Dennis Smith, Nabors Industries Ltd - Director, Corporate Development & IR [36]

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Given the time here we will a longer the prepared remarks than usual. Let's just take one more question in we'll wrap up.

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Operator [37]

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Okay, the last question is from Blake Hancock.

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Blake Hancock, Howard Weil - Analyst [38]

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Thank you. Good morning, guys. Tony, last quarter you talked about international EBITDA of at least $500 million and clearly that seems achievable here given the commentary for 1Q. I wanted to see if you'd go as far as talk about full-year? Do think you can be flat to up with what you did in 2016, let's call it $575 million. Does that seem ballpark ish or duel achievable giving the second half ramp you're discussing?

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [39]

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I don't want to go out on a limb here but we noted the comments by other people in the international market space that, things are actually going to be down. In our view right now is if things continue the way we see them, we actually think we'll meet that. That we will be up.

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Blake Hancock, Howard Weil - Analyst [40]

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That's great. I appreciate it. And then also going back to kind of the daily commentary on the new builds and what we're seeing in the low $20,000 per day. Is any of that attributable to NDS in that day rate or is that purely just the rate of the rig?

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Tony Petrello, Nabors Industries Ltd - Chairman, President & CEO [41]

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That's an important point you're making I'm glad you brought that up. The NDS that excludes NDS and the NDS is in the rig service's line of the P&L that we're talking about. So those numbers aren't in there at all as compared to some of our competitors in their rig day rate they put revenue that's non-rig stuff and other stuff. All that's separate out.

All that other stuff I'm talking about is add on. That $10 million that we said -- a run rate in the fourth quarter for, for EBITDA annualized for NDS in the fourth quarter. And that by the way is after SG&A, that's all per rig margin not in our day rate. Absolutely.

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Blake Hancock, Howard Weil - Analyst [42]

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That's great. I appreciate it, guys.

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Dennis Smith, Nabors Industries Ltd - Director, Corporate Development & IR [43]

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Amy that will conclude our call today. Thank you ladies and gentlemen for participating. I apologize for the short Q&A session but if you have any further questions, just give us a call or better yet email us. Thank you very much.

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Operator [44]

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