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Edited Transcript of NBR earnings conference call or presentation 27-Feb-19 4:00pm GMT

Q4 2018 Nabors Industries Ltd Earnings Call

HAMILTON Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Nabors Industries Ltd earnings conference call or presentation Wednesday, February 27, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony G. Petrello

Nabors Industries Ltd. - Chairman, President & CEO

* Dennis A. Smith

Nabors Industries Ltd. - VP of Corporate Development & IR

* Siggi Meissner

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

* William J. Restrepo

Nabors Industries Ltd. - CFO

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Conference Call Participants

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* Chase Mulvehill

BofA Merrill Lynch, Research Division - Research Analyst

* Gregg William Brody

BofA Merrill Lynch, Research Division - MD

* James Marshall Adkins

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

* Kenneth Irvin Sill

SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst

* Marc Gregory Bianchi

Cowen and Company, LLC, Research Division - MD

* Scott Andrew Gruber

Citigroup Inc, Research Division - Director and Senior Analyst

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Presentation

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Operator [1]

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

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

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Good morning, everyone. Thank you for joining Nabors Fourth Quarter 2018 Earnings Conference Call. Today, we will follow our customary format with Tony Petrello, our Chairman, President and Chief Executive Officer; and William Restrepo, our Chief Financial Officer, providing their perspective on the quarter's results along with insights into our markets and how we expect Nabors to perform in these markets.

In support of these remarks, a slide deck is available both as a download within the webcast and in the Investor Relations section of nabors.com. Instructions for the replay of this call are posted on the website as well. With us today, in addition to Tony, William and myself, are Siggi Meissner, President of our Global Drilling Organization and other members of the senior management team.

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

Also, during the call, we may discuss certain non-GAAP financial measures such as adjusted operating income, EBITDA and adjusted EBITDA. All references to EBITDA made by either Tony or William during their presentations whether qualified by the word adjusted or otherwise mean adjusted EBITDA as that term is defined on our website and in our earnings release. We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures.

Now 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 fourth quarter and full year results for 2018. Before discussing the results, I would like to comment that 2018 was a year in which Nabors continued to make significant progress towards its longer-term goals. We strengthened our U.S. fleet, which now accounts with about 100 superspec rigs operating at peak efficiency and attracting the most demanding customers. About 35% of our U.S. fleet has been contracted by majors. Our daily margins in the Lower 48 reached $9,400 in the fourth quarter with year-end exit rate approaching the $10,000 mark. In addition, the U.S. offshore and Alaska markets have started to recover with additional rigs working. In the Gulf of Mexico, the MODS 400 rig, the largest rig in our global fleet, commenced operations on its initial 5-year contract.

NDS delivered excellent results. We closed the year with $23 million in EBITDA, a $92 million annualized run rate almost matching our goal of $25 million for the quarter. This run rate represents 83% growth as compared to the prior year's fourth quarter. We are particularly encouraged by the successful integration of Tesco's casing running business, the acceleration and the growth of our performance software and the additions to our wellbore placement suite of downhole tools.

In wellbore placement, we have established our AccuLine suite as a high quality fit-for-purpose offering in the market, and we have had multiple, successful commercial runs with our rotary steerable tool. And in the fourth quarter, we added logging while drilling capabilities with the targeted acquisition of PetroMar.

Our automation initiatives have also made significant progress, specifically in tubular services and pipe handling. In addition, our Canrig robotic systems delivered its first automated product to an offshore driller.

International continues to be meaningfully contribute to our cash flow generation. Our average rig count increased in 2018 over 2017. We achieved this growth even after selling the jackup rigs in Saudi Arabia and the workover rigs in Argentina. We have strengthened our relationship with the largest NOCs, including our JV partners in Saudi Arabia and remain poised to capitalize on anticipated growth during 2019. Nonetheless, the International drilling market has lagged other segments. Pricing has not improved in most markets. Although the drilling rig count has increased, the additional volume fell short of our expectations. Opportunities to deploy large newbuilds on attractive terms still have not materialized at this point in the cycle.

Rig Technologies continue to support all of our segments through the delivery, repair and certification of equipment. Third-party unit sales of rig components doubled last year, including the integration of Tesco products into our portfolio. The rig technology segment results include substantial funding of 3 commercial technology initiatives for our rotary steerable system as well as robotic tooling system. Although Rig Technologies results are burdened by these costs, we expect these investments to positively impact results later this year.

Finally, and even more importantly, we delivered on our commitment to our shareholders of breakeven cash flow generation after dividends for 2018. This was a challenging objective given the slim margins at the beginning of the year, coupled with the ambitious rampup in activity we expected to deliver last year in the U.S. and internationally.

Finally, at the same time, we upgraded a significant number of rigs to superspec stays in Lower 48 market. We closed the year at $3.1 billion in net debt. Our equity issue in May of 2018 went solely to reduce our leverage, and we remain committed to further reducing our debt by $200 million to $250 million during 2019.

Now let me discuss our view of the market. The U.S. Lower 48 land rig count last week stood at 1,026. That compares to 1,029 at the end of the third quarter, an average of 1,048 during the fourth quarter, 1,056 at the end of 2018 and 1,025 at the end of January.

The fourth quarter was marked by tremendous volatility in oil prices, especially in the latter portion of the quarter. Given the existing contract terms and drilling plants, the industry rig count was relatively more stable as we would expect. Since the end of 2018, the industry rig count has eroded by 30 rigs, as the number of customers have elected not to renew their expiring contracts. At the same time, majors and larger independents have stepped in with commitments to take on the available superspec rigs, return rigs have been quickly signed up for new contracts. The incremental churn in contracts with some idle time between customers has resulted in a slight decrease in utilization for the larger drilling contractors. While many operators are still formulating the drilling plans for 2019, we believe the recent rebound in oil prices offers support even for the more cash flow dependent companies.

Nabors worldwide customer base is heavily tilted toward NOCs, IOCs and major independence. We are not immune to pressure from commodity prices, drilling activity in our customer base has typically been resilient. We see this resiliency in the U.S. reflected in our Lower 48 customer survey. As in the past, we surveyed our top 20 Lower 48 customers, which account for 36% of the Lower 48 industry rig count. The results of our most recent survey, which took place earlier this year, are more mixed that we have seen in recent quarters. On balance, the survey indicates a modest net reduction among these 20 operators. This includes large plant declines and 2 respondents, partially offset by increases in several others. This same survey of 20 customers accounts for about 60% of Nabors working Lower 48 fleet. As of the beginning of the year, we have signed contracts for 9 additional deployments with a couple of them.

With respect to our fleet, at this time, we expect little impact from the indicated declines. Our penetration of those couple of companies is very light. This outlook confirms our focused approach to customers and their growth prospects. We are fielding several requests from clients, awaiting superspec rigs. This leaves us to believe our rig count will grow in 2019 assuming WTI remains in a constructive range.

What's behind this picture? In the U.S., our Lower 48 customers are largely in manufacturing mode as they develop their resources. They realize significant efficiencies by maintaining continuity in their operations. The steep drop in oil prices in the fourth quarter, no doubt causes a reevaluation of capital spending plans, but as the survey indicates, at this time, most of our customers are maintaining prior plans. This is in line with the longer-term strategies, particularly in view of the recent rebound in oil prices.

Within the industry rig fleet, the most capable rigs continue to see the strongest demand, and pricing on those rings as we made intact. We could see weakness in less capable rigs where price competition has traditionally been more aggressive. We also see operators based primarily on performance, taking advantage of market churn to upgrade their rigs. We are currently fielding several inquiries to replace incumbent rigs.

In our International markets, we see much less reaction to the commodity price volatility. This is consistent with the typical operating cadence within our NOC customer base. Within the non-OPEC universe, which were Nabors is largely Latin America, we expect gradual tightening in those markets as excess capacity has been absorbed. We see opportunities emerging in the Middle East, Kazakhstan, Algeria and Russia as well.

During 2018, contracts for several high-margin rigs expired. These contracts were for new build rigs and included upfront payments, which are typical in International markets. The expiration of these contracts has a negative impact on our segment margins. The good news for Nabors is that International market pricing has stabilized. We have largely finalized the process of rolling our legacy contracts into the current lower pricing environment, and we have additional opportunities to increase our rig count this year in select markets with limited capital expenditures.

Now let me comment briefly on our results and on segment highlights. For the fourth quarter, EBITDA totaled $202 million compared to $201 million in the third quarter. Revenue for the quarter was approximately $782 million compared to $779 million in the previous quarter. Despite the similar EBITDA and revenue results, the quarters were quite different. The U.S. results continued their strong growth driven by pricing in the Lower 48 and incremental activity in the Gulf of Mexico.

Our drilling operations in Canada benefited from the normal seasonal cycle with 30% increase in EBITDA. Drilling Solutions EBITDA also improved delivering 43% EBITDA growth as compared to the third quarter with virtually all product lines contributing. The increase in the U.S. together with improved NDS results and seasonal growth in Canada more than offset a drop in International EBITDA. As anticipated, our International segment experienced a reduction in revenue as legacy contracts for higher-margin rigs rolled off. Also, unanticipated, country-specific circumstances in Venezuela led to reduction in activity and a decrease in EBITDA.

Rig Technologies remain close to breakeven in the fourth quarter, nearly matching the results of the prior 2 quarters. The fourth quarter was clearly impacted with the oil price uncertainty experienced at the end of the year. Within Rig Technologies, our Canrig and Tesco businesses, the sales of traditional rig components, the other $3 million in EBITDA. For the full year, total company EBITDA increased by $215 million. The main contributor was the U.S. Drilling segment, which increased by $212 million. In the Lower 48 alone, EBITDA almost tripled. EBITDA in both the U.S. offshore and NDS more than doubled.

In the North American market, our Canadian drilling operations strengthened considerably in line with U.S. Canadian EBITDA almost doubled to $31 million and improved rig count and pricing. Our International segments EBITDA fell by $52 million for the year, largely attributable to the sale of our jackups in the Middle East and somewhat lower pricing as our fleet continued to roll into a lower price environment. The long anticipated inflection in International markets occurred only late in the year. Consequently, utilization remained low for a longer period. We do not have the opportunity to roll over contracts in several markets at higher day rates. We did see pockets of International strength, which translated into annual improvement for Latin American markets such as Colombia, Mexico and Argentina as well as Russia and Kazakhstan.

Now let me discuss our segments in more detail. First, U.S. Drilling. During 2018, results improved in the U.S. as we added 14 rigs to the working fleet and increased pricing. We currently have 111 rigs working in the Lower 48. This compares to an average of 111 for the fourth quarter and 114 at year-end. During the fourth quarter, average rig count increased by 5 rigs versus the third quarter.

Earlier this quarter, we deployed our first pace pay M750 rig for our customers in South Texas. Our M750 rig is an upgrade to our M550 rig. On its first job, the rig received an award from a major independent for beating the drilling curve. This was the first time a new rig ever accomplished this on a first job with this operator. This achievement validates the capabilities for our new design and bodes well for the potential further upgrades. We have contracts to deploy a total of 7 M750s for 2 customers. We look forward to delivering exceptional value with each rig.

Going forward for the first quarter, we expect the average rig count will remain steady as churn is offset by committed deployments. This market churn increases our opportunity to increase pricing. We anticipate the impact of churn will decline in the second half of the year.

During the fourth quarter, we averaged 111 rigs and finished with 114. Our Q4 Lower 48 margin of $9,400, up $700, reflected the favorable pricing environment for high specification rigs. Given our December exit rates and January results, we expect our Q1 margin to be in line with the fourth quarter exit rate, including the impact as normal beginning of the year cost increases. Assuming that WTI price remains constructive, we would expect daily gross margin to break the $10,000 mark and to exit the year around 120 rigs.

Now let's turn to International drilling. In the International business, during 2018, we saw 3 of our 5 jackups in the Middle East and 7 workover rigs in Argentina. Our International rig count for the fourth quarter reached 88 rigs, reflecting the sale of the workover rigs and the idling of the Venezuela rigs. We have 5 rigs in Venezuela. All the rigs work for JVs and not for PDVSA directly. As a result of the political uncertainty, our 4 working rigs were released in the fourth quarter but returned to work early this year. More recently, one of those rigs has since been idled. As a result of the U.S. sanctions, 3 others have a waiver until the end of July. Given the uncertainty in Venezuela at this point, we would expect our International rig count for the first quarter to average 91 to 92 rigs. With the rig awards, we have already received or expect to receive, we now expect to average in the vicinity of 97 rigs in the fourth quarter internationally.

Our daily margin for the fourth quarter was $13,500, a reduction of $1,500. This decrease in margin for the fourth quarter resulted primarily from the rollover of contracts and lost revenue in Venezuela. This was somewhat offset by the sale of low margin work over rigs, which were replaced with incremental drilling rigs during the quarter.

Our margins also reflect the absence of the fifth contributed rig from our partner in the SANAD joint venture. We will expect first quarter margin to decrease further as we finalize our process of rolling contracts into lower day rates. Given the wide range of rig economics and the influence of geographic mix in our International segment, we think it is usual to offer EBITDA expectations.

For the first quarter, we expect international EBITDA will range between $85 million and $90 million. Reduction as compared to the fourth quarter results from a lower number of revenue days in the quarter some startup costs for additional rig deployments and uncertainty in Venezuela.

Now let's turn to Drilling Solutions. We continue to make progress in all our product lines both domestically and internationally. Performance software and casing running continued to increase penetration within Nabors and third-party rigs. As you know, our ROCKit directional control system is the industry leader for oscillation. We continue to expand that market. Our Navigator, and Pilot software products are now commercial and installed at several customer paying jobs.

We expect these products will set new standards for the industry. While Performance Software grew most in the Lower 48, casing running expanded internationally and offshore. We have now developed an integrated casing service model, which provides the most seamless service available in the marketplace today. Our service reduces required staffing and increase its performance consistency. We are now running at several rigs and are focused on expanding it.

Wellbore placement increased its number of jobs and reduced overhead and direct costs. In addition, we completed the acquisition of PetroMar, which designs and operates a suite of downhole reservoir evaluation tool. These tools will complement our other downhole products. On the technology front, NDS completed the first commercial run of its rotary steerable tool.

Finally, we successfully integrated the operations of Tesco into our existing portfolio, which benefited both Drilling Solutions and Rig Technologies. We also exceeded our previously stated cost synergies target of $25 million.

Looking forward, we expect to deliver first quarter EBITDA in line with the fourth quarter. We also expect to continue increasing our results during 2019 to close the year with an annualized run rate of $125 million in the fourth quarter.

Next, Rig Technologies. During the second half of 2018, we moved our manufacturing in support of Tesco from Calgary to Houston. This had a negative impact on sales and costs. However, the consolidation should yield improvement in the segments long-term cost structure and profitability. Given the industry rig count progression, new equipment sales have been challenged. This situation was exacerbated by the volatility in oil prices in the fourth quarter. To increase the scope of its portfolio on the International front, Canrig opened a manufacturing facility in Saudi Arabia. It is now fully operational and completed manufacturing of the first catwalk in the kingdom. In addition, this facility provides full aftermarket service for our client base in the Middle East. Also, our robotics operation completed the installation of its first drill floor robot on an operating rig in the North Sea. This marks an important milestone for this business. We are already in discussions for additional projects as well.

Looking forward, we expect first quarter EBITDA for Rig Technologies in the low single digits.

That concludes my remarks on the fourth quarter results and our outlook. Now I will turn the call over to William for a discussion on 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 $188 million represented a loss per share of $0.55. Results from the quarter included $54 million or $0.12 per share after tax in net impairments and other charges, primarily related to our legacy rig fleet and other obsolete assets. 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 fourth quarter results compared to a loss of $105 million or $0.31 per share in the third quarter. The third quarter results included a $10 million charge after taxes or $0.02 per share on the redemption of our 9.25% note.

Revenue from operations for the fourth quarter was $782 million, up $2.7 million from the third quarter. Our global drilling business was in line with the prior quarter as strong growth in the U.S. and a seasonal uptick in Canada fully offset a decrease in our International segment.

U.S. Drilling revenue of $304 million gained $30 million, an 11% increase, driven by strong expansion in the Lower 48 and offshore markets. International drilling fell by $32 million or 8%, reflecting the expected reduction in Aramco high-margin revenue, following the expiration of newbuilds rig contracts and subsequent renewal at lower day rates. Also, uncertainty of our Venezuela sanctions resulted in the temporary idling of 3 of our rigs.

Drilling Solutions revenue of $66.8 million increased by almost $6 million, up 10% sequentially on higher activity in all product lines and cost reductions in our wellbore placement business. This increase was partially offset by unanticipated weak results in our Rig Technologies segment.

Although revenue of $61.4 million was only $2.3 million below the third quarter, deliveries of rig components and aftermarket sales were materially short of our forecast. Year-end sales were affected by delays and cancellations, triggered by year-end oil price volatility as well as steps taken to reduce our drilling rig capital expenditures, which significantly cut our internal sale.

Tesco legacy sales were also affected by the migration to a new ERP system. Adjusted EBITDA grew slightly to $202 million compared to $201 million in the third quarter. U.S. Drilling EBITDA increased by $15 million sequentially, driven by the significant improvement in both Lower 48 and offshore margins. The Lower 48 adjusted EBITDA rose by $10 million as daily margins increased by $700 to $9,400 per day. The improvement was attributable solely to improved pricing, as average leading edge day rates for our superspec rigs exceeded the mid-$20,000 range. Our Lower 48 EBITDA margin at 34.3% improved by nearly 100 basis points. Rig count increased by 5 sequentially as we continue to deploy upgraded rigs.

We expect daily margin to continue to progress higher in the coming quarters though not at the same sequential progression which we reported for the fourth quarter. We still have the opportunity to reprice multiple rigs from current leading edge day rate levels. We would expect margins for the first quarter to approach the $10,000 mark. Our rig count for the Lower 48 should reach 111 to 112 rigs in the first quarter. Although our contracted rigs will exceed that level, we have experienced a higher-than-usual level of nonrenewals with the oil price volatility at year-end. Although these rigs have been rapidly recontracted by other customers, the higher churn comes with increased loss revenue between contracts. Due to this factor, we expect to pay a utilization penalty of 3 to 4 rigs during the quarter. Alaska and the U.S. offshore market are expected to add an incremental couple of rigs between them.

International adjusted EBITDA declined by $23 million to $94 million in the fourth quarter. This decline reflects primarily the expiration of a number of newbuild contracts in Saudi Arabia. Typically, international clients pay significantly higher day rates for newbuilds to incentivize their construction then for existing rigs already in the market. Although all of our rigs have been recontracted by Aramco, compared to the day rates for newbuilds, the new rates are significantly lower.

In addition, 3 of our Venezuela rigs temporarily interrupted operations as a result of uncertainty created by the expectations of U.S. sanctions. Although these rigs returned to operations at the beginning of the year, Venezuela EBITDA fell by several million dollars. The International rig count fell by 8 rigs sequentially. The sale of the work over rigs in Argentina accounted for most of the 8-rig decline in the quarterly rig count, with Venezuela also contributing to the decrease.

International margins were $13,527 per day compared to $15,000 in the prior quarter, driven by the Aramco contract renewals while the Venezuela situation also had an impact. The sale of our Argentina rigs somewhat offset the previously mentioned headwinds. Although International rig count should increase by several rigs in the first quarter, we expect our first quarter International EBITDA to decrease by approximately $5 million as compared to the fourth quarter.

We faced some headwinds in the first quarter, including continued uncertainty in Venezuela, planned downtime in Saudi Arabia for the renewed contracts and reactivation costs for new rigs coming online. Canada adjusted EBITDA increased to $9 million from $7 million in the third quarter. While rig count was only about half a rig higher, daily margin increased as expected to nearly $6,500 per day. Normally, we would expect the first quarter activity to exceed that of the fourth quarter, but as the Canadian market has weakened, we now expect flat EBITDA for the first quarter.

Drilling Solutions posted adjusted EBITDA of $23 million, up from $16 million in the third quarter. We did realize an increase in wellbore placement results in the fourth quarter as expected, but all the other product lines also contributed to the improvement.

For the first quarter, we are targeting a similar level of adjusted EBITDA for this segment. Rig Technologies reported an adjusted EBITDA loss of $1 million in the fourth quarter, slightly below the third quarter breakeven results. We would expect to see positive results for Rig Technologies in the first quarter in view of the more stable oil price environment we've seen in the past few months.

For Nabors as a whole, we would expect EBITDA to match the level of the fourth quarter as the improving results in the U.S. should offset the reduction in International.

Now let me review our liquidity and cash generation. We remain busy during 2018, addressing liquidity and leverage. As last year started, we promised our investors that we would not increase the level of our net debt. This was a tough challenge given the significant cash flow requirements to operate rigs, to reactivate a large number of vital assets, deploy Drilling Solutions growth CapEx and complete an important new facility in Saudi Arabia.

In addition, our margins in the U.S. at the beginning of the year were relatively low. Finally, the increase in revenue was expected to trigger a significant increase in working capital. We managed to deliver on our promise by remaining cash flow neutral during 2018, excluding the net proceeds of our May equity issue. In fact, including our equity issue, we managed to reduce net debt during the year by approximately $580 million, closing the year with $3.1 billion in net debt.

We also addressed some of our debt maturities. In July, we retired over $300 million in senior notes expiring early 2019. In October, we secured a revolving credit facility for $1.3 billion expiring in 2023. And in the latter part of 2018, we repurchased in excess of $100 million of senior notes expiring in 2020 and 2021.

In the fourth quarter, net debt decreased by $245 million. The quarter included the contribution of $157 million by Saudi Aramco. Total debt decreased by $151 million as we bought back senior notes and reduced our revolver balance. We achieved these improvements after funding the $21 million acquisition of PetroMar. This implies we managed to squeeze over $100 million from our operations.

I would like to point out, though, that almost all of our interest payments come in the first and third quarters. So cash generation tends to be higher in the second and fourth. The first quarter will be less favorable than the fourth, due to interest payments, dividends at their precut levels and disbursements for bonuses and other onetime costs associated with the start of the year.

CapEx for the fourth quarter totaled $122 million. For all of 2018, CapEx totaled $453 million. We are targeting approximately $400 million for 2019. We remain focused on reducing our net debt over the next few years with a target level of $2 billion to $2.2 billion. By the end of 2020, we expect to reduce net debt by a cumulative $600 million to $700 million.

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. Even as the energy markets endured a period of extraordinary volatility, Nabors business was stable. Our financial performance in the fourth quarter enabled us to make progress on our debt-reduction goal. We remain focused on expense control and extracting the maximum value from our existing asset base. In the U.S. Drilling business, our Lower 48 fleet is top-notch and second to none. We still have contracted upgrade deployments pending, and the value we bring to the market is evidenced in growing demand from the industry's most exacting customers.

Internationally, we have the best land rig franchise in the industry. We are capitalizing on our marketing success in 2018 with more deployments scheduled in 2019. There are discussions for additional rigs underway. We are well positioned for an upturn on pricing when the market further tightens.

Our technology portfolio, our Performance Software, downhole tools and automation is the most robust in the industry and offers a unique value proposition for customers. We are gaining momentum to fulfill our vision of the rig as the logical platform for drilling and drilling services necessary to deliver a successful well. Automation and true integration of both the surface and downhole from the core of that vision. At the same time, we continue to drive improvement in our current operations, which we expect to make progress on this 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 Ken Sill with SunTrust Robinson and Humphrey.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [2]

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So the guidance on International is kind of flattish to better over time. What are the magnitude of the opportunities you guys are seeing in Argentina, Russia and Middle East and Kazakhstan? I mean, how many rigs are we talking?

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

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Sure. Well, in hand today as we said we have 6 rigs. Those rigs were spreaded for Argentina, Algeria, Kazakhstan, 2 in Mexico and 1 in Saudi. In Argentina, the unconventional plays are very active and we have a number of customers looking at why don't you bring down smart Tier 1 rigs down there. So the appetite, I think, is growing down there. Similarly, in Colombia, the market there is turning to exploration and as for reserves and there's potential added rigs as well required in there. So I think both of those markets are looking pretty attractive. Russia, Siggi you got anything about Russia?

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

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Russia is really -- the things -- rigs that we have bring them back to work for a better utilization.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [5]

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Okay. And then follow-up question, the $400 million of CapEx guidance for 2019. How much of that is going towards your traditional rig business? And how much or kind of what's the magnitude of the spending for tools related to your Drilling Solutions business?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [6]

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Okay. So the way that breaks down is about $200 million to $225 million is sustaining and then of the balance 55% would go to U.S., 35% to International and the remainder to NDS and other things in Nabors, that's the way. So still relatively minor.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [7]

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Okay. So that is going to start being additive but it's not going to be a huge ramp this year, though, given the current capital spend plan?

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William J. Restrepo, Nabors Industries Ltd. - CFO [8]

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It will be similar to what we had last year, somewhere in the range of $30 million-plus in that range for all of NDS together. That includes casing running, managed special drilling and, of course, well replacement.

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [9]

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Yes. On the rotary steerable tool, which we mentioned it's now -- we've had some successfully runs. The goal is to build out a small set of tools there, get some more practice there and with the goal toward by the end of the year then ramping it up. So we don't envision spending a lot of capital this year to do that, but we want to prove the concept, prove the gross margin, prove the business case out. And as I said, we've had some really good run so far.

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Operator [10]

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The next question comes from Marshall Adkins with Raymond James.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [11]

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Quick first one. You mentioned that you intend to pay down $200 million to $250 million of debt this year. Is it fair to assume that's all free cash flow generation? Or is there something else going on there?

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William J. Restrepo, Nabors Industries Ltd. - CFO [12]

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That's all free cash flow, Marshall. And if we can pay more, we'll pay more, but we're going to be using generated cash flow and from time to time, we use the revolver as well.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [13]

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Perfect. And then on the survey you all did, I'm just curious, I think most of us are modeling a decline -- further decline in the rig count going into the second quarter. And it sounds like your survey suggests overall in the U.S. that directionally we are still maybe headed lower for a little while. But that your -- you expect your activity to hold up fine. Did it -- did I understand that correctly or could you just parse that out a little bit better?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [14]

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Sure. So we survey our top 20 customers, Marshall, which is about 36% Lower 48 rig count. And of that group, in terms of what they're saying for the year, they're looking at a downward trend of maybe 2% to 3% on the rig count. If you parse the data on the top 20, there's 2 guys that have significant downturn, but actually there's a bunch of other guys who are planning increases. So when we look at that core of our customer base, that's it. Now obviously, our customer base is much more skewed to the larger independents and majors. And so I don't think it's representative of what's going to happen in the market as a whole, but it gives us some confidence in why we think our outlook for our Lower 48 is very good for this year still.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [15]

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Okay. Great, great. I got that. One last quick one. Tony, the Venezuela thing, you were pretty clear on. I'm just curious, it looks like more and more every day, where you are going to have regime change down there. How quickly do you think the industry can respond? You're one of the few companies that's still active down there. How quickly can the industry respond, if indeed we have regime change to -- a change in Venezuelan production trajectory?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [16]

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Well, I think speaking for Nabors, we're poised to jump in. So, as you know, we have a long history there. In the '90s, we were, I think, the largest rig player in the country, and it's been hampered for the past 10 years. So I think speaking from our point of view, we're able and ready to really scale quickly there. And I think the other -- I think it's a well-established oil market. There's a lot of good people there. So I think if they get their act together and the government steps away, unless their -- the business people really focus, actually things can respond pretty quickly, Marshall. I think that's the advantage Venezuela actually has. So it's an untapped potential right now.

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Operator [17]

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The next question comes from Scott Gruber with Citigroup.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [18]

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William, how are you thinking about the potential to refinance the 2020's at this point? High yield rates are down? Are they down to a level that's appealing to you? Do you think there's sufficient appetite in the market to pull the trigger on the refi?

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William J. Restrepo, Nabors Industries Ltd. - CFO [19]

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I think we're always open to the possibility of refi. It's a matter of having the right windows. So I think in 2019, we'll have several good windows to try to refinance 2020 and potentially even 2021. So we'll be looking, we'll be watching monitoring the markets, and we think we'll get some good pictures kind of heading our way over the next 9 months or so.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [20]

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Got it. And then as you think about managing the CapEx budget but also striving to enhance free cash generation. Can you talk about how you think about CapEx going into the International market? How do you think about what return or payback is needed on the International newbuild opportunities and major upgrade projects on the rigs operating abroad? Has that shifted here? How do you think about balancing that?

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William J. Restrepo, Nabors Industries Ltd. - CFO [21]

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That's a Tony question, but I can tell you, what I can tell you is that we, in today's environment, because we are being careful about our cash, we probably passed up on opportunities that we would have done in the past but that require a significant upfront investment from our part. So unless there's some attractive return on capital and upfront pre-funding for the time being, we're staying away.

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

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Yes. I think the point is, within Nabors, we have all of the business units now competing for capital, and we're giving them as a target to try to subsidize as much as possible upfront capital as part of that decision process. So the hurdle is high not only to -- from an IRR or payback point of view but also from an outlay of cash point of view. So -- and that's the pressure all of the business units have and that's where we're kind of committing to right now to get us where we need to go.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [23]

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Are you going to cap the CapEx, essentially on a multiyear basis? I mean, obviously, maybe flex it a bit based upon market conditions, but it sounds like you're really making the segments compete under a CapEx cap?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [24]

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That's correct. I mean, I think I was pretty clear in the press release. We have a target for this year, and it's harder to reduce net debt, we got to work backwards on that. That puts the -- that creates the cap for the CapEx, and we're pretty committed to making sure that's fixed. Obviously, if there's something -- yes, go ahead.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [25]

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Obviously, again, we had a bit of multiyear -- it sounds like it's a multiyear philosophy now for Nabors. Is that fair?

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William J. Restrepo, Nabors Industries Ltd. - CFO [26]

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At least until we get to our leverage target.

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [27]

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Yes.

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

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We're going to continue putting the screws on our every single cost in the organization, including CapEx.

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [29]

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And you could see this past year's performance in terms of what we said renew CapEx and where we ended up. So we're not just talking about it. We actually did it in this past year. We actually came down quite a bit in the year, the street thought we were going to be on a Capex basis, which reflects what we have been doing this past year.

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Operator [30]

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

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [31]

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I guess, first question if we can kind of come back to International and think about the daily gross margin. Can you maybe talk about where true cash daily gross margin is -- was in the fourth quarter and kind of compare that to GAAP? And then how you expect that to unfold as we go forward?

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

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So in the fourth quarter, a lot of our pre-funded amortizing revenue is gone. We still have some pockets in Kazakhstan and other places but it's -- the last, that the environment in the last couple of years and the fact that we're being more cautious on our Capex means that we haven't really taken on a lot of projects for large newbuilds that come with a lot of pre-funding associated with those contracts. So what you'll continue to see through 2019, absence some huge change in the environment, where somehow clients allow us to take on more of those newbuild contracts with significant pre-funding, you will see a little bit of continuing reduction in that amortizing revenue. What that means is that our conversion of EBITDA to cash flow is going to be improving through 2019. We already saw some of that in the fourth quarter, but we'll see an even more marked trend next year. So I think the number is really in 2019, it's not really comparable to what we saw in the prior year as such, as the Saudi contracts in particular expired.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [33]

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Okay. That's helpful. And then kind of coming back to Lower 48 and just kind of thinking about your overall strategy here. How do you think about M&A versus kind of potential partnerships, when you think about accelerating your fully automated and integrated approach to drilling? Are you -- do you -- especially given your balance sheet, do you think about potential partnerships as we look forward?

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Anthony G. Petrello, Nabors Industries Ltd. - Chairman, President & CEO [34]

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I think you can assume, we're looking at all possibilities. I think we believe, we have probably the most robust portfolio of technology now. We use the rig as a platform for services and anyway we can exploit that. We're not assuming we have a lock on the knowhow work. Obviously, the financial resources to make that happen and, therefore, we are looking at all kinds of ways to exploit that.

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Operator [35]

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And the next question comes from Marc Bianchi with Cowen.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [36]

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On the -- just back to the International side, and I appreciate that there was a little bit of a mismatch of EBITDA and cash flow on the margin there. But for what you're guiding to here in the first quarter as we progress throughout the year, would you say that that's the low-end on the reported EBITDA margin that we should see? Or do you see some further downside as more contracts kind of roll to where leading edge is?

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William J. Restrepo, Nabors Industries Ltd. - CFO [37]

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Are you referring to daily margin on a per day?

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [38]

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Yes.

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William J. Restrepo, Nabors Industries Ltd. - CFO [39]

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So I mean, we're trying -- there's a lot of moving pieces, Marc, and we're trying to move a little bit more towards EBITDA. I think Tony is comfortable...

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

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Okay. Well, I'm curious if you are comfortable on EBITDA.

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William J. Restrepo, Nabors Industries Ltd. - CFO [41]

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Yes. Tony and I are comfortable in saying that we think at least $400 million is the reasonable expectation for 2019 International EBITDA. And then when exactly does the margin per day bottom or not, which month? It all depends on when the new rigs come in and some of those rigs are heavy hitters so they can move the needle and it's difficult to give you a specific number. But I think a good working number for EBITDA for 2019 is somewhere in the range of $400 million.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [42]

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Okay. That's very helpful, and that does show some nice improvement from what it looks like here in the first quarter. As -- over on the Lower 48 side, the commentary on high-end rigs sounds very good and pricing being stable with the high-end that it was at in the fourth quarter. And it also sounded like you still have a number of rigs yet to kind of roll to that leading edge. So I was a little bit surprised that it doesn't seem like there's a lot of upside to your outlook for margin over the course of the year. So I'm wondering if that's maybe related to risk to the lower end rigs that you're running, having some pricing downside or perhaps it's just conservatism. Maybe, Tony, if you could talk through the outlook.

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

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Sure. I think actually you, you probably touched on 2 things, a little bit of conservatism and in particular. But about -- we have rigs today about 60% of the rigs. Hold on 1 second...

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William J. Restrepo, Nabors Industries Ltd. - CFO [44]

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Yes, 60% or have 6 months or less remaining term.

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

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Yes, 6 months or less and about 23 of those rigs have the potential. We're rolling up into higher day rates of a couple thousand dollars from where we are today of those 23 superspec rigs have that potential. So there is that potential for further improvement in the system that does exist.

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William J. Restrepo, Nabors Industries Ltd. - CFO [46]

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So we're being cautious about the cost side, that's probably a reason that you're not seeing a more aggressive forecast. We are very -- we feel good about the pricing side of things. But at this point, it's too early to take a guess on what costs are going to be doing throughout the year, is this going to be some cost inflation particularly in the second half of the year.

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Operator [47]

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The next question comes from Gregg Brody with Bank of America.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [48]

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Do you happen to have a SANAD cash balance for us?

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

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A what?

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [50]

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The cash balance at the JV.

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

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It's a moving target. We haven't disclosed that yet, but we are considering giving more information this coming year on the specifics to SANAD. But it goes up and down quite a bit. I mean, there's a lot of intercompany transactions between our JV and -- remember that a lot of the rigs that are being used by SANAD today are leased back to Nabors. So that number changes quite a bit. Can go up and down by $100 million in a month.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [52]

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So when you're talking about your net debt reduction targets, are you including the cash from the JV when you talk about that? And how would we think about getting access to that cash over the next couple of years?

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William J. Restrepo, Nabors Industries Ltd. - CFO [53]

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Well, that cash, that cash is going to be -- when we have excess within SANAD, that -- there is a mechanism to clear it. And -- but we also are clearing that through our leasing contracts and other intercompany arrangements that we have. So that cash can be cleared if needed, and we don't really need to clear at this point, Gregg. So the cash that we are generating in the rest of Nabors is what we're using right now to pay down debt. If we need to clear cash from SANAD, we will do so.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [54]

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Got it. But is that -- that's helpful. But is the net debt reduction targets through -- is that through debt reduction or is there a possibility that, that includes cash that's accumulating at the JV?

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William J. Restrepo, Nabors Industries Ltd. - CFO [55]

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No, it will be to debt reduction, and we don't expect cash to accumulate within SANAD from the levels they are today.

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Dennis A. Smith, Nabors Industries Ltd. - VP of Corporate Development & IR [56]

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Ladies and gentlemen, thank you for participating. And if we didn't get to your questions, or feel free to just e-mail us or call us with any questions you might have yet. Dave, if you want to wrap up the call?

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Operator [57]

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