Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Nabors Industries Ltd. (NYSE:NBR)

Q1 2014 Earnings Conference Call

April 23, 2014 11:00 AM ET

Executives

Dennis A. Smith – Director, Corporate Development & Investor Relations

Anthony G. Petrello – Chairman of the Board, President and Chief Executive Officer

William Restrepo – Chief Financial Officer

Joe Hudson – President, U.S. Drilling

Joe Bruce – President, Canada

Analysts

Jim D. Crandell – Cowen & Co. LLC

Ole H. Slorer – Morgan Stanley & Co. LLC

Jim K. Wicklund – Credit Suisse Securities (NYSE:USA)

Waqar Syed – Goldman Sachs & Co.

Byron K. Pope – Tudor Pickering Holt & Co. Securities, Inc.

John Daniel – Simmons & Company International

Operator

Good morning, and welcome to the Nabors Industries First Quarter Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Dennis Smith, Director of Corporate Development. Please go ahead.

Dennis A. Smith

Good morning, everyone, and thank you for joining our first quarter 2014 earnings conference call this morning. We will follow our customary format today with Tony Petrello, our Chairman and Chief Executive Officer; and William Restrepo, our Chief Financial Officer providing our perspective on the quarter’s results and provide you with insight into the trends in our markets and anticipated influence on our business. In support of his remarks, we have posted some slides to our website, which you can access following along, if you desire.

They are available in two ways. If you are participating by webcast, they’re available as a download within the webcast. Alternatively, you can download them from nabors.com under Investor Relations in the submenu, Events Calendar. And you will find them listed as supporting materials under the conference call listing.

With us today, in addition to Tony, William, and myself, are Laura Doerre, our General Counsel; Clark Wood, our Principal Accounting Officer; and all other heads of our various business units.

Since much of our remarks today will concern our expectations in the future, they may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in 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.

Now, I will turn the call over to Tony to begin.

Anthony G. Petrello

Good morning. Welcome to the Nabors Industries Conference Call to review our results for the first quarter of 2014. Thank you for participating this morning. As Denny mentioned, we have posted the quarterly presentation slides on nabors.com. I will refer to these by slide number during my remarks.

I want to officially welcome William Restrepo to the Nabors family. I think he will provide a great addition to the company and he is going to be available for the analyst community to help with financial questions and operating questions as well. And I think he will make information more seamless and available to the investment community. I would like to make my opening remarks, William will then discuss the first quarter results, and then I will wrap up before we take questions.

Yesterday, we announced our results for the first quarter, which exceeded our expectation from last month when we provided guidance to account for adverse weather conditions in the Northern United States. Our EPS from continuing operations totaled $0.16. Excluding our weather impact to completion segment, all other businesses delivered strong operational performance throughout the quarter and even our completion segment had the highest monthly utilization in recent times during the month of March.

Absence of weather-impacting completions, our first quarter earnings were driven primarily by first another strong performance in our International Towing business; second, activity improvements from the U.S. Lower 48 segment excluded the impact of the fourth quarter’s early termination revenue; third, seasonal improvements in the U.S. for offshore Alaska and Canadian drilling operations; and fourth, continued progression into Production Services segment from higher revenue in the recently acquired KVS trucking business.

Our Rig Services, which consists mainly of Canrig, reported its best performance in over a year. Results in the Rig Services segment benefited from both strong revenue and margin, which were aided by a restrained level of expenses. I will discuss those factors as well as our outlook in a few moments, first, some recent highlights.

Before we get into the details, I would like to note the following ccomplishments during the first quarter. First, during the quarter, we signed contracts for four PACE-X rigs to be deployed later in 2014. These are rigs, which we previously decided to build in advance of securing contracts for them. We believe that this high level of customer interest in additional PACE-X rigs validates our strategy to commence construction and maintain a steady pipeline of long lead time components ahead of signing contracts.

Second, we completed deployment of three of our significantly upgraded rigs into Argentina during the quarter, we’re also on time and on budget. Another one deployed earlier this quarter, so we now have five of the total six working and expect the final to spud in the second quarter.

Third, we mobilized the first of 11 previously announced newbuild rigs into Saudi Arabia. The rig was subsequently accepted by the customer and went on rate earlier this month. This very large newbuild program is on time and on budget. The financial impact of these rigs will phase in during 2014, and we should see the full impact of our results in the first quarter of 2015. Both the Saudi Arabia and Argentina projects are examples of Nabors unmatched opportunity to improve returns by allocating capital into strategic markets around the globe.

Let me now turn to our outlook. Essentially every element of the business looks positive in the near to intermediate term. I will start with the U.S. Lower 48 market where several positive trends are beginning to converge.

First, as I mentioned, we see continuing interest in our PACE-X rig. We deployed the first X rig about a year ago and we now have 21 in the field with a 22 expected to go out this week. The performance of this rig and reducing well times has exceeded our expectations. This growing interest in the X rig is a direct result of the benefit the rig is generating for customers. We rolled out five X rigs in the first quarter. Our plans call for an additional 13 rig deployments during 2014, seven of which will already have contracts.

Second, customers are developing plans for higher density drilling pads, including in the Eagle Ford and Permian. The PACE-X rig is ideally suited for drilling large well arrays from a single pad. Third, we are realizing broad, though still moderate rate increases on rigs as contracts rollover. We think strong cash flows are driving customer spending while drilling rig efficiency gains maybe starting to plateau. That convergence means additional wells are starting to generate demand for incremental drilling rigs.

For our International business, the upturn in the market we have previously identified remains firmly intact. For the second quarter, the short duration factors which we mentioned previously on conference calls will impact results early in 2014 should begin to dissipate. Our largest jackup 660 remains on schedule to go back on day rate late this quarter in the Arabian Gulf.

The success of the shipyard visit is a real credit to our local team and in particular their ability to pre-plan the scope and execution of the yard work, while the rig was still operating late last year. Our second newbuild land rig for the Saudi market is scheduled to deploy during the second quarter. We should begin to see the impact of higher day rates as the renewals we signed last year begin to rollover to higher rates.

Looking further out, we see opportunities for additional rigs across several markets, including Saudi Arabia, Argentina, offshore Mexico, Kurdistan, and India land. We recently signed our first contract for the Indian land market, a high horsepower rig targeting high pressure, high temperature gas. That market is a new one for us and the high pressure, high temperature work is in our suite spot.

Partially offsetting these positive factors are declining prospects for operations in the increasingly competitive Mexico land market, where we currently operate four rigs. In addition, two of our platform rigs operating offshore India have come off contract. And we will spend sometime off rate as we find new opportunities for them. The Alaska market looks highly prospective. The market there appears strong enough support at least one additional rig this year versus 2013 and potentially two more in 2015.We are in discussions with customer for large projects in Alaska, which were potentially requires significant capital investments but which we would also expect to generate attractive returns.

For the US offshore segment, we are committed to the platform market, where we think we hold a distinct advantage with our proprietary platform rig designs. Utilization of our platform rigs is firm. We anticipate that the rig supporting the Bigfoot project will mobilize very late this year and come out full operating day rate about mid year 2015.

As we have mentioned previously, we are looking at alternatives for the US jackup and barge rig fleets. Prospects for the Gulf of Mexico jackups and barges are limited. So we are likely to see a decline in US offshore business in 2014. Moving out to Canada, we are moving through the break up, so we expect sequential results to reflect that impact. As with the underlying market we have previously described it as the most challenged among our drilling segments from a return perspective and that characterization has not changed.

However, we are seeing somewhat more rig demand that we expected at this point of the season due to incremental year round work. We expect the Canadian market to improve if the large liquids projects now contemplated move forward for its LNG export projects move ahead. Our rig services business is benefiting from the strong additions the Canrig’s backlog since the second quarter of last year.

The increase in the third-party backlog since that time has outpaced the increase form our internal business. Total backlog now, since at the highest level in the past five years. We expect the slight shift in the Canrig’s business mix as well as an increase in necessary expenses, to compress margin somewhat in the current quarter and for the balance of the year.

In our completion services business, although we are disappointed with the financial performance of the segment the first quarter, we are somewhat optimistic for improving performance throughout 2014. As sever weather eased late in the quarter, we saw better financial performance. So the full period’s results are not indicative of the entry point into the second quarter.

We expect to return to positive operating income during the second quarter due to higher stage volumes, better cost absorption, and lower cost for purchased items including guar and chemicals. In the production services business, we expect rig and trucking hours increase seasonally. Utilization for our workover rigs and trucks is improving and we are seeing increasing bit opportunities for rigs.

The trucking business we acquired late last year continues to perform at our expectation. In the California market, we have seen some tempering of well P&A activity as customers shift their focus to additional production and production enhancement.

I’ll conclude this outlook with our near-term expectations. Several factors will impact our result in the second quarter. First, a traditional seasonality in the Alaska and Canadian drilling businesses. Second, we expect abatement of the severe weather that hampered operations and results in the completion services business. The monthly trend in that business has been positive since bottoming in January. Finally, Rig660 our largest jackup rig which is working in the Arabian Gulf is expected to go back on day rate in the later part of the quarter as scheduled.

In addition to these factors, in the international segment we foresee a few rigs coming off day rate tempering the positive development I mentioned. The impact of the newbuilds and renewals that we have previously announced should be most pronounced in the second half of 2014. In the U.S. we expect higher quarterly rig years as additional PACE-X rigs enter service. Demand and completion services and pressure pumping in particular is improving and the market maybe tight enough to support limited price increases.

The pressure pumping industry and its customers realize that last year’s spot-market pricing does not generate an acceptable return on investment. This is true especially when considering the maintenance expenditures necessary as fleets shift to more 24 hour work and deeper horizontal wells typically with higher rates and pressures. This could support current attempts by us and by our peers to increase pricing.

Now, I’ll turn the call to William who will detail our financial results.

William Restrepo

Thank you, Tony, and good morning, everyone. For those following our slide presentation, our consolidated financial results are illustrated on slide number five. Net income from continuing operations was $49 million or $0.16 per diluted share compared to $92 million or $0.31 per share in the first quarter of 2013 and $129 million or $0.42 per share in the fourth quarter of 2013.

The sequential decrease was principally driven by the following four items: first, the $0.16 per share reduction in completion services mainly from the first quarter’s adverse weather conditions; second, $0.12 per share of various income tax benefits in the fourth quarter of last year; third, $9 million or $0.02 per share from the favorable settlement of a previously reserved customer bankruptcy; and fourth, $5 million or $0.01 per share of lump some early termination revenue in the U.S. drilling business.

Operating revenue and earnings from unconsolidated affiliates totaled $1.6 billion in the quarter, essentially flat sequentially and up modestly compared to the first quarter of 2013. Operating income was $109 million compared to a $133 million in the first quarter of 2013 and $160 million in the fourth quarter of 2013. These reductions mainly reflect our completions business performance which fell by nearly $48 million sequentially and by over $51 million versus the comparable period of last year.

The deterioration profitability was driven by the conclusion of our last remaining take or pay contract at the end of December 2013 and by unfavorable weather in critical geographical areas. As I mentioned in the net income comments, the sequential comparison also includes lump some early termination payments of $5 million as well as $9 million from the full recovery of a receivable from a bankrupt customer, both of these items in the fourth quarter of 2013. EBITDA was $391 million for the first quarter versus $413 million in the first quarter of 2013 and $437 million in the fourth quarter of 2013.

I will now review the results from each of our operating segments starting with drilling and rig services. Our summarized results are on slide seven. In the first quarter, we recorded operating income of $156 million compared to a $157 million in the fourth quarter of 2013, which included a total of $40 million of combined early termination revenue and proceeds from a bankruptcy settlement. U.S. drilling earned operating income of $72 million compared to $75 million in the fourth quarter of 2013. Alaska was up seasonally while offshore was flat. The Lower 48 was down as expected due to seasonally higher expenses for workers comp and unemployment insurance, as well as the absence of $5 million in early termination revenue.

During the first quarter, rig years in the Lower 48 business totaled 187, up from 183 in the fourth quarter. We expect second quarter rig years to increase from the first quarter level. Our average daily margin for the fleet declined to 9,423 from 9,712 in the fourth quarter, normalized for the early termination revenue realized in the fourth quarter. Although the first quarter margin was affected by seasonally higher compensation expenses, we expect daily margins to rebound seasonally in the second quarter. Today, we have 199 rigs on revenue including two in standby rigs. Our AC rig count stands at 150. Utilization of our AC rigs in the first quarter was 95% and utilization for our pad-capable AC rigs was even higher at 97%.

As Tony mentioned earlier, we see day rates in the Lower 48 generally moving higher. For AC rigs, spot ranges are flat since last quarter in the low 20s depending on basin and rig configuration. However, we are seeing more pricing strength in the Rockies and for rigs with walking systems, we still see a 500 to 1,500 per day premium depending on the region.

During the first quarter, contracts on 27 of our rigs expired. 15 of those received extensions averaging 7.8 months at rates around the low 20s. For the second quarter, we have 29 rig contracts expiring. At the end of the first quarter, 122 of our rigs were working under term contracts and 70 were in spot. As we deploy additional PACE-X rigs, our rig mix improved, which should progressively lead to higher daily revenue and margins.

Result for the U.S. offshore business improved sequentially in the quarter, excluding the effect of the settlement of the customer bankruptcy in the fourth quarter. Rig years improved over Q4 although were down year-over-year. As Tony mentioned, we’re finding alternatives for the Gulf of Mexico jackups and barges as part of our effort to sharpen our focus on our business. We continue to anticipate deployment of our modular offshore dynamic series platform rig for the Big Foot development in the Gulf to occur either late this year or in 2015.

Our timing is dependent on deployment of the platform out to location, though at this point we would not expect to realize the full operating day rate on this rig before mid-year 2015. The business in Alaska normally sets up significantly in the first quarter and this year was no exception. On a sequential basis, we saw an increase of three rig years and daily rig margins exceeded $38,000. In the fourth quarter of 2013, margins were $32,000 to $33,000. The first quarter performance of our Alaska drilling business confirms our belief that drilling activity would pick up on the heals of last year’s favorable tax reform.

For the balance of the year, we anticipate a normal seasonal pattern of rig activity. We continue to engage customers in advanced discussions for additional large projects in Alaska with timing expected a year or two out. As a preeminent driller in the North Slope, we’re well positioned for such opportunities should they materialize.

Moving on to Canada, although the Canadian drilling season got off to a slow start, our operation realized nearly 10% more rig years than a year ago. Margins were down versus the first quarter of 2013 due to longer duration contracts swell into market rates, heavy tele doubles replacing triples on some projects, and the impact of newbuilds from competitors. The Canadian market remains challenging. We have had higher return opportunities for capital in other markets notably U.S. land and international. Thus we have refrained from now from deploying significant newbuild capital into the Canadian market.

We think the turning point for Canada will be the onset of widespread drilling to support LNG development. Considering the large scale of those projects, the timing of a ramp up in drilling is uncertain and in our view 2015 at the earliest.

Our International drilling results are illustrated on Slide 13. This segment continued to perform well in the first quarter exceeding our own projections. Operating income totaled $48 million, down from $17 million in the fourth quarter of 2013. We signaled on last quarter’s call, our expectation that operating results would decline sequentially due to several specific transitory factors, including the Rig 660 shipyard stay another impact full rigs coming off contract.

While those expected factors impacted the quarter’s results, our execution otherwise was strong, resulting in more days of revenue than we anticipated. But the national performance of the International segment in the first quarter reflects very little from the rig awards we announced last year. The results include the partial impact afford of the Argentina rigs and no impact from the Saudi newbuilds.

The effect of the remaining rigs should become more evident in the second half of the year, but the full impact will not be reflected until early 2015. The last business within our drilling related segment is Rig Services, which is mainly Canrig and the Ryan directional drilling business.

The segment’s revenue increased 8% sequentially to $144 million. EBITDA more than doubled and operating income swung into the black versus the fourth quarter’s depressed levels. EBITDA margins for this segment improved to the 11% from 4% in the December quarter. We expect product development expenses to ramp up in the second quarter, which couldn’t narrow our margin slightly.

As mentioned earlier, backlog at Canrig increase during the quarter and is approximately 2.5 times the low point in the second quarter of last year. In addition, the improvement in backlog is skewed towards third-party customers. Continuing with completions and production services, operating income for this division is illustrated on Slide 16.

The segment experienced a difficult quarter with an operating loss of $3 million, down from operating income of $41 million in the fourth quarter. Part of the sequential decrease was anticipated, but as we announced earlier, the U.S. Completion Services business was severally challenged by harsh weather throughout the quarter and it generated an operating loss of nearly $34 million.

In addition to weather operations in this segment were impacted by inefficiencies as a transition from the last remaining take-or-pay contracts to the spot market and to more 24-hour operations. January marked the low point from monthly results, while March was the best month of the quarter, reflecting a very strong stage count, this despite some loss activity from prop and shortages and the tail end of the weather issues.

Revenue was similarly affected with the first quarter reaching $228 million, down from $292 million in the fourth quarter. Currently, our horsepower is configured into 20 frac fleets, of those 15 are working on 24-hour pumping schedules, while another four fleets are in 12-hour schedules. One spread is currently being retrofitted with dual fuel capability.

We use the remaining additional capacity as relief horsepower for the existing crews and we are refurbishing some of our older equipment so it can work on high pumping intensity wells. While this operation’s results for the quarter were disappointing, we realize that our completions team had to contend with tough weather conditions during the most of the quarter in the majority of the geographical locations.

On the positive side during the first quarter, our operations managed to replace very material take-or-pay contract in the spot market. While achieving very high utilization and price stability for fleet at the end of the period. Consequently, we expect financial performance to improve in Q2. Our frac crews are fully booked for the second quarter and the market for pumping capacity appears tight enough to support some pricing improvement.

In fact, most companies are requesting higher prices from their customers. Nonetheless, it remains to be seen whether the industry can actually realize pricing that materially improves margins in the near term. Finally in Q2, we should begin to see the benefit of the cost initiatives we have put in place. Specifically, around sourcing consumables. Our production services segment turned in a positive performance in the first quarter.

Revenue was $275 million versus $266 million in the fourth quarter of 2013. Revenue was up seasonally in Canada and also in our US operations. Segment EBITDA increased sequentially to $60 million from $56 million in the prior quarter. The improvement in your operating results came from several factors. Primarily our trucking business in California and our combined operation in West Texas. We have seen some softening in our California well serving operation as plug & abandonment activity is down versus last year.

This concludes my discussion and segment results. In terms of consolidated metrics, which maybe useful for financial modeling purposes, we anticipate 2014 capital spending in the range of $1.6 billion to $1.8 billion depending on the actual timing of PACE-X newbuilds in 2014. In terms of income taxes, you should assume a four-year effective income tax rate of 18% to 20% for 2014.

There are ultimate geographic mix of could cause that to vary somewhat. In conclusion, we continue to work on various profitability improvement initiatives and on reducing purchase costs of our principal consumables. Optimizing overhead in the field operations, improving our revenue capture and ensuring all of our operating locations are delivering appropriate return on investment or are on a path to doing so. We expect to start seeing results from these efforts in the second half of the year.

And with that I’ll now turn the call back to Tony for his concluding remarks.

Anthony G. Petrello

Thank you, William. Let me summarize our views and priorities. First, drilling markets continue to improve globally. We see this trend most prominently in the high-spec segment of the market that is where Nabors traditionally focuses and where we see opportunities to deploy capital and attractive returns.

Second, the execution of our major capital projects is proceeding smoothly. The scale of our current capital program is unprecedented in the company’s history and our combined teams are successfully delivering high-performance rigs on time and on budget. Third, our efforts to streamline the company’s activities are continuing. We are perusing opportunities to prove non-core assets in multiple lines of business. We are also consolidating functions where that make sense.

A quarter ago, our outlook for the year called for a soft start. We experienced an even greater challenge in completion services. Our expectation remains intact for earnings to improve as the year progresses, especially in the second half. Looking further, the outlook is positive and we’re positioning Nabors to capitalize on that environment.

Thank you for the time this morning. With that, I will take your questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session (Operator Instructions). Our first question comes from Jim Crandell of Cowen. Please go ahead.

Jim D. Crandell – Cowen & Co. LLC

Good morning, Tony and team and William, welcome to Nabors.

Anthony G. Petrello

Thank you, Jim.

William Restrepo

Thank you.

Jim D. Crandell – Cowen & Co. LLC

And also my condolences to everyone in Nabors from your recent loss.

Anthony G. Petrello

Very much appreciate it.

Jim D. Crandell – Cowen & Co. LLC

Tony, I wanted to first ask about pressure pumping, you talked about the prospects for increased pricing, are you actually seeing that now in any regions and what is that exactly that makes you optimistic? Is it the tightening utilization you see out there in the field today?

Anthony G. Petrello

Let me first try to answer that, put some context around your question. Last fall commodity prices were oil around 88 and get through 50 at the time operator budgets were done. They are now about 102 and 480, and so all the reports from the operators is that cash flow is running more robust.

The second thing is you’re obviously seeing more pads, you’re seeing more laterals per pad, and you’re seeing more prop per well. And I see 215 well pads moving north, and if you just look at our utilization, we’ve had an increase in 50% of work on pads as well. Then layer that on top of the following, which we’re running on 24-hour basis 75% of our spreads are running on 24-hour basis.

Now, I think there is a lot of literature out there about the capacity of the frac spreads, and I don’t pretend to have any more greater insight towards that number is whether it’s $3 million actual horsepower or whatever. But I do suspect whatever that number is, it’s nominally overstated, and I also suspect given the number I just gave in terms of 24-hour crews the amount of burning up that we are doing of the equipment is…

William Restrepo

Hello?

Operator

Pardon me, this is the conference operator.

Jim D. Crandell – Cowen & Co. LLC

Hi, this is Jim Crandell, I was asking you a question and it was cut off.

Operator

Yes, I do see that, one moment. Actually one moment here. Mr. Denny Smith.

Dennis A. Smith

Yeah.

Operator

Petrello or you gentlemen….

Anthony G. Petrello

Yes.

Operator

So they may still on, I was cut off there.

Jim D. Crandell – Cowen & Co. LLC

Yes. We hear you.

Anthony G. Petrello

We can hear, Jim.

William Restrepo

We hear you, Jim

Jim D. Crandell – Cowen & Co. LLC

Okay. I’m sorry. I was cut off, but now I’m back on. I missed the end of your response, Tony, but just move on to a follow-up question. You’ve been having great success with getting the orders for your PACE-X. My question is about the performance of the rig to-date, or can you indicate strong performance in the rig? And what – is there a primary factor or two that you can attribute that performance too?

Anthony G. Petrello

Well, so I think that there is a slide in the slide deck at on page 10, where everyone talks about how great the rigs are and it’s very hard with apples-to-apples comparison. So I have been very reluctant to start saying one rig is better than the other rig, because of the apples-to-apples comparisons, but what we did here in this slide is just give a context to show that our rigs are not second to anybody is we went to a customer in a field, where our rig is now working and the competitor rigs they’re well know are in that same field working the same type of job and you can see the dramatic fee per day difference. That’s due to, I think the configuration of the rig and it’s due to the including the horsepower and a bunch of other things on the rig.

So, I think the difference is real and I think as you move to pads with multi, as we have talk like this before in terms of what phase excess designed to do its really. It shines in for those operators that wanted to do, multi-wells on pads, particularly multi-wells like lines – I would say four rows of four wells each. That’s where the rigs really shines and I think that kind of work is going to continue I think everything the PACE- X has over the other competitor rigs has a spacing advantage that in terms of size and location. With all the pressure on operators to minimize space which that transmits to costs, it also translates into getting approvals. I think that’s another advantage of the rig. So now I think we – to the extent – this is obviously a bed on pad drilling, but I think the market’s moving in that direction.

Jim D. Crandell – Cowen & Co. LLC

Okay. Then just one quick follow-up to that, Tony. You have been building in advance of contracts here because of your confidence, I think, in A, the market, and B, the rig’s performance. Do you see yourself continuing to do that in the future? Might you get even more aggressive in that regard?

Anthony G. Petrello

The answer is to both yes.

Jim D. Crandell – Cowen & Co. LLC

Okay. Okay. Terrific. Thank you very much.

Operator

Our next question comes from Ole Slorer of Morgan Stanley. Please go ahead.

Ole H. Slorer – Morgan Stanley & Co. LLC

Thank you. And, Bill, congratulations again with the move. I suppose all we should do from now on is to follow your every move, because you seem to have an impeccable track record in exiting and entering businesses?

William Restrepo

Thank you, Ole it was not improved this although.

Ole H. Slorer – Morgan Stanley & Co. LLC

I don’t believe it for a second. This is not a coincidence, if I look at your track record on entering and exiting. So very positive backdrop all around. Could you help us a little bit with the timing of the international, I think, on North America? Everybody can probably do their own models, but when it comes to the international progress, I mean, you are highlighting a ton on your contract, on what appears to be very profitable terms.

At the same time, you are highlighting some near-term misses on the Mexico land and the offshore and Saudi jackups. That’s supposed to Saudi jackup is all incremental, negative this second quarter, but how do you see the EBITDA move for your international drilling operations sequentially into the second quarter with these kind of near-term headwinds and strong tailwinds into the back end of the year?

William Restrepo

Yes, well with that was standing the jackup not going back to work and the transitory effects, we see going into the second quarter at least as well as for the first quarter. And then we see a ramping up internationally in third and fourth quarters. So we see that as the transitory things we talked about those negative were being offset by the early deployment of things we’ve spoken about, and then by the third and fourth quarter those things begin to have a substantial impact when you start to see the ramp up.

Ole H. Slorer – Morgan Stanley & Co. LLC

Okay. So flattish into the second quarter and then we start to get to the tailwind?

Anthony G. Petrello

Yes, I think we’re going to have enough of the new stuff on there to make up for any of those transitory things we’ve spoken about, that’s what we’re working toward. And as you can see that sort of what happened this quarter as well, where we had some positive stuff, we came out a little bit better than what we thought given the negative stuff would be jackup.

Ole H. Slorer – Morgan Stanley & Co. LLC

So if we look a year ahead until the first quarter of 2015, when they are getting for the full tailwind internationally, but also what you are describing in the U.S., would you care to shed some light on which of your four key divisions U.S., Canada, or international do you think will have the strongest EBITDA growth, percentage wise, year over year as we still look a year ahead, first quarter to first quarter

Anthony G. Petrello

I think clearly International will.

Ole H. Slorer – Morgan Stanley & Co. LLC

Thank you. If you look to the Production Services and Completion Services…

Anthony G. Petrello

Yes…

Ole H. Slorer – Morgan Stanley & Co. LLC

Clearly a disappointing result on the Completion Services there. But based on what you are seeing in the market right now and getting pressure pumping back to full utilization as you highlighted, what should a sensible near-term EBITDA margin be for that business?

Anthony G. Petrello

In terms of absolute dollars I think we will – we should get back to at least the rate of EBITDA that we’re in the third and fourth quarter and that kind of range or the second quarter, on a consolidated basis for NCPS as a whole.

Ole H. Slorer – Morgan Stanley & Co. LLC

And you highlighted some challenges around proppants, for example, was this because of the weather and was this relating to ceramics, the white sand or in general, could you shed some light on that and how you have solved that situation?

Anthony G. Petrello

Yes, well on the supplier side, I don’t think we have problems. I think we have really good arrangements with suppliers and we are working on that in terms of further costs. I think there was issues with some deliver where the rail cars were baked up as suppliers, and that caused a bunch of congestion at the actual FLB plant sites. I think that is starting to ameliorate, and I think they is still a risk maybe at the endpoint of having that congestion repeat itself. But right now, we think we’re managing through it.

And as we said in our prepared remarks in addition to that we have put an intense focus on some of the elements here in terms of chemicals, as well as try to reduce our costs and we think all that’s going to start manifesting itself from the second quarter.

William Restrepo

A quick comment, I think in the second we won’t see the full impact of the guar and chemical cost reductions, because they have to flow through inventory. But they will see enough to offset any increases in sand and proppant in general.

Ole H. Slorer – Morgan Stanley & Co. LLC

Are you seeing increases in sand prices at the moment?

William Restrepo

We saw a little bit of tightness, that has increased slightly the cost of sand, but we feel it’s a temporary impact due to the weather – to the weather impact in the first quarter.

Ole H. Slorer – Morgan Stanley & Co. LLC

Okay. Well, thanks a lot and congratulations with the corporate turnaround.

Anthony G. Petrello

Thank you.

Operator

Our next question comes from Jim Wicklund of Credit Suisse. Please go ahead.

Jim K. Wicklund – Credit Suisse Securities (USA)

Good morning, guys.

Anthony G. Petrello

Good morning.

Jim K. Wicklund – Credit Suisse Securities (USA)

You talk about the last remaining contract, the big take-or-pay contract. What is the difference between those contracts signed a couple years ago and the current spot market rate?

Anthony G. Petrello

From the take-or-pay contracts are long term contracts first of all. A lot of them were signed, I think were signed sometime back. So the pricing is better than the spot-market today and basically the client is – during this life of the contract, the client is obligated to guarantee a minimum revenue for the month or for the periods in lots of those contracts. So obviously, that’s a more favorable and steady situation than competing in the spot market.

But our team is open to the challenge, we have lost some margin obviously versus because of the timing when those contracts were signed, but we are seeing that our fleet adjusting to the new spot-market and already achieved stability in pricing and even starting to get more I won’t say aggressive but more confident and trying to achieve some pricing traction during the second quarter.

William Restrepo

In terms of the rates for forex recently talked about that we just renewed those are at a very attractive rates equal to a rate range that we have enjoyed previously, so just to give you an idea.

Jim K. Wicklund – Credit Suisse Securities (USA)

Okay. You’re talking about margins for your rig fleet at $9,400 and obviously that will skew higher as more PACE-X rigs go out. What do you guys think is where we can get in terms of margins before we start having somebody call up NOV and start fostering competition? Is there any risk of that in the future?

Anthony G. Petrello

I mean there is always competition and all I think there is going to be demand for as we’ve said before we think about 300 of these, what we are call high-spec rigs. And I think yes, there is a risk there. The people are going to try to pursue that I think we have as good a mouse trap as anybody right now. We are going to forward and share that, but I’m not going to say that other people can try to access it. I think frankly the people have been within the business for a longer time, should be able to do it better and more cost effectively and deliver the performance with the rig and I think that’s where the advantages are for us.

Jim K. Wicklund – Credit Suisse Securities (USA)

Okay. Last question, if I could. The jackup rigs and barge rigs in the Gulf of Mexico, the barge rigs have been difficult for a while and the lower-end jackup market has been difficult. I know you have to have a bunch of different options on that, but would you be willing, just from a management point of view, to retire those so that you can focus on other parts of your business, or is that something that you think may one day come back?

Anthony G. Petrello

We would probably at this point I think we don’t want exit the business, so we will do at the most cost effective way possible, that’s were has that right now.

Jim K. Wicklund – Credit Suisse Securities (USA)

Okay. Gentlemen thank you very much.

Operator

Our next question comes from Waqar Syed of Goldman Sachs. Please go ahead.

Waqar Syed – Goldman Sachs & Co.

Thank you very much. I have a question on the US Lower 48 rig count. Looking forward, you have a bunch of PACE-X rigs coming in. Do you think the incremental rig count for your guys is going to be just driven by PACE-X, or do you see some of the conventional rigs, the Tier 2 or Tier 3 currently not working, go back to work as well?

Anthony G. Petrello

Well this past quarter you saw a couple additional legacy exit go back to work and so that is happening obviously it not happened as robust – or hasn’t so far but I am going to turn it over to Joe to add more color to it.

Joe Hudson

The answer is we are continuing to see legacy assets back to work, we are going to continue to see that for the year PACE-X is incremental at this point. It’s not replacing legacy assets we have, so that is all accretive. The answer is we are going to increase the rig count.

William Restrepo

The other point I would like to make there is, if you look at our activity since the second quarter of 2013 I think we’ve taken 20 legacy rigs and redeployed them to international. And give what we still see the appetite of international is at there is still prospect of that as well. So like we’ve said before, we view the legacy rigs as an option on – an upside option, basically that’s approaching getting into money now with tightness we’re seeing

Waqar Syed – Goldman Sachs & Co.

Okay. And, Joe, what is your current outlook for where the rig count, US land-to-rig count, could be by the fourth quarter of this year?

Joe Bruce

Nabors count?

Waqar Syed – Goldman Sachs & Co.

Well, Nabors, as well as for the industry.

Anthony G. Petrello

We still say it’s modestly higher.

Joe Bruce

Yes. We definitely think, again, with the build input, incremental PACE-X that Tony’s talk about I guess in the past two weeks we put four legacy assets up. So again, you’re moving to rig count up and I think the overall market will continue to improve rig count-wise

Dennis A. Smith

Waqar, of the trends we think is afoot is that as we show on slide 12 is, productivity of rigs this is moderating a little bit. So increased spending is increasing wells, which is increasing rigs, whereas rig count been pretty good flat for the last 3.5 year. So, we think incremental rigs demand is there.

Waqar Syed – Goldman Sachs & Co.

Are you seeing any demand at all in any of the gassier basins?

Joe Bruce

Yes. We’ve recently been awarded a few jobs in the Gulf Coast and South Louisiana. We are putting out our first 3,000 horsepower rig we done in years. So, we are seeing in the Gulf Coast part two to three rigs are going out to specific to gas market.

Waqar Syed – Goldman Sachs & Co.

How about in the Northeast and Appalachia, Marcellus, in that area? Any demands right now for drilling?

Joe Bruce

Well, it’s somewhat flat. But, yes, I think the Marcellus will continue to improve. Yes, we are going to see some increase of that.

Waqar Syed – Goldman Sachs & Co.

And Tony, just a broader question on restructuring. Where do you stand right now, and when do you think you will be able to make any decision on what direction to go with regards to the corporate restructuring that – any major steps in that regard?

Anthony G. Petrello

I have nothing new to update, report. I think it continues to be a priority. We working on it full time basically, I think if you look our asset base, our collection assets today, it was really put together with the view toward appealing to the manufacture drilling in North America to cut the combination of both drilling side and the completion and production side. I think that the division of what is probably – the collection of assets is well suited for that I think the issue for us is the execution for optimal capital deployment and we’re figure out what we need to do to make that even better and that’s what the focus is on.

So, in addition to that in terms of the structuring lead to some of the comments we have a series of internal issues we want to take in as well to improve. Improve our profitability as well. Some of the things that William referred to in terms of focus some of the procurement stuff of high significant dollar things and as much or similar initiatives on that across the company. So, one of the other things we’ve done just as quarter as we finally integrated our engineering group.

So we all Nabors now have a corporate consolidated engineering group, which we think we’ll [indiscernible] quite a number of benefits now and just from a design point of view making sure we’re bringing the best of Nabors has to offer in all our products, but also standardization and also purchasing power, because as a combined unit, I think we’re still the largest buyer versus everything that anybody needs in the drilling community. So we intend to aggressively use that buying power and that leverage as much as possible in our favor.

Waqar Syed – Goldman Sachs & Co.

Great. Thank you very much.

Operator

Our next question come from Byron Pope of Tudor, Pickering, Holt. Please go ahead.

Byron K. Pope – Tudor Pickering Holt & Co. Securities, Inc.

Good morning, guys.

Anthony G. Petrello

Good morning.

Byron K. Pope – Tudor Pickering Holt & Co. Securities, Inc.

Tony, you partially answered this question in your response to one of the prior questions when you talked about 20 or so rigs being – legacy rigs being deployed from the U.S., but I just wanted to probe a little further, because it sounded like on the international side, as you look at potential incremental opportunities in Saudi and Argentina and Kurdistan, all those are – seem to be geo markets where you have redeployed assets from the U.S.

And so as you think about incremental rig contracting opportunities in those international theaters, are they such that you’re in a similar position to potentially redeploy some of those legacy SCR rigs from the U.S. market to those specific geo markets where you have already won some of that type of work?

Anthony G. Petrello

I think you hit it right on the head, that’s exactly the plan. And I think the fact that, these awards were done shows that those market has a need and demand for that. And I think as we execute and execute well, it will justify the decision by the operators to do that. I mean one of the things I have emphasized to people is this international market doesn’t really make such a big difference between AC versus SCR, particularly in our case, because our SCR has our K-box functionality, which makes it act like an AC rig anyway, it’s where the power and other things around the rig.

And having those that legacy infrastructure does allow us to have expedited cost of time of deployment, which matters as people start gearing up. And I think our job is to take advantage of that, that lead and convert into an opportunity [indiscernible][0:51:17] add any other comments. Anything else?

Byron K. Pope – Tudor Pickering Holt & Co. Securities, Inc.

Okay. And then just a second question on the Canrig backlog build, is it reasonable to think that the driver of that is both North America and international top drive demand on both the capital equipment and rental side? Just curious as to what’s driving the big increase…

Anthony G. Petrello

Yes, Canrig has – obviously it’s a primary product, it’s the top drive, but it also produces catwalks and wrenches and all three of those actually have seen recent increases, and it’s not just North America, it is International. Canrig has pretty good footprint in Algeria and Russia and China and Dubai. And so all those markets are now starting to see that demand as we mentioned about half of this backlog is third-party.

Canrig is about to open an office in – or is in the process of opening an office in Dubai to improve their ability to locally services the top drives and really think in terms of the fact that we have a pretty large installed base that part of the world and try to capture some more that work as well. So that’s the time to play it right now.

Byron K. Pope – Tudor Pickering Holt & Co. Securities, Inc.

Thanks, guys. I appreciate it.

Anthony G. Petrello

Okay.

William Restrepo

And I think we are starting to approach our one-hour kind of self-imposed time, but let’s take one more question and wrap up the call please.

Operator

Sure, absolutely. And our next question comes from John Daniel of Simmons & Company. Please go ahead.

John Daniel – Simmons & Company International

Hey, guys. Thanks for getting me in. First couple questions just on international. Given the newbuilds and repricing opportunities, can you explain for us, Tony, perhaps just a regional range for international cash margins in 2015, based on what you know today?

John Daniel – Simmons & Company International

Broadly speaking within international. I mean, the cash margins were close to $16,000 Q4, dipped a bit here in Q1, and I know they will be low in Q2. With all that’s going on, the positive traction that you are getting, is it high teens for 2015? Just, again, based on what you know today, and I realize that changes.

Dennis A. Smith

Yes, that’s rational. Not north of $20, but in the high teens range. Development And it varies a lot between some of the Latin America smaller stuff to obviously the at the top end

Joe Bruce

Yes, that’s in the high teens.

John Daniel – Simmons & Company International

High teens? Okay. Thank you. And then turning to the completion services segment, does any of the 2014 CapEx budget include any expansionary CapEx for that segment?

Dennis A. Smith

Very, very little.

John Daniel – Simmons & Company International

Okay.

Dennis A. Smith

We are doing some – as William mentioned, some conversions to duel, we’re upgrading some of the control vans. A lot of refurbishment of equipment.

John Daniel – Simmons & Company International

And then on the stack fleets, I think you have got, it looks like three in San Angelo. Is that right? What’s the prospect for redeployment there?

Dennis A. Smith

Those are being refurbished, the fleets in San Angelo as referring to talks about and what’s our prospects putting back to work.

Joe Bruce

Yes. One fleet can retrofit it right now is there any separate dual fuel little commencing operations for the later part of this quarter. And then this one of the fleet is getting referred when it can probably go out we are on the same time both curse have places to go.

John Daniel – Simmons & Company International

Okay. Awesome. And then just a final quick one from me. The less P&A work in California, as they shift to more production enhancement, is there any impact of that material on margins or revenues with that type of shift?

Dennis A. Smith

No.

John Daniel – Simmons & Company International

Okay. Thanks guys.

William Restrepo

Thank you.

Anthony G. Petrello

Thanks very much everyone.

Operator

This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Anthony G. Petrello for any closing remarks.

Anthony G. Petrello

Thank you everyone for participating. Very much appreciate your continued interest in Nabors.

Dennis A. Smith

Thank you, ladies and gentlemen with that we’ll wind up the call. Thanks.

Operator

Thank you. The conference is now concluded. Thank you, once again for attending today’s presentation. You may now all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: NBR's CEO Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts