Nabors Industries Ltd. (NBR) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Nabors Industries Ltd. Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, February 22 of 2012. I would now like to turn the conference over to Dennis Smith, Director of Corporate Development. Please go ahead, sir.

Good morning, everyone, and thank you for joining us again. In addition to myself, this morning, Tony Petrello is with us, our President and new CEO, and he will be conducting the call today. Also in attendance is Laura Doerre, our General Counsel; Clark Wood, our Principal Accounting Officer; and essentially all the heads of all of our various business units. Today's call, we're going to take a lot of extra time to not only review the quarter and the forward outlook, but talk about a lot of more specific information, a little bit of our plans that are in motion. And as such, in support of that, we put some slides on the website. That's on our website. You can find them if you want to follow along, and Tony will referring to them, a few, as he goes. It's at nabors.com under Investor Information, and then under the sub-menu under Events Calendar. You'll find it where the conference call is listed with the discussion. As I said, we'll limit the call as we usually do to about an hour. The remarks will probably be more like 45 minutes today, so we'll have a limited time for questions and answers, but we'll try to get to as many as we can. And with that, I want to just remind everybody that obviously a lot of what we're talking about is forward-looking and subject to change as the market goes. We encourage you to read our 10-K and 10-Q filings for all the risk factors that are involved with that. And with that, I'll turn it over to Tony to get started this morning.

Good morning, everyone. Welcome to the conference call, and I want to thank everyone for participating. As Dennis said, we have posted to the Nabors website the slides, please refer to them. And as he also said, I expect to be going on a bit longer. Hopefully, I intend to address much of what is on your mind. And if I don't get it right, I apologize. Before we begin a review of our fourth quarter and recent developments, I would like to share with you some of the reasons why I'm so excited about the opportunities that are available at Nabors. This quarter, every player in the sector is focused on exploiting their liquids-rich market position given the respective gas and oil commodity prices. Think back just 4 years ago how everyone was exploiting their operating leverage to U.S. gas. Things change often. Today, everyone is also focused exploiting their competitive advantage because of new equipment, whether that is new spec rigs or frac spreads. But as we know, commodity prices change and ramp-ups eventually ease. Today, when you look at where the operators' investment is directed on a large scale basis, whether that is in deepwater or in the shales, there is a common denominator, the desire and ability to invest in projects that can provide a reasonable return for the duration. Successful execution of these projects require that they be done in a safe, predictable and consistent manner. While access to new fit for purpose equipment is often optimal or even necessary in certain applications, they are in the end just tools. The real need is to have organizations that have resources, power, processes and know-how that can deliver reliable and safe solutions that address the real risk factors economically and in today's world, on scale. And…

Flo, we're ready for the question-and-answer session please.

[Operator Instructions] And our first question comes from the line of Jim Rollyson with Raymond James. James M. Rollyson - Raymond James & Associates, Inc., Research Division: You mentioned at some point getting back, you were hoping, to the 2008 level margins on the international front, which were in the mid-teens. When you kind of look at where you stand today and getting to the 130 rigs that you -- exit rate you were talking about, where does that put you on for margins if everything goes as planned and kind of when do you think you might get back to that mid-teens level?

I think during -- as I mentioned, during the first quarter of 2012, we're still at a plateau level. Then it starts -- it will start to ramp up in the second quarter, and that should accelerate toward the end of 2012. By 2013, that's when I think we can hope to approach that level. I think one of the questions -- one of the things that's hampering that number is obviously the jack-ups were -- these numbers, of course, are all blended between land and offshore, which makes it a little difficult. But the jack-ups have been locked in at numbers, and they're on term contracts. So we need to offset some of that. But by the beginning of 2013, I think that’s where we see getting those ranges. And of course, on new projects, the discipline in terms of allocation of capital to anything new, we're going to try to be pushing to rates where we want to get to. James M. Rollyson - Raymond James & Associates, Inc., Research Division: Sure, that's helpful. You mentioned in your prepared commentary, operating cash flows this year will fund CapEx, debt redemptions and provide free cash flow. Is that including asset sales or would asset sales just basically be icing on the cake?

Well, the aspiration is to do it before asset sales. So -- but like I said in the press release, we have this number of $1.5 billion currently on the table for CapEx. It's still subject to some scrutiny. And if that holds and the plans I have mentioned hold as well, there should be some free cash flow away from asset sales. James M. Rollyson - Raymond James & Associates, Inc., Research Division: Okay. And the last question for me. When you think about capital investment right now, and obviously you're taking a look at rationalizing your asset base starting with Oil and Gas and other things, are you focused on doing the rationalization first? Does that preclude you from considering anything on the M&A front or are those functions kind of mutually exclusive?

I think with respect to the former, we have a sense of urgency about it, but it is not exclusive of the second category. So in other words, we will think in parallel terms, and I think we have to in today's world.

And our next question comes from the line of Kevin Simpson with Miller Tabak. Kevin Simpson - Miller Tabak + Co., LLC, Research Division: Tony, maybe you can -- I don't know if Joe is there, just swing it over. I'm just curious as to the current tone in the marketplace with -- obviously with gas prices down, which you've already spent a fair amount of time on. But I'm just wondering if you guys are now beginning to see companies back off from prior plans, rigs that you thought were going to get renewed, not renewed or are you still able to find homes for everything that gets -- like go on the rig side? And I guess -- and also to some degree, in terms of activity in the frac business.

Sure. I don't think Kevin is -- it's kind of an interesting world where we do have a $100 oil price and you have a bunch of companies, for example, who are looking to deploy capital. And historically, they deploy capital because they need to find places to spend large amounts of money and capitalize on that kind of oil price, and they typically have gone international. So given that that's out there, that thinking, the fact that there's still $100 oil, you would think that the fact that the gas price is low doesn't abate, in fact, ought to cause people to continue to think of U.S. as just another place to continue that process. Anyway, Joe will -- he recently held some talks with some people, so let him give you the color.

All right. Thanks, Tony. Kevin, I looked back at the transcript from July and you asked me then what my vision was looking out. You said, "Is it a 10?" I said, "No, it's a 7." And I said, "30 years of experience tells me things change." Now the term contracts we have in place are partially a result of that. And you asked about the rollover. So far, we've been able to put most of the rigs to work coming off of existing terms, whether it's an extension with a current operator to a new operator, et cetera. So we've been pretty fortunate with that. We -- as Tony mentioned, I attended a function Sunday night at a large independent, did a presentation. Their thoughts, the rig count isn't going to change dramatically in the U.S. And the comment was -- yes? Kevin Simpson - Miller Tabak + Co., LLC, Research Division: It’s not, you said?

Yes, is not going to change in the U.S. What they're doing, they're redeploying, as Tony mentioned, dollars into Oil and Gas. And the comment was by their CEO, as long as $100 oil is here, they're going to work. And he says, hopefully, we don't drill ourselves out, like we did with gas, with oil. But the bottom line is, there's a lot of future ahead with oil. We're redeploying assets, as Tony mentioned, from different areas into the oil plays. We've recently put our first rig in the Utica, which came out of the Marcellus. We put 3 rigs up in what they call the Mississippian shale, which is in Kansas. So we've seen deployments. Most of those rigs came out or will come out of the Haynesville, so there's a lot of opportunities still going forward. Not saying again and say, as I told you in July, a 7 out of 10 as far as the vision. Kevin Simpson - Miller Tabak + Co., LLC, Research Division: Good. That's great. And just one quick follow-up. You did mention in the release, Tony, that there were some new build -- still new contract opportunities. Could you -- it sounded like that was in the U.S., I think it was. Is that -- are there still -- are you far enough along that you can kind of project out that when you do the next call, the one after that, that you will have signed some new contracts up even in the environment we're in?

What I like to talk about is things that are done. When something’s done, we'll talk about it. And we're hopeful, and that's something we're pursuing daily with lots of people. So -- but nothing to report right now. Kevin Simpson - Miller Tabak + Co., LLC, Research Division: Black and white, no projections. I get it.

Right.

And our next question comes from the line of Ole Slorer with Morgan Stanley.

One thing that struck me, again, going back to the 35 rigs that are locked on take-or-pay. I mean, even rigs, I presume, that are on take-or-pay contracts will have customers trying to move them from gas to oil. So how many of those rigs do you have in gas do you think are capable of moving to oil?

The 35 rigs, they're all currently operating, so they're all fungible assets.

[indiscernible] size, so 1,500.

No. And a majority of those can because, again, a majority of our rigs, as Tony mentioned earlier, they’re 1,000-, 1,500-horsepower rigs that are designed to work in almost any basin. So they're all fungible assets.

So there's not a disproportionate slant in the -- towards the, say, more vulnerable rigs in gas basins towards lower quality assets that could not be moved to...

Not at all, not at all.

Okay. So the second question then would be, how long time do you think it will take -- if your mix is now 35 rigs not under take-or-pay, working in gas or -- let's say, we have a Haynesville, Marcellus, Barnett exposure of about 50 rigs or 20% of your fleet. I presume those are the most vulnerable areas for the rigs. How many of those do you think will migrate into oil basins through the year?

How many rigs do you think will migrate over to oil basin?

About 35.

Probably 35. Again, it depends. We're still -- we still want to compete in those markets, keep operations underway. But again, we already today redeployed some rigs in the last 2 weeks, 3 weeks from East Texas to West Texas where a very sizable operation is underway there. We moved some rigs recently from the Haynesville down to the Eagle Ford and are moving either 1 or 2 up into the Mississippian shale. So we'll continue to move as opportunities come up.

Bottom line, he doesn't want to get pinned down. But right now, he's got 3 or 4 that are repositioning right now or in the next few months.

So how few rigs do you think will be required to drill for gas? I suppose there is some sort of a minimum level because of obligations. So is there a -- I'm just trying to figure out, at what point do you reach a level from which it is difficult to drop your gas rate count below?

Well, I think that would depend on what's the base number for activity for gas drilling depending on the commodity price. There's certainly a number at which the whole thing goes through the floor. But I don't know what that number is, whether would a portion of that number that sets the floor for maintenance, as well as holding leases, et cetera. I don't know what that number is.

That's okay. The reason why I'm trying to get into this is that you made a statement, I think, that the total gas or the overall rig count would be flat to slightly down. And I presume that you believe the oil rig count will continue to rise, which assumes that you presumably had a pretty negative view on the net effect of the decline in gas rig count. That's what I'm trying to understand.

Well, I think I said it was flat with potential to going down. And I think, on a cautious basis, that the deployment of the oil -- of rigs to oil should -- I'm not going to say it's going to overtake the decline but I think it reduces the rate of decline of the overall count. So that's the best we could say right now.

You also highlighted that the Eagle Ford was the weakest area, where you saw the most competition on Pressure Pumping. That was maybe a little surprising to some of us. Could you -- when did this become the most competitive market in your area? Was this a recent phenomena?

I think Eagle Ford is a market that everybody has been focused on because, again, there's a lot of activity. I think what we're seeing is crews from the Haynesville, even some from Oklahoma, Barnett, have kind of focused on that area because it stayed active. So there's just a lot of people bidding on future projects. And now there's some new entrants into that play, and their goal is to keep the crews busy. So with that, they're just trying to find a way to get a foothold in that market. So for us, we've been there for a while. We've had some -- we got some good contracts in that market. And I think we just see that anything in the future that we're going to be bidding on has -- that there's going to be a lot of margin drop in those situations.

Okay. Finally, Tony, what's the book value now of the assets that you are holding for sale?

Clark's got that.

Yes, one second.

You're talking about the...

Yes, book value, about 2 seconds.

Yes, all the E&P properties, et cetera, you took some impairment charges [indiscernible].

Net of all the impairments and everything.

Yes, the net of what's all for sale is $275 million and then NFR is around $300 million.

So it’s, say, it's $600 million altogether.

Okay. And you said that you don't rely on that in order for your -- or possible, in the $0.5 billion debt reduction target.

We understand that. Cash is cash. Cash matters.

And our next question comes from the line of John Daniel with Simmons & Company. John M. Daniel - Simmons & Company International, Research Division: You mentioned in -- this is for the Lower 48. You mentioned that flat cash margins in Q1 because of the, call it, $500 a day impact from payroll taxes and workers' comp. All else being equal, Tony, would you expect margins to jump $500 a day to get to Q2?

Well, there's going to be an improvement. And Joe?

Yes. As you mentioned, the $500, we call it, headwind we go into the quarter with. Because there, we think the second quarter, as mentioned, is going to be flat. It's really going to be determined on the pressure we see. We know -- we still have 21 new builds to deploy this year. All those rigs are going to be at better margins. So it really is going to be determined by what happens with the overall fallout and the gas count, which we don't know at this point. We know the term contracts were very well protected on the margin side. Eagle’s coming in and it's going to improve it. So again, we think...

I think the short answer is we think a substantial amount of that will be offset, yes. John M. Daniel - Simmons & Company International, Research Division: Fair enough. Just a couple on Pressure Pumping and I'll turn it back over. In the 14 long-term service arrangements today, is it safe to assume that some of those service agreements incorporate more than 1 frac spread, given that you've got 27 spreads? I'm trying to get to the 72% that's contracted.

All right. The 27 -- first of all, those 27 includes Canada, so there's 25 -- so there's 2 up there, so there's 25 in the U.S. And then, of the 25, the long-term service agreements are on 14. I don't have the exact number, if you -- that’s by number. I don't have the exact number if you break it by horsepower related to the contracts what -- if the numerical 14 divided by 25, it’s disproportionate in horsepower, but it is 72% of the margin. John M. Daniel - Simmons & Company International, Research Division: And then just last one for me, on the potential for margin improvement in Pressure Pumping. As you think about that, does that forecast incorporate any pricing reductions on the non-contracted work? And at this point, given that the market is getting a bit more competitive, have any new customers come to you to ask for you to amend contracts? And do you expect that to happen?

The 14 contracts, definitely, we have some inflationary language in there where if we have inflation, we can pass that through. Some of the other spot market contracts, again, I think, at this point, we're kind of looking where -- if they're in the right spots, do we need to shift them around? There's still some markets holding up. And as we said earlier, we have a very high percentage between our contracts and oil basins that we feel like has a little better pricing than some of the dry gas areas. So a little overly detail, I think we're seeing E&Ps at this point, still evaluating where they want to be. And -- but I think we have a pretty high confidence in our position where we stand today.

Operator, unfortunately, we're out of time. I'm afraid we're going to have to suspend the questions there. If anybody didn't get their questions answered, feel free to call us. We'll wind up the call, please.

Thank you.

Thank you, sir. Ladies and gentlemen, that concludes today's Nabors Industries Ltd. Fourth Quarter 2011 Earnings Conference Call. Thank you for your participation. You may now disconnect.