Q4 2019 Earnings Call

Today we will follow.

Customer 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 them sites into our market and how we expect neighbors to perform in these markets.

In support of these remarks the slide deck is available both as a download within the webcast and in the investor relations section of neighbors. Instructions for the replay of this call are posted on the website as well.

With us today in addition to Tony Williams and my cell are sticky Meisner present or Global 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 Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks and uncertainties as disclosed by Neighbors from time to time in our filings with the Securities and Exchange Commission, as a result of these factors are actual results May Vary 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 net debt adjusted operating income adjusted ebitda and free cash flow.

all references to

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.

Likewise unless the context clearly indicates otherwise references to cash flow mean free cash flow as that non-gaap measures defined in our earnings release Thursday. 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 return the call over to Tony wage again.

Good morning. Thank you for joining us as we review our results for the fourth quarter and full-year 2019. Our remarks will follow the usual format. I will begin with comments on the market our results Outlook William Will Follow with details and I will then wrap up now to the macro during the fourth quarter the price of near WTI average just under $57,000. This was essentially flat with the third quarter average during the fourth quarter the trends and pricing was solidly upward the quarter began sub $54 and then $61 natural gas prices were essentially flat averaging just over $200 per mcf during the fourth quarter is the most recent quarterly Dallas fed energy survey half of respondents reported using WTI in the $53 range for the 2020 Capital planning.

The beginning of 2020 the price of near WTI has declined from 61 to $51 oil prices are reacting to fears of reduced economic growth and crude oil demand wage in China and elsewhere. These fears have been triggered by the recent Corona virus outbreak in China. The impact to Global oil demand is uncertain though reports estimate consumption in China has declined by as much as 3 million barrels per day at the same time. OPEC has proposed temporary production cuts to mitigate the lower demand.

As I anticipated on a prior earning School industry-wide drilling activity in the lower Forty-Eight decline through the end of the year this reduction resulted from the combination of limited access to Capital as well as investor pressure to generate free cash flow during the fourth quarter the average US lower 48 land industry rate count declined by $97.11 reduction from the third quarter average. I will have some more thoughts on this when I cover our quarterly customer surveys in a few minutes.

for internet

Show markets, the macro picture remains positive pricing is improving activity is increasing in most markets. The level of oil prices has continued to support wage activity. Even after the recent softening the typical International customer in NOC or ioc is increasingly committed to longer-term development plans as such would expect improving conditions across most of our markets to drive incremental Rick demand.

Fourth quarter adjusted ebitda of 203 million dollars solidly in line with our expectations held up. Well despite the reductions in the US activity to Thursday our Canada billing solutions us offshore an international operations or recorded Improvement are lower Forty-Eight average recount declined by 10 rigs daily, gross margin essentially flat as somewhat higher average revenue per day was offset by a similar increase daily operational expenses.

and our International segment

Justin even increased by about 1% despite a significant reduction in advertising Revenue following recent contract renewals. This Improvement reflects better operating performance across several markets in other segments drilling Solutions improved sequentially, even as market conditions deteriorated this marks 3/4 of sequential Improvement in NDS, ROM Canada results increase with the seasonal lift and drilling activity. Rig Technologies declined as sales of Capital Equipment tailed off into the end of the year.

Now let me discuss our view of the market in more detail during the fourth quarter the industry recount in the lower 48 average 790 rate last week the recall she stood at 7:57 that is down by 17 drinks from the end of the fourth quarter which stood at 774 a 2% reduction.

Over the past twelve months the red cat has declined by 259 Riggs or 26% for the full year 2019 neighbors lower Forty-Eight recount outperformed the industry off a full year average recount improved by 1% as the industry recount dropped by 9% Our largest peers also experienced significant drop serve account. This performance. Thursdays are positioning in the market. We believe we offer the best combination of rigs technology safety and operational excellence.

during the

Quarter a steep drop in natural gas prices had a dramatic impact on rig counts and pricing in predominantly gas basins activity drops sharply in the Rockies Haynesville, Mid-Continent and Marcellus rather than chasing lower pricing. We decide to stack some of our Legacy Rigs and move. Hi spec brakes to other markets.

Once again, we surveyed our top twenty lower Forty-Eight customers the surveyed clients account for approximately 41% of the total over 48 industry account at your end and seventy 1% of neighbors recount on balance. The participants indicated a flat outlook for 2020. I would remind you that these conclusions are those of this customer group wage may not be representative of the full Market.

As I mentioned earlier are lower 48 count has held up quite well in spite of current industry conditions at this point are working Fleet in the lower 48 is overwhelmingly. Hi spec home these rigs comprise 98% of our working great count looking at it. Another way rigs working in the predominantly oil basins Permian Eagle Ford and Bakken comprise about 87% of our account.

the market

Hi spec rigs in the oily plays comprises the strongest segment of the lower 48 hour solid presence. There has drawn customer mix explain our high utilization zillion Financial results.

Across the industry. I suspect Greg pricing has moderated somewhat contractors have begun adjusting to the recent market trends and the significant pricing disparities between Basin this strength varies a great deal depending on the market. We continue to hold the line on pricing with our focus on the delivery of value and performance to our customers. We are confident. We will retain our leadership position, you know, International Market industry reactivity was stable in 2019 pricing in these markets is firm with pockets of strength. We have already deployed additional rigs not press our fourth-quarter account and should deploy at least one more as we head into the second quarter. We continue to pursue multiple opportunities for additional high-spec rates in several markets.

in the other segment

We see growing interests in our Advanced Technologies and drilling Solutions the adoption of our Innovative products and services continues to increase an inquiry levels remain high.

Now, let me comment and more detail on our segment highlights full-year Consolidated adjusted ebitda of $100 million was up 6% versus the prior year for the fourth quarter off of 203 million as we expect. It was just below the prior quarter.

Among our segments. We saw the strongest sequential adjusted ebitda growth in Canada are recount their grew by almost five rates or 60% as seasonal demand improved billing solutions adjusted ebitda increase sequentially by 6% to 24.8 million dollars this Improvement primarily reflects higher margins and tubular running services.

International adjusted ebitda increased by $1 to ninety six point two million improvements in Latin America and the Middle East drove the growth these improvements more than offset a reduction in advertising revenue of approximately ten million dollars following the exploration and subsequent renewal of a number of contracts with material upfront payments.

I just

City in US drilling declined by eight million dollars or 6% This was mainly due to the 10% reduction in quarterly average recount in the lower 48.

In rig Technologies segment results declined due to lower shipments it can drink.

We achieved notable highlights during the quarter first. We took significant steps to improve our debt profile in December. We amended the revolver and now have covenants more Instinct with our business office recently. We raised a billion dollars at attractive terms and subsequently tended for existing notes with these transactions. We substantially extended our debt maturities.

Second I want to mention the performance of Nabors Drilling Solutions, certainly competitors of adopted similar models to compete with our strategy. I believe we remain a mystery leader integrating additional services on Touareg and in driving the automation of the drilling process. This is demonstrated by the level of profits delivered by our end alignment rack is continued growth Trend. Our TRS value proposition is gaining share with increased profitability as we pursue our integration strategy. We have a robust set a v a purpose downhill technologies that are still in the early stage of harvesting and and today at the most extensive and mature performance software suite in the industry off rocket. The industry is gold standard for oscillation systems to reduce friction and increase ROP towards share increase driven by third-party jobs.

This asset-light segments out performed both neighbors and the industry's lower 48 rig counts.

Take me to ebitda increased thanks to continued margin Improvement in casing running penetration of software Solutions, notably pilot and navigator also increased off in a declining fourth-quarter big Market. We maintained our total pilot navigator job count.

Third our daily gross margin in the lower 48 business was essentially unchanged sequentially in the fourth quarter, even at the market. For the full-year daily marching in the lower 48 month exceeded $10,000 in each quarter. And was that more than $2,000 versus 2018. We continue to maintain pricing discipline and to realize the value we delivered to customers.

Now let me discuss our Outlook by segment us Drilling in u.s. Drilling for the first quarter. We believe our lower 48 recount should approximate the current level of activity or slightly higher. We expect our lower 48 daily margins to decline by a few hundred dollars per day our Alaska activity and results should improve the US offshore business should essentially in line with the fourth quarter.

International

In the international segment, we expect big activity to increase by a couple of rates. We recently deployed to Offshore platform rigs in Mexico one in late December and one in January. We took place a large reach work in Kuwait and our Rush of rigs will resume activity during the quarter. We expect some incremental downtime and key markets for work on certification and planned maintenance activities. Well, and we expect first quarter International adjusted ebitda of ninety to ninety-five million dollars.

Billing solutions in drilling Solutions. We expect first quarter results somewhat below the fourth quarter the decline and third-party recount in the US quarter-over-quarter and turn of the the business is driving most of the expected decline for the remainder of the year. We expect continued adjusted ebitda growth as we harvest the technology portfolio.

Brake Technologies for Rick Technologies. We expect an improvement in adjusted ebitda as the shipments of equipment and parts as well as the volume of services pick up.

Annual outlook for the full year. We are targeting the following first. We expect to extract increasing value for existing asset base. This includes the deployment of Iraq sits and repositioning assets to higher-value markets second. Our plan is to accelerate the monetization of our robust technology platform. We are on target too commercialized impactful projects and expect them to generate Revenue during twenty-twenty in addition the trajectory for our Navigator and pilot Performance Tools is steep and we expect to contribute materially to the segment revenue and earnings.

Third we target free cash flow generation of $300 and $20.20 during 20/20. We expect increased adjusted ebitda lower advertising Revenue reduced Capital expenditures off in capital reductions.

That concludes my remarks on the fourth quarter results and our Outlook at this point. I usually turn the call over to William for his discussion of the financial results.

Or I do that. I would like to make a few remarks about a member of our team.

After 102 quarterly earnings Seasons that neighbors just part of a full career. Denny Smith has announced his plans to retire in April.

Jenny joined Neighbors in 1992 during his tenure his contributions have been invaluable to neighbors operational financial and corporate development success.

Denny's in the oilfield spans more than 40 years in the early part of his oil field tenure. He played a pivotal role in the development of the North Slope of Alaska while at neighbors his choice and Alaska the international Arena and many significant projects. You may not realize this but most recently Danny was the Chief Architect and negotiator for the Senate joint venture package Arabia for me personally. I consider him an industry Oracle any as well known to many of you on this call. He is widely considered the dean of investor relations in the office space.

I hope you have appreciate it.

I have his wisdom his Candor and his honesty. He has mentored innumerable successful professionals within neighbors and in the broader industry.

Bill Conroy will be assuming the Senior Bowl and I are in corporate development and has big shoes to fill please join me in Wishing Danny and Lynette many happy years in a well-earned retirement age you remembered and sorely missed now, I would turn over the call to William after his comments. I will follow with some closing remarks.

Good morning, the net loss from continuing operations attributable to neighbors of $267 in the fourth quarter represented a loss of $0.70 per share of results from the quarter included $186 or $0.53 per share and impairments and other charges. These charges were primarily related birth parents of Goodwill and other assets as well as the writedowns of receivables reflecting increased political risk, and the shutdown of certain countries, the fourth quarter results compared to a loss of $123 or $0.37 per share in the prior quarter.

resulting

The third quarter included twenty three point two million dollars or six cents per share in exceptional charges related to an income tax settlement in a foreign jurisdiction, and after tax current job losses revenue from operations for the fourth quarter with $714 as sequential reduction of $44 million or 5.8% off by 18.3 million or 5.9% driven primarily by reduced recount in the lower Forty-Eight brake Technologies Revenue decreased by ten point five million dollars reflecting reductions in equipment and parts sales our average recount in the lower Forty-Eight of 97.5 declined by just over ten reads off 1.5 rigs more than we had anticipated daily revenue in the lower 48 at 26455.

Increase by slightly more than $500.

I'd like to clarify that are drilling Revenue per day includes only Revenue strictly related to a drilling rig Services business plus certain reimbursable items rebuilt to our customers wage does not include any of our performance software. Sometimes called apps. It does not include drilling automation revenue and is not include Revenue related to casing running manage pressure Drilling and Bo pisting all of these are included in the results of our neighbors billing solutions segment.

Revenue at $332 increased by three point four million primarily due to improved operational performance across several markets off this Improvement a set of roughly ten million dollar reduction in amortization of deferred revenue from Advanced payments, the reduction reflects a significant number of contracts that recently concluded and were subsequently renewed by our customers.

Canada drilling Revenue at 19.4

Million dollars increase by 7.2 million. This was driven by the usual seasonal ramp up in activity going from an average of 7.7 rigs working in third quarter to twelve point three rigs in the fourth quarter.

During Solutions revenue of 60.5 million dollars declined by 1.8 million from the previous quarter. Our International activity increases were more than upset by law in the US land markets Revenue in our technology segment was ten point five million dollars lower at fifty two point six million that decreased Revenue came primarily from lower internet sales of Capital Equipment as well as falling spare parts and repairs Revenue driven by the lower us recount.

Adjust the TV down for the quarter was $203 compared to 207 million in third-quarter as we expected a reduction in lower Forty-Eight and I T was largely compensated by improved results in our other segments us drilling adjusted ebitda of 113.1 million dollars was down by 6% off early in the lower 48 daily margins held steady closing at 10218 again, I would like to point out that these margins are pure drilling rigs without contribution from software apps Trucking between locations casing running or other sources of revenue. Sometimes included in the margins of our competitors.

we expect

Daily rig margin to tail off somewhat towards the $10,000 Mark in the first quarter driven by market price erosion in certain regions. Our current rate count is 98 in the lower 48 breakdown for the quarter should average slightly higher than the current level.

International adjusted ebitda increased by almost a million dollars to ninety six point two million in the fourth quarter despite a 0.6 reduction to 87.1 average wage incremental Revenue days in Mexico and Kazakhstan were more than offset by idle time between contracts and Russia as we moved our operating race to a new customer number that are operational up time in the Middle East was substantially better than the quarter and we continue to reduce costs in Latin America these operational and cost improvements more than a month roughly ten million sequential reduction in advertising revenue and the slightly lower rate count.

International

Really gross margin increased from approx 13702 14100 bolstered by the improvements in cost and upcoming performance. We currently expect International q1 adjusted ebitda the dip somewhat in the first quarter. We are conducting certification projects and several rigs in the Middle East which will likely result in significant planned down. This will be partly offset by startups in Mexico and Kuwait as well as increased activity in Russia.

Canada adjusted ebitda increased by 3.8 million to 5.3 million thread count at 12.3 was 4.6 higher and daily margin increased from $3,800 to $5,500. This increase is somewhat better than what we had predicted going into q1. We expect to continue with additional improvements in Rico and margins the Canadian Market continues to surprise to the upside.

Drilling Solutions posted adjusted ebitda of 24.8 million up from twenty three point five million in the third quarter the adjusted ebitda margin for this segment wage increase to 41% from 37.7% among product lines. The largest Improvement was in similar running Services as their activity continue to shift toward higher-margin integrated services are other NDS product lines declined modestly in the fourth quarter driven by the lower us recount or the first quarter of specting a reduction in adjusted ebitda as the lower Forty-Eight billion City continues to fall.

Rip Technologies reported and adjusted ebitda loss of one point six million dollars in the fourth quarter 3.7 million below third-quarter results. We are expecting some improvement in adjustable done to 1 to just above Breakeven.

For Neighbors is a whole for the first quarter. We would expect that just that he did in a range of $193 to $200 million dollars.

Me review our liquidity and cash generation.

We remain busy during 2019 addressing the quiddity and leverage as last year started. We promised our investors that we would reduce our net debt between $200 and $250.

I'll do the marketing. The US was not quite what we expected. We reduced net debt by two hundred and twenty million and close to a year with just under two point nine billion dollars in that dead to achieve our goal. We implemented further cuts to our overhead and capital expenditures and we reduced our DSO significantly.

In December, we amended our existing 2018 revolving credit facility most significantly this amendment replaced the previous net debt-to-capitalization Covenant off with a more suitable Covenant to maintain met funded debt at less than 5.5 times editor.

Also addressed nearly a billion dollars of our near-term debt maturity in early January neighbors completed an offering at attractive rate of $600 of senior notes doing 26th, and another 400 million doing 20 28 the proceeds from this offering we're used to successfully tender for more than nine hundred and fifty million dollars of senior. I'm maturing in 2021 and 2023.

And the fourth quarter free cash flow was 232 million dollars this compares to approximately 82 million in the prior quarter our cash generation in the quarter was strong in part to see how you low interest payments in addition. We reduced our Capital expenses and benefited from strong collections. I would point out that almost all of our interest payments come in the first and third quarters the first quarter cash generation will reflect interest payments higher capex property taxes disbursements for bonuses and other one-time costs associated with the beginning of the year.

capital

Expenditures of 60.6 million dollars in the fourth quarter fell by 26.5 million below the level of the preceding quarter Catholics for the full year was $424,000 somewhat higher than our Target as we brought forward committed operation certification from contract renewals in Argentina. We are now targeting 352 $370 in capital or 20 20

20/20 we remain focused on generating cash flow while decreasing our leverage. We are targeting free cash flow of three hundred million dollars and twenty twenty we believe this target is achievable as we were reduced. Our cap is significantly as compared to 2019. And in addition. Our advertising revenue is expected to decrease by $45 million dollars versus 2019 month lease. Tailwinds should more than offset any potential increases in working capital.

I would also like to thank any for his tireless efforts to help us improve neighbors Denning is one of the best people I know during my time in Neighbors. He has been a teacher and Mentor a source of advice and most importantly a friend. I will greatly miss his wisdom his sense of humor and his support

without it

To call back to Tony for his concluding remarks.

Thank you William. I will now conclude my remarks this morning with the following. I would like to say that I'm very proud of what our team accomplished during 2019 in a tough industry environment First Choice during the past several years. We have transformed our Fleet and lower Forty-Eight from predominantly Legacy assets to what we believe is the most capable modern Fleet in the market off. Our customer base recognizes the quality of our assets the competency of our crews are industry-leading operational performance and the value-added for our performance software and our services integration.

And they have rewarded us with increased market share and premium pricing. We believe our utilization of High Spectrum is the highest of our peers. This is helped us out perform our competitors in this important Market. We were the only major land contractor to grow average lower 48 recount in 2019.

Can our neighbors drilling Solutions segment has continued to grow despite the Steep drop and lower Forty-Eight rate count year-on-year adjusted ebitda growth with 34% Our drilling automation software offerings has made significant strides the high-margin low Capital intensity software business accounts for a significant portion of our custody, but it contributes strongly to our cash flow. You may find that the depth and breadth of our down whole tool portfolio surprising and we'll come back to grow when we started NDS. We used our rig to pull through incremental and DS activity today are Innovative and offerings are also helping us improve our drilling rig market share loss.

Third our balance Global presence and diversified offerings have provided us with stability in our results as our competitors dropped off in the third and fourth quarters neighbors continued to Thursday the 3rd quarter and sustain those levels in the final quarter of the Year our leading offshore rig position provides a meaningful contribution to our results.

our

Yes in Canada teams have offset the market weakness in the US in short. We have a diversified set of quality Market positions Each of which has strong growth drivers. This combination is unique in the space.

Finally the hard work on our leverage and liquidity has started to show results amendments to our credit facility in December removed investor concerns about covenants in January. We demonstrated our ability to tap Capital markets with 1 billion dollars and six and eight year notes at attractive rates. This was followed by the Redemption of daily 1 billion dollars in senior notes with it will be nearer term maturities.

As a result, we increased our average debt duration to 4.7 years and substantially alleviated the liquidity concerns of our investors.

At the same time we reduced our leverage net debt decreased by 220 million and 2019 these improvements resulting from increased adjusted ebitda over the prior year as well as lower capex interest expenses and dividends.

Looking forward I'm excited with what the future has in store for neighbors are rigged and services portfolio is stronger than ever. We have made enormous progress in our strategy of Fleet modernization wage International Sprint integration of joint Services into the rate and automation of the drilling rig and the drilling process.

Several of our technology is already contribute meaningfully to our results. We are now commercializing a number of our automation initiatives in addition to continue penetration from rnds Mainstays. We expect our drilling automation software to start moving the needle in 2020 and with initial deployments in automated rig floor is offshore and automated pipe handling on land. We still have gained instead of us from the robot ization of the rig that concludes my remarks this morning. Thank you for your time and attention with that. We will take your questions.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the key to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

And our first question comes from our side of the Capitol, please go ahead. Thank you for taking my call. First of all, I want to join Tony and William and thanking you for your service to the industry and to your friendship for over the last twenty years. You really enlightening me, you know, I've learned a lot from you, and I believe that generation of sell-side analysts have learned from you about the industry. So thank you again. Thank you for your service and congratulations on your retirement. I hope you're able to take some some rest now. Thank you. Thank you. Thank you. My my question. First of all twenty just a clarification. You mentioned that in your rig survey your your customers half of them said that maybe activity could be flat wage.

Is it a flattish to from current levels is there?

Sent from current levels. Yes. Okay. Just wanted to clarify that secondly on the capx2020. Could you provide some breakdown on how that would work out between uh maintenance and growth and maybe domestic versus International and also what would be the the the how much of that would be within? I'm not sure I think about roughly about 250 or so range would be sustaining and the rest Grog and I'd say if the growth Capital most of it would be International Summit and

Come and drink Tech. It does not assume a lot for Santa William speak to that. Well, the 250 is Tony mentioned really the the sustaining Catholic faith is really ongoing. It's about $200 and there's another forty or so that comes from renewals of international contracts which you know vary from year to year how many of those renewals we have lunch, but we are forecasting about forty million dollars for next year and and Santa in it does have a big piece which is a facility which is about forty million dollars, but outside that we're still not deploying any of the uh of the new bills in Saudi Arabia. So the levels there are not much higher than elsewhere.

Do you expect to start investing into the new bills? But it all depends on when nov is ready and mean we haven't really gotten a good fix on that. But I don't expect to start investing in 2012 and May and no deployments before the end of 2021. I don't believe at this point. Okay, and then just one last question. What is the what was the cash balance sheet of standard at the end of the quarter? It's somewhere around two seventy to eighty million dollars somewhere in that range. That'd be great. Thank God is also me. Thank you. Thanks for calling our next question comes from Chris voice of Wells Fargo, please go ahead.

Morning. Thanks. Just want to check. I think the commentary NDS was that it should be a little bit lower in the first quarter curious. If you could give a little more color on that and then you know, what point do you expect it to recover two four Q levels? Sure. Well about a third event is it's focused on third-party rates and they've given what's happened with great count. Although we think you offering is gaining Traction in the broader Market. There is some turn going on and therefore it's going to it will affect our growth in the office in the first quarter. But for the year, we we do believe we're going to keep going I think there's a couple of bright spots hear. The first one is the case in running portion of n d s. I think you probably realize yet at this point but uh TRS is gained market share in both the Gulf of Mexico and it's now the second biggest International tubular operation going on and off.

strong emphasis on execution and I think our margins are actually Best in Class when measured against the public people available, so

That that's really been a a good a good story. As you know fact about a year ago. We had a pause on this because we were waiting to improve our value proposition for the integration. We now have it hover our our jobs to the integrated approach away from conventional and that's accounting for some of the margin gain you're seeing even even on the same job count. It's increasing margin. So we think that stories I tell you cuz the value proposition with the customers is compelling directional drilling there. The story is also kind of interesting if you think about the marketplace in general, we actually I believe that if you think about the the drilling drilling Direction doing Services, I think it's in a in a seismic shift Arena right now. I think four or five years from now is stuck a look anything like it is off today. I think what what's going to happen is the use of what they should combine with the down whole I don't know who who's sorry for the Dead.

The use of the automation down whole I think it's making a different value proposition available to the to the operator, I think.

So that the historical stronghold that the big four had on directional drilling both in the US and international is being challenged. If you look at the US, for example, the big four used to count maybe five years ago fifty percent of the lower 48 MW D market now, it's a it's down more than half of that number today. And so I think the kind of offering that we've we now have in place is an offering a substantial growth opportunity. So with all that I think looking forward to at the year. I think we're looking at 4 quarter to four quarter you for 2019 is two for 20 28 about twenty twenty 20% twenties in the twenties.

Okay, that's helpful. Thank you. And then my follow-up so, you know granted your customer base is suggesting that the recount might be flattish going forward you guys, you know have some of the best birthday. Do you expect market share gains and and therefore some kind of upward momentum for the second quarter for the US land rig count just curious, you know to what extent you have any visibility or thoughts around that? I think what we're saying is I guess right now in terms of this quarter will be about about the current level or slightly higher. We do have this pay as we go through the account will be higher. We do expect that margin Improvement will depend of course on the trajectory of any sort of path. But yes, we do expect that. There will be an increase just for your information today. When you look at or our Fleet in terms of basis Thursdays wide disparity between oil leak oil base and the gas basins in North Dakota to give you an idea all 25 of our high-spec rigs are busy a hundred percent utilization in in South.

Texas 1817 of 18 is because you're busy only we only have one extra stacked and in West Texas of our rigs are we only have one of our x-rated fact that gives you an idea of

Of the high utilization that we're enjoying. So we think we do have the premier rigs in the marketplace and we think the the brakes that are stacked are going to find homes.

So I'll make a comment on that. Also, I think part of what we're trying to do is to balance pricing against market share and in the gas basins, we have decided not to chase March are at any cost and prefer to start moving some equipment to other locations and even stacking some rigs. And and by the way, we've also stacked a lot of our Legacy Ridge most of the ones that have suffered the brunt of our recount drop and you know, we I think we the bigger companies should be stewards of pricing and we're trying to behave responsibly by trying to optimize how much of eBay. We can squeeze out of the fleet rather than focusing on Purely market share.

Okay, great. Thank you.

Our next question comes from of RBC, please. Go ahead. Well, good morning. Danny took the best. You've been a great partner for all this time. So really really appreciate everything you've done. Thank you.

Tony I got to get a question for you, you know, we're now going on I guess the fourth year since that greyish you guys did back in the fall of Sixteen and kind of outlined this this movement arts or Drake Automation and these directional drilling services and the software and apps and Thursday. So on and maybe maybe you think a moment to kind of reflect upon, you know, the the game plan that was laid out back in 16 and kind of where we stand now in Fallout, you know, some of the some of the things I've found John better than you thought you might have expected and you know, what what maybe been some of those speed bumps along the way sure I appreciate the question if you look back and at the time the 2016, I think what we were told about was something was something to talk about in the marketplace. I think first of all it was that that analyst day that we actually spoke about the name.

at optimal rig and

Talking about the special features of the X-ray as well as the new brakes that we are planning in the pipeline. If you remember the debate back, then we were espousing the view that there was a difference between a walking rate and the skid ring and other people saying there was no different to cetera and people got caught up in that but you also didn't notice that that that that conference we identified what everyone now is calling super expect when we outlined the pad off the way you control the functionality at the same conference we said

And turned out to be I guess warrant that we said the industry needs a different model to adjust to growing in a market that's going sideways or potentially down and that's why we create a strategy and the Envy of strategy was focused on not bundling services but integrating him into the ring and that gave rise to our getting into the casing business as well as the directional business office software business all three of those I think today events have more doubts. That was a pretty precipitous move on our part It's worked out reasonably. Well, I think I've been disappointed in the the progress of the penetration to be honest with you a lot of operators during the course of the past three or four years. They didn't quite understand what we were talking about. Our marketing with Iraq was one thing that we didn't spend enough time on it was marketing the actual Solutions, but now I would say everyone's highly engaged and of course the fact is other people have joined in this in this effort. You have all dead.

Other large building contractors trying to replicate this to some extent so in some in some sense limitations to Port a performer.

Pottery and I think it's all make sure that it is topical. This is where the action is and I strongly believe that if you look back to the past five years of Eva. Per rig and versus the committee that the operators got they obviously got the Lion's Share of that unless you do something like this you're going to be challenged. So for us, it's absolutely business necessity to pursue it and not the right. Now. I'm pretty proud of that the portfolio we have obviously we're much shorter of the objectives that we laid out back then I didn't Envision it would have another to downturns in the past four years. And so we've accomplished with all the downturns in our faces as well. And as I said on the call here, I think the best is yet to come. I think the romanization of rigs is going to be a new era and I think we have some stuff in the pipeline pretty exciting as well as some more digital offerings in the in the pipeline as well. So we're not stopping we're pretty enthused by the reaction and hopefully wage

We'll find operators that willing to join in the effort to make this thing work to make this work. It's going to require the industry to change the device that we need.

More Alliance kinds of relationships where there's joint investment in these initiatives because the complications of making them successful really require you to offer your workflows, which requires more statistics between who you choose to work with and hopefully some of these larger operators will understand that because the the its untapped potential for them is fantastic as well as the benefit of the drilling contractor. So that's the way we see it and kurta I'll comment on the financial Point part of it. I think we're very very happy with the results up to now we're very encouraged by lower seen today about 12% of our ebitda coming from Neighbors billing solutions, right? And we we wanted to drive that number to 20% of our total wage jobs and I'll tell you why because we mentioned the margins at 41% Those are the highest margins we have in our portfolio and but the second thing even more importantly of the Dead

A hundred million dollars or so that we expect or believe we had last year about twenty-five was the Catholics, right? So the conversion of that page into cash flow is huge as compared to a drilling rig business and the margins are much higher. So we think as we move forward into a more envious world with changing the nature of our cash generation and you're seeing it in the results of 2019 and what we expect to see in 2020.

That's great.

Summary and then maybe maybe for you William on a follow-up, you know, the $300 free cash flow Target for 2020. I was wondering if you could just give us some insights as to you know, what kind of what kind of working capital contribution you know, you you expect to help drive drive that free cash flow. So so I did say at least right? I didn't say that but but yeah, the working capital is is helping us but it's helping us just to stay in place in the sense that we expect to reduce diesto by about five days during this coming year which will upset most of the increase in Revenue that we expect to see in in 2020. So from the working capital, you're not seeing what you're seeing. The the biggest increase is really are from the reduction and Catholics, which is quite significant and the second one is the 45 million dollars or so. Yep.

We expect to have higher even.

Died in 2021 in 2019 and if that higher ebitda $45 million reduction in advertising Revenue, so that just goes straight down to the back to the free cash flow. So those two numbers are pretty significant if you add them up and then the goal is reduced debt by that amount of free cash flow.

Well, we have some dividends to take account of so-so not quite that amount, but I did say at least three hundred so

Okay. Thank you. Thanks. Our next question comes from John Hunter of please go ahead.

Hey, good morning, and any congratulations, thank you. So first one I wanted to ask is just on the lower Forty-Eight. So you all did a great job outperforming the market in 2019 your guidance for the first quarter implies a decline a little bit below market and it appears that these wage jobs are mostly from private operators. So I'm wondering how you see things playing out as we move into the second and the third quarter and if you have visibility to to picking up something that activity that that was lost from some of the privates the 2020 is still a little premature for visibility. I would say in our core Market we're off with the level and we also have some green shoots to pick up some brakes so away from and that that corn Market is just the super Majors with the large Independence and that's 65% of our wage.

But yes, you're right. There is some folks.

Now on the other segments and we're going to probably be doing our efforts there to to attack that as well.

One thing one thing one thing that we struggled with a little bit is how much the impact of the Health crisis in China is going to impact all prices. So a lot of our Guidance just to take away the with that in mind we thought it would be uh appropriate to put a little bit wider range in our expectations the for the first quarter round and that widening was to the downside absent that Health crisis. I think we would have been more aggressive in our in our forecast cuz really it's very difficult at this point to see what the impact of that crisis will be on our results. We do think that I do think however that I would expect us to land closer to the upper end of the range than to the lower.

Yeah, I I've just would reiterate that, you know looking at looking at the whole thing from above is really pretty good things going on in all of our segments International. Although you know, we mentioned here that there's some plant down time. That's just operational the earnings power of international is enforced and we have these rigs coming on and the looking forward. We think these incremental may be marching enhancing as well. So there's good fundamentals there and the S. Where as we said we're we're pretty comfortable their offshore. We have a solid position there as well and Thursdays even cat is looking up for next year as well. And you've heard that from other people. So I guess we're a little more cautious but it's William said with all the macro going on. We thought we'd guide little more cautiously here in in light of everything that's happening.

Understood and then just to follow up on on the lower 48 on on the margin side.

Guiding down only about $200 a day. I'm I'm curious, you know, if you marked the whole Fleet to where the market rate is today about how much lower would your margin be and and you know, how many quarters would it take to kind of get to that level? I don't really want to get into that but I wouldn't say there's a a big thousand a year between regions.

So today we only have about 13% of our Fleet in those affected regions and our strategy has been not to Chase and that's why you've seen some stability in our in our margin overall and our ebitda. I'm going forward. We don't think it's appropriate to uh to lower significantly or pricing long. We expect we've seen a lot of stability in places like back in west west, Texas South Texas. So with 87% of our Fleet in those markets, we feel pretty good on our with our strategy right now.

Great. Thanks for taking my questions. I'll turn it back Andrea. We're getting close to our with you could just take one more question, please.

Our next question comes from Shaun Meachem of JPMorgan, please go ahead.

Thank you. Good morning. Good morning Shawn.

I appreciate the comments with respect to some the moving pieces on free cash flow. If we're on this call a year from now is at the fork you recall if you end up coming short on the three hundred million dollars or you know, beating it materially just curious. What are the major Flex Points in either direction that you highlight and thinking about in the context of things that are in your control versus things that are outside of your control. I don't think we have time left to answer that question.

I I think I think on the free cash flow, obviously, you know, the big the biggest influencer really would be the actual ebitda that we generate for next year's. Now. We are assuming based on what's going on on our international business and Mavis want Solutions Canada and some other places that all of that is going to have said what happens in the US and but that is that is really the market is really out of our control. We can mitigate by being smart about our strategy and pricing and I, you know, focusing on certain clients and geographies, which is what we've been doing what we can do we can cut capex further if we if we need to and off and we can get more aggressive on our Collections and and some of those issues are so that's that. Those are some of the things we can work with working capital initiatives more birth.

7 selling idle acid. So those are some of the the

Compensating issues that we could do, but I think if we exceed the 300 will just pay down more debt if we're a bit short will try to compensate with all the the the the items that we mentioned which again ugh capex reductions working capital initiatives and so forth. Yeah, I would just reiterate that off, you know, the numbers the targets that we've said that does Target a full year above last year's 2019 number and we have confidence in that as a Target. And of course by this companies could be measured against that this year as well as the free cash flow Target that speech information for your information if the whole thousand employee based that's that's one of the financial metrics but both of those numbers so three-quarters of our incentives for this year are coming from basically cash flow. Yeah cash flow. So yep.

But the point I'd like to make that what we're neighbors is different in this market is when you look at the composition of our even look at your question.

You know with having International and the offshore and even as Mainstays that gives a pretty solid foundation a base there that unlike what life more competitors have and that we think it's really distinguishing feature of what we have cuz those things don't move as much.

I guess about the recount.

Well, I think that was pretty succinct the Tony I think you out performed your own expectations. They're just the last thing I would say is to clarify when you talk about free cash you're saying cash-money operation last cash from investing that's an estimate of of how much asset sales or other items within CFI that are that are being baked into that free cash number. We have some somewhere in the range of forty million dollars.

But you know that happens every year. We we sell somewhere between forty and sixty million dollars of acid that remains stranded real estate close facilities wage. That's pretty much the number that we do every year. So that's obviously part of the calculation.

Got it. Great. Thank you. Thanks, Andrew. If you'll go ahead and wind up the call and thank you ladies and gentlemen for participating. And if you have a question or want to discuss anything, feel free to fax or email us is always thank you.

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