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Nabors Industries Ltd (NBR -0.65%)
Q1Â 2019 Earnings Call
May. 01, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to Nabors First Quarter 2019 Earnings Release 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 Dennis Smith, Vice President of Investor Relations. Please go ahead.
Dennis A. Smith -- Vice President, Corporate Development and Investor Relations
Good morning, everyone. Thank you for joining Nabors first quarter 2019 earnings conference call. Today, we will follow our customary format with Tony Petrello, our Chairman, President and Chief Executive Officer; and William Restrepo, our Chief Financial Officer, providing their perspectives on the quarter's results, along with insights into our market and how we expect Nabors 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 nabors.com. Instructions for the replay of this call are posted on the website as well. With us today, in addition to Tony, William and myself are various other members of our 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 Nabors from time to time in our filings with the Securities and Exchange Commission.
As a result of these factors, our actual results may differ materially from those indicated or implied by such forward-looking statements. Also, during the call, we may discuss certain non-GAAP financial measures such as adjusted operating income, EBITDA and adjusted EBITDA. All references to EBITDA made by either Tony or William during their presentations whether qualified by the word adjusted or otherwise mean adjusted EBITDA as that term is defined in our website and in our earnings release. We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures.
Now, I will turn the call over to Tony to begin.
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
Good morning. Thank you for joining us as we review our results for the first quarter of 2019. Before discussing those results, I will offer some comments on the macro factors that worked during the quarter. These factors understandably had a strong influence on our customer's activity and forward planning.
The first quarter began with two notable events. WTI was trading below $46. That was down more than 33% just during the fourth quarter. Second, capital markets were severely limited for energy issuers at the end of the year. This backdrop weighed heavily on our customers as they completed their budgeting and planning cycles during the first quarter. The result was a mixed bag of outcomes. In some cases, their processes were delayed, others reduced their planned activity, some maintained their prior intention to increase drilling, and we saw all that play out during the first quarter. The net impact to the industry during the quarter was a decline of 74 rig.
In the face of an uncertain though improving environment, our operations performed well during the first quarter. Adjusted EBITDA totaled $197 million, down modestly from the fourth quarter. Once again, our US Drilling segment and the Lower 48 in particular performed admirably. Average daily margins in our Lower 48 business exceeded $10,000 for the first time since late 2015. Our quarterly rig count in the quarter was up slightly, outperforming the broader market. Beyond the Lower 48, in the first quarter, we had more rigs working in Alaska and the Gulf of Mexico combined than in any quarter over the past three years.
Now, let me discuss our view of the market. The Lower 48 average rig count during the first quarter was 1,011 rigs. More recently, last week, the rig count stood at 960, that is down by 50 rigs from the end of the first quarter, which stood at 975. Since the beginning of the year, the rig count has declined by 89 rigs or about 8%. A number of customers in the Lower 48 have followed through on plans to reduce their spending and activity in 2019. On balance, these reductions have resulted in the decreased industry utilization since the end of last year.
Our customer base in the Lower 48 tilts heavily to IOCs and major independent. These operators have been among the more resilient, increasing or maintaining their previous drilling activity. Once again this quarter, we see this in our Lower 48 top 20 customer survey. The clients surveyed the camp for approximately 39% of the Lower 48 industry rig count. The results of this edition of the survey are mixed. The survey indicates about a 20 rig or about 5% decline in planned activity during the remainder of 2019. The largest planned declines are in four respondents, although a large portion of respondents indicated plan declines, several larger companies anticipated increasing their activity. When we last shared the survey in February, it indicated a mid-single digit rate decline with activity reductions concentrated in two operators. The additional declines are a combination of deeper cuts than previously indicated at some operators and the finalization of reduced drilling plans and others.
The previous survey was completed before our customers had finalized their budget plan. The survey group accounts for 63% of neighbors working Lower 48 rig fleet. Our exposure to the four operators, which are most significantly dropping rigs is limited. It amounts to four rigs. We have demonstrated that we can place any returns to prospect rigs quickly, even in this market.
On the plus side, as of today, we hold signed three year contracts for three additional deployments with one of our customers. Those deployments are expected to occur during the second quarter. The strength in our rig count is indicative of our performance in this market. We outperformed the industry during the first quarter as our rig count increased slightly. We are already on target to increase rig count during this quarter. We currently have 115 rigs working in the Lower 48. That's up by four since the end of the first quarter. Within the industry, the upward movement in leading edge pricing has paused for now, at the same time, demand for the most capable rigs remains strong. And pricing for our rigs remains intact. We continue to successfully reset closer to current rates rigs, which have been working on contracts with below leading edge pricing. Bottom line, our utilization of super-spec rigs remains essentially 100%.
In our International markets, industry activity has continued to gradually improve, though with uncertainty in two of our most important Latin American markets. As is typical in our customer base in these markets, there is less sensitivity to commodity price volatility. Pricing in these markets has also stabilized, although at a lower level than prior peak. We have finished the process of rolling higher margin, legacy contracts to the current pricing environment. We absorbed the less significant pricing concessions during the first quarter. We expect gradual tightening in rig supply as excess capacity is absorbed by activity increases. And we expect to deploy additional impactful rigs over the next year in select markets.
Now, let me comment on our results and on segment highlights. For the first quarter, consolidated EBITDA totaled $197 million, compared to $202 million in the fourth quarter of 2018. Revenue increased sequentially by approximately 2% to $800 million. Several factors drove our results for the first quarter. The US segment continued its strong growth trajectory. The performance was driven by pricing and margin improvement in the Lower 48 and increased activity in US offshore and Alaska. International results declined, principally due to two factors. Several rigs in the Eastern Hemisphere were also new contracts at lower current day rate. We also incurred market related and operational challenges in Latin America, which have been addressed.
In Canada, we had expected a seasonal increase in rig count, which did not materialize. The market there has become even more challenging as the peak drilling season disappointed. We achieved several notable highlights during the quarter. First, our Lower 48 operation deployed four upgraded rigs in the first quarter. These deployments included the final two PACE-F rigs for a customer in West Texas, and the initial two PACE-M750 rigs. One of the PACE-M750s went to work in West Texas and the other in South Texas. These deployments are excellent examples of our ability to cost effectively upgrade existing asset to premium super-spec rig. These first PACE-M750s have performed quite well in the field, demonstrating the value we envision for our customers.
During the first quarter, we also installed the industry's first drill robot on a semi-submersible rig working in the North Sea. This deployment is an important milestone for Canrig Robotics Technologies, and for the drilling industry. We also signed a contract for the first fully automated drill floor for a platform rig in the North Sea. Delivery of this comprehensive drill floor package should begin later this year.
During the first quarter, we added several installations in ROCKit Pilot, our automated directional drilling system. We were also awarded multiple installations for our Navigator software. Navigator automates directional drilling workflow. While Navigator determines optimal instructions for directional drilling, Pilot automatically executes those instructions. Fully automated direction of drilling, which optimizes wellbore placement is an emerging market, and we are at the forefront.
Finally, we completed the additional successful commercial runs of the rotary steerable tool. With our successes downhole, we are now adding resources to achieve wider commercial acceptance.
Now, let me discuss our segments in more detail. First, the US. We currently have 115 rigs working in the Lower 48. This compares to an average of 111 for the first quarter and 111 at the end of the first quarter. During the first quarter, average rig count increased slightly versus the fourth quarter. Our first quarter Lower 48 margin of $10,170 increased more than $700 sequentially. This increase reflected superb operational performance as well as the favorable pricing environment for high specification rigs.
Next, International. Our International rig count for the first quarter averaged 90 rigs, up two versus the fourth quarter. That increase reflects rigs deployed during the fourth quarter in Columbia and Saudi Arabia. Those increases were partially offset by declines in Argentina and Venezuela. EBITDA for the quarter was impacted by market related and operational challenges in Latin America and the Middle East.
Revenue declines in the Eastern Hemisphere due mainly to rigs' lower day rates, and partially offset by higher revenue in Mexico. In Canada, despite the weak market environment, our operations there generated healthy EBITDA. The Canadian drilling market has been severely impacted by a number of factors. These include wide base in differentials and government mandated production curtailment. In the first quarter, the industry rig count declined year-over-year by approximately one-third. Nabors outperformed. Our rig count declined by approximately 23%.
In Drilling Solutions, we continue to make progress in several product areas, most notably in performance software. During the quarter, performance software continued to increase penetration within Nabors and third-party rigs. The fourth quarter benefited from high year-end sales from the newly acquired PetroMar business.
In our Rig Technology segment, results from the Canrig equipment operation improved sequentially. This improvement occurred despite the ongoing challenges to new equipment sales given the industry's rig count progression. This segment also includes two of our technology development initiatives, namely our robotics operation and the rotary steerable tool. Our engineering expenses supporting these efforts increased somewhat. The robotics operation took two significant steps forward during the quarter. The installation of the first drill floor robot was completed and the first contract for a complete automated drill floor was signed.
Now, let me discuss our outlook by segment. In US Drilling, for the second quarter, we expect our Lower 48 rig count will increase by three to four rigs over the first quarter level. This forecast is supported by our pending contracted deployments. Given our March exit rates and our most recent contracting results, we expect a modest increase Lower 48 average day rates and a corresponding uptick in daily margin. Our rig count in Alaska is likely to decline modestly due to the seasonal wind down in that market. For the full year, we expect to hold Lower 48 daily gross margin above to $10,000 mark, and to exit the year at about 120 rigs.
In the International segment, we expect an improvement in EBITDA in the second quarter. Our rig count in the segment should be essentially flat. However, we anticipate improved operational performance, as well as some cost reductions in Latin America. For Venezuela specifically, we do not anticipate any change in activity levels during the second quarter. However, the situation in the country remains uncertain, injecting an element of risk into this outlook. All in, we expect International EBITDA to exceed $90 million in the second quarter.
In Drilling Solutions, we expect second quarter EBITDA to exceed the first quarter. This improvement is forecast across most of the major service lines. We also expect this segment results to increase throughout 2019, and to finish the year with an annualized run rate of $125 million in the fourth quarter.
Looking forward, we expect second quarter EBITDA for Rig Technologies to improve slightly versus the first quarter. While, there are several moving parts in the forecast and then impact is expected to be minimal. Later this year, we expect to begin recognizing revenue related to the rig floor automation projects in the segment's robotics operation. That concludes my remarks on the first quarter results and our outlook.
Now, I will turn the call over to William for a discussion of financial results. After his comments, I will follow with some closing remarks.
William Restrepo -- Chief Financial Officer
Good morning. The net loss from continuing operations attributable to Nabors of $122 million, represented a loss of $0.36 per share. The first quarter results compared to a loss of $188 million, or $0.55 per share in the fourth quarter of 2018. Results in the fourth quarter included $52 million, or $0.15 per share after-tax in net impairments and other charges, primarily related to our legacy rig fleet and other obsolete assets. Results also included a $52 million, or $0.15 per share tax charge related to the establishment of a non-cash deferred income tax valuation allowance in Canada.
Revenue from operations for the first quarter was $800 million, up $18 million from the fourth quarter. US Drilling and Rig Technologies drove the sequential increase in total revenue, while Canada and International decreased sequentially. US Drilling revenue of $320 million grew by $16 million, a 5% increase, driven by higher average pricing in the Lower 48 and strong seasonal expansion in Alaska.
International Drilling declined by $8 million, or 2%, reflecting market related and operational issues in Argentina and Venezuela. In addition, we absorbed the last of our negotiated pricing concessions on contract rollovers in the Eastern Hemisphere. Canada Drilling revenue fell by $4 million, or 13%. While the highly seasonal Canada market typically increases in the first quarter, our rig count declined due to weak market conditions.
Drilling Solutions revenue of $65.4 million declined by $1.4 million versus the previous quarter, reflecting high fourth quarter revenue for our newly acquired PetroMar business. Offsetting this sequential reduction was a $1 million revenue increase in drilling performance software. Revenue in our Rig Technology segment increased by $10 million, or 17% to $71.7 million. This increase was driven by improved sales of capital equipment and replacement parts, as well as higher volumes of repairs and certifications. Capital equipment sales remained sluggish, reflecting the volatility in commodity prices and its ultimate impact on drilling rig capital expenditures.
Adjusted EBITDA declined to $197 million, compared to $202 million in the fourth quarter. And the $11 million improvement in the US market was offset by an $8 million reduction in International. Results in Latin America were affected by the US sanctions and turmoil in Venezuela, as well as an activity drop in Argentina, driven by the recent reduction in regulated natural gas prices. Operational issues resulted in downtime in both countries.
Pricing concessions in the Eastern Hemisphere also had a negative impact. Canada down $2 million was affected by falling rig count and margins, as the normal seasonal trend was overwhelmed by the currently weak market. Finally, given the nature of our business, our drilling rig and performance software margins are highly correlated with the drilling days in each quarter. The 2% fewer days in the first quarter translated into an unfavorable sequential impact of approximately $6 million for the global drilling and drilling solutions business lines.
US Drilling EBITDA increased by $11 million sequentially, driven by the significant improvement in Lower 48 margins and increased rig activity in Alaska. Lower 48 adjusted EBITDA rose by $6 million as daily margins increased by $742 to $10,170. The improvement was attributable solely to improved pricing, as average leading edge day rates for our super-spec rig remained above the mid $20,000 range. Rig count improved fractionally as our deployments of upgraded rigs offset the increased utilization penalty between the releases of rigs by customers and their subsequent rig contracting with other customers. We expect daily rig margin to progress higher in the coming quarters, though not of the same sequential rate, which we reported for the first quarter. Since we still have the opportunity to reprice multiple rigs to current leading edge day rate levels, we would expect margins for the second quarter to exceed the first quarter level.
Our rig count for the Lower 48 stood average 114 to 115 rigs in the second quarter. The Alaska market is expected to share an incremental regular sale as the seasonal decline impacts operations there. International adjusted EBITDA declined by $8 million to $86 million in the first quarter. This decline primarily reflects the last of the pricing concessions granted on the rollover of a number of contracts in the Eastern Hemisphere, which have been renewed with pricing more reflective of current market pricing.
We also experienced activity decreases and interruptions, including operational issues in Venezuela and Argentina. Following these issues, we have adjusted our cost structure, pending the return to normal conditions. We also expect our Argentina rigs to return to operations shortly as the market reabsorbs the rigs released due to the reduced natural gas subsidized pricing. We currently expect our International Q2 EBITDA to improve some $4 million to $5 million as compared to the first quarter results.
Canada adjusted EBITDA decreased to $7 million from $9 million in the fourth quarter. Rig count at 16 rigs was two rigs lower, and daily margin decreased about as expected to $6,055 per day. After the atypical decline activity in the first quarter, we expect a further reduction in the second quarter as the spring breakup impacts rig count. Average Q2 rig count should decrease between six and seven rigs sequentially. Margin should hold up as a rig mix during breakup tends to be favorable.
Drilling Solutions posted adjusted EBITDA of $21 million, down from $23 million in the fourth quarter. Most of our product lines were stable with the exception of our performance software, which grew by $1 million, compared to the prior quarter. In our recently acquired PetroMar business, project related revenue in the fourth quarter did not repeat in the first. For the second quarter, we are targeting an increase for NDS adjusted EBITDA of $2 million. Rig Technologies reported an adjusted EBITDA loss of $2 million in the first quarter, slightly below the fourth quarter loss of $1 million. We incurred higher expenses in our (inaudible) region technology development initiative, as we ramp up toward commercialization. EBITDA in the core Canrig business was again positive and increased from the fourth quarter. For Nabors as a whole, we would expect EBITDA to be on the range of $200 million to $205 million in the second quarter with the improvements in most of our businesses, partially offset by seasonal declines in Canada and Alaska.
Now, let me review liquidity and cash generation. In the first quarter, net debt increased by $104 million toward the upper end of our expectation range. Several items normally impact cash flow in the first quarter. The net debt increase in Q1 includes $81 million in interest payments, which are concentrated in the first and third quarters. In addition, we incur several annual payments at the beginning of the year that include property and other taxes as well as employee incentive bonuses. These payments, which will not recur during the remainder of the year amounted to approximately $50 million.
Finally, our dividend payments will fall by $18 million in the second quarter. We also funded capital expenses of $140 million in the quarter, as our deployment schedule for upgraded rigs is weighted toward the first half of the year. We expect CapEx to decline sequentially each quarter this year and to total approximately $400 million. During the second quarter, we expect our cash consumption from interest and dividends to fall by about $100 million and CapEx to decrease by approximately $40 million. EBITDA improvement, the absence of beginning of year payments and working capital reduction should also help us to arrive at the midyear point with net debt below our year end 2018 level.
We remain focused on addressing our liquidity and leverage. We maintain our commitment to reduce net debt by $200 million to $250 million, this year and total reduction of $600 million to $700 million through 2020.
With that, I will turn the call back to Tony for his concluding remarks.
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
Thank you, William. I will conclude my remarks this morning with the following. During the first quarter, volatility in the energy markets declined and commodity prices increased significantly. Through this period, our drilling business in the US performed exceedingly well. Our financial performance in the first quarter exceeded our internal expectations. Our focus on expense control is unwavering. We remain committed to maximizing the value in our existing asset base. In the Lower 48 market, this recent volatility has tested our strategy. Our financial performance during this period demonstrates that we are bringing the best rig to the industry's most demanding customers. Our working percentage of super-spec rigs is among the highest in the industry. Our field performance measured across KPIs is top notch and the customer base is taking notice. With three contracted upgrade deployments pending this quarter, we have visibility to further growth.
US offshore business accounts for more than 10% of total EBITDA. Our platform rig designs are best in class. We are well positioned for any upturn here.
Internationally, our land rig franchise is unmatched in the industry. We hold significant share in major markets across the globe. We have more deployments scheduled as we move through 2019. There are discussions for even more rigs under way. We believe the first quarter marks the bottom in financial performance and we expect to show improvement as we move through 2019.
In our technology businesses, we believe that we are entering the commercial stage. Our recent market success in robotics is encouraging. Meanwhile our entire portfolio of performance software, tubular running services, downhole tools as well as drilling and rig automation is unique, and customer adoption is growing.
At our Analyst Meeting in 2016, we unveiled our vision to change the way wells are drilled. At that time, we suggested that existing AC rigs could soon become legacy rigs. We defined the pad optimal super-spec rig, which has now become the generally accepted standard. We also outlined our belief in the industry's need to embrace process automation and robotics, and to use the rig as a platform to deliver services around the well, while generating superior returns.
We have been hard at work since then, executing on our vision. The merits of that vision have largely been validated by events since that time, including by the number of service providers now trying to replicate similar objectives. We believe our current rig designs are second to none and we have the sector's most robust portfolio of performance software and tools, which utilize the rig as the delivery platform. We are focused on exploiting this portfolio to drive superior performance for our customers and enhance returns for our shareholders. I fully expect to report improvement on both fronts as we move through the year.
That concludes my remarks this morning. Thank you for your time and attention.
With that we will take your questions.
Questions and Answers:
Operator
We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Kurt Hallead of RBC. Please go ahead.
Kurt Hallead -- RBC Capital Markets -- Analyst
Hi. Good morning.
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
Good morning.
Kurt Hallead -- RBC Capital Markets -- Analyst
Hey, thanks for all that insight and detail. And maybe I might, Tony, want to start off question for you. When you mentioned the 2016 Analyst Day and at that point in time you kind of -- part of your vision, you outlined on Drilling Solutions, you had a target of getting to about $250 million, a blink of annualized EBITDA by the end of 2020. It looks like your commentary regarding the exit rate for '19 will get you halfway there. Can you just give us some insights on some of the uptake and the drive to commercialization, and kind of where you think Nabors fit in getting the industry to adopt these processes?
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
Sure. As I said in my opening remarks, I think that the move that we've had has been embraced by many of our customers. Everyone realizes that to get to a new level of efficiency, we have to change the way we did things in the past, which means changing workflows at the rig site. Typically, the way the operators lower their cost historically has been basically counting on each individual vendor and getting cost reductions. But that has a lot of diminishing returns. So if operators are truly interested in getting to a better level of BOE costs more efficient, I think you have to put on the table redoing all the change in workflows. And that was the strategy we outlined in 2016 with NDS.
Today, I think quarter-to-quarter, I think basically we have about 46% of the rigs in the Lower 48 now running about five NDS services, which is up a couple percent from last quarter. The reason why and NDS services this quarter was down a little bit was because of churn; as you know, in this market there's a lot of churn that was going on. And you got to realize, NDS services about almost 30% of it actually performance on third-party rig. So that's another point that affects our churn -- where the churns probably a little greater on third-party rigs, and this is for Nabors rigs for the other reasons we outlined.
In terms of our plan, I think as I said, the portfolio that we feel very good about the performance tools, I think our ROCKit product is known in the industry. It's the industry leader for oscillation and we're building on that with wellbore replacement products. We think that's a real growth market today. More than half our installs of ROCKit Pilot are using no directional driller at the rig site, which is a big change. And I think that as customers get more and more comfortable with that, that will accelerate. I think the tubular running services business part of the market where we've introduced a way to run casing on a more integrated fashion, that's getting traction as well. And wellbore placement, we've actually improved, we've worked on our cost structure, which was -- as I said in prior quarters also a bit of a problem. We're starting to improve our gross margins and the wellbore placement well. We actually tested our rotary steerable tool. This past quarter, we got a good trial run. We'll do a bunch more trials throughout this year to get geared up for full commercialization, beginning at next year and that of course has a big upside. And then finally, we introduced the technology called PetroMar, which is -- PetroMar technology, which is actually a new tool that's designed to help operators understand their wellbore.
And it's interesting that today when you think -- when people talk about completions, which count for more than 50% of well cost, there is -- most completions today are done kind of new force. You put a bunch of the stages X feet apart, and then you just hope, and you frac, I mean, that -- and that's basically the way it's done. There is no real intelligence about how to locate the stages. What our new tool does is, it actually can take a sonic log during the drilling process, so when we complete our drilling, we can hand over an image of the log to the operator, which then allows him to understand where his fractures are, so he can better places stages of the fracture. So this is a new technology we rolled out, we made. So you're seeing some spotty sales until we get some acceptance table, we're pretty excited about it. The image by the way that this thing produces is best-in-class as compares to the big threes imager (ph) that cost maybe five to six times the cost of what this service provides by the way we deliver it. So we're pretty excited about that.
So when you take all those services together, that's where we think the growth is going to come from. I think you correctly pointed out the growth aspirations to get there. We're maybe a little behind track by 2020, but we'll see if we can accelerate it as we go through the year. And I think some of these new things I've talked about have very large upsides. So it's up to us now to just exploit them and get them out to the marketplace.
Kurt Hallead -- RBC Capital Markets -- Analyst
That's great color. Thanks, Tony. And maybe one follow up for William. In the context that where you mentioned $200 million in net reduction target for this year and then I believe you said $600 million to $700 million in 2020. So first along those lines is, is the $600 million to $700 million in 2020 is that a cumulative effect? And then separately, I think the investor base has really been wanting to see some consistent level of free cash flow generation, so just wondering if you can give us some general sense on I guess the forward predictability that free cash flow generation?
William Restrepo -- Chief Financial Officer
Sure, Kurt. Yes, the $600 million to $700 million is combined for 2019 and 2020. But we won't stop there. I mean, the end objective as Tony and I have repeatedly stated is that we want to get to the lows $2 billion mark in terms of net debt. So we still have a ways to go.
So in the first quarter, I mean as you've seen in prior years, our cash flow for the cores is fairly seasonal. Last year, in the first quarter we had about over $200 million of net debt increase. This year, we pair that to about $100 million. In the first quarter, we do have a significant amount of expenses that don't recur in the remainder of the year, as we say, as I stated in my prepared remarks. If we take out in the second quarter the $80 million of interest expense, $80 million of dividends, reduction in CapEx, the absence of those one-time events in the first quarter plus the improved EBITDA, we think just those things give us an improvement of $200 million over the first quarter. And then we also are counting and targeting some working capital reductions. Well, we are -- we have made some efforts to reduce our receivables. We saw some of that in the first quarter, but we expect to get much more in the second quarter.
So all that together means that we feel that we have been very good position in mid-year, basically on the plus side that is reducing net debt by a somewhat versus the end of last year. And then in the second half, we expect a very strong cash flow as our results continue to improve, and again we expect a very strong quarter like we did last year. If we compare this first quarter to last year's first quarter, just to give you an idea of the progress we've made, Kurt, our operating cash flow from the cash flow statement as you will see in the Q is about a $150 million better than last year. We did spend a little bit more of CapEx this year than the first quarter of last year, maybe some $50 million, but again that's just related to our plans for the year where we had targeted about seven to eight or a total of nine upgrades in the first half of the year, and not in the second half of the year. So you'll see the second quarter have a very, very strong cash flow generation and we expect to deliver for the full year.
Again the fact that our interest payments are semiannual, first and third quarter doesn't really allow us to have like a smooth quarter-on-quarter cash flow generation. But again if you take that into account, you'll see that our operating cash flow is progressing and should be stronger by the end of the year.
Kurt Hallead -- RBC Capital Markets -- Analyst
That's great. Thanks, William, I appreciate that.
Operator
Our next question will come from Marshall Adkins with Raymond James. Please go ahead.
Marshall Adkins -- Raymond James -- Analyst
Good morning, guys, and again thank you for the detailed guidance here. I do want to hone down on the US guidance a little bit more. What I heard was that you have -- you're going to hold up pretty well in the second quarter despite your customer survey that kind of echoing what we've heard from other of your peers that Q2 is going to see a reduction. But your full year guidance suggests maybe you see modest improvement in your fleet through the rest of the year. So give me a little more color on that. I presume obviously it's -- you have some contracted rigs coming online, it's customer mix in Q2 that's causing you to outperform peers. But just make sure that I heard that right. And could you comment a little bit on -- your thoughts on the second half of the year?
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
Sure. So today as we said the rig count is 115 that we're at and we're still in the process of deploying the three additional contractor rigs on top of that. So that gives us some confidence that the rig count is going to be quarter-to-quarter up three to four rigs with the first quarter. And if you look at our fleet -- the contracted fleet, there's probably about 20 rigs in the fleet today are super-spec rigs that are still on old day rates they're enrolling, and so that gives us the ability to move them to market. As we said, we don't see the leading edge market moving up right now, but because we have 20 rigs that we can reprice to current rates, that also give us some potential of some additional margin improvement. So that combination I think that's what's giving us some comfort.
And looking toward the end of the year, I think we still believe that we should be able to take that about one -- close to 120 on the rig count. Obviously, it becomes difficult as people churn more and more and the pressure will mount, but right now, we're feeling pretty good about that, Marshall. So as I said -- so the next quarter you can see an increase in average rig count, we think and also be accompanied by a slight increase in daily margin as well.
Marshall Adkins -- Raymond James -- Analyst
Right. Thank. And William, shifting gears to International, we're looking at uptick in International. Could you help us bridge the improvement in EBITDA, how much of that's kind of pricing versus utilization versus like (inaudible) cost going away, stuff like that?
William Restrepo -- Chief Financial Officer
From te next quarter, Marshall, we -- in reality, we just have a couple more rigs coming down that should add some incremental margin. But a lot of that what we experienced in the first quarter was related to interruptions on and off, start and stop in Venezuela where we had to keep our resources waiting for the activity to resume. And we also had some temporary reductions in rig activity in Argentina as well that we had to cope with. That was pretty significant, so we had some extra costs in there that we have addressed in those two specific markets. So we feel comfortable that this coming quarter, we should beat that or meet that guidance that we gave. So it's a couple of items, I would say that, again one is rig count and the other one is just taking care of some cost in Latin America, given the volatility that we've seen in activity.
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
And looking out a little longer, Marshall, I think what gives us some comfort here as why we think we're in a upward trend from where we are today is, as we said before, we have visibility on additional seven rigs to go to work in International. Those are in -- that includes -- that's in the second -- later part -- the second half of the year. Two platform rigs in Mexico. We have rigs in Argentina, Algeria, Russia and Italy also to go to work. And so we have some visibility right now in the pipeline. And as we also commented in the remarks, the renewals that we're actually depressing, margins have basically been all now receptive markets, so that -- that's kind of overhang is behind us. And finally, the commodity price environment as you all know is definitely better than where it was. So you put all that together, that's why we feel we have some good visibility and confidence in some growth from where we are today.
Marshall Adkins -- Raymond James -- Analyst
Thanks, guys.
Operator
The next question will come from Chase Mulvehill of Bank of America. Please go ahead.
Chase Mulvehill -- Bank of America -- Analyst
Hey, good morning. I just want to follow up on Kurt's question about the net debt reduction. Is there any divestitures that are included in that net debt reduction?
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
None.
William Restrepo -- Chief Financial Officer
None.
Chase Mulvehill -- Bank of America -- Analyst
Okay. So it sounds like that you've got a pretty positive outlook of free cash flow next year. So I guess maybe also kind of help us understand what kind of CapEx is kind of implied in that target number of net debt?
William Restrepo -- Chief Financial Officer
We're targeting around $400 million.
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
From 2019 and in 2020, a slightly higher number than that.
Chase Mulvehill -- Bank of America -- Analyst
Okay, all right. And then if we come to Lower 48 and think about your cash margins -- in the performance of cash margins, you've had some good performance there. Can you maybe talk to how much digital or software app revenue you have flowing through there and then what kind of you know adoption rate you're getting in some of that?
William Restrepo -- Chief Financial Officer
The thing you have to understand about our numbers is with NDS, we totally separate out those two segments. So in other words, our rig margins are pure rig margin only. It doesn't include any performance software, doesn't include any tubular services like some of our other competitors. That's subsidizing our rig margins as a stand-alone. All that margin from software and other applications is all-in NDS. So if you only want to get apples-to-apples, you have to take the NDS numbers divided by rigs, and then add it to the US margin to really understand compared to some other people, and you'll see how well the Company is actually doing. But it's important understand that our rig margins do not include any of those our revenues.
Chase Mulvehill -- Bank of America -- Analyst
Okay. And thanks for the clarification. And then -- so just maybe on the software app side. Could you maybe just quantify how much revenue that you're generating from the digital and software apps, and then what kind of penetration you have across the fleet?
William Restrepo -- Chief Financial Officer
Well, in terms of penetration, we have 97% -- 98% of all Nabors rigs have one of the software products -- at least one of the software products on today. So we have great penetration Nabors rigs. We have a new version of the software that actually will work on -- actually works on third-party rigs with Canrig or Tesco South drives, we now have a version of software that works on third-party rigs with NOV top-drives. And that's being making some headways into that market as well. So we're pursuing that third-party market as well. In terms of overall dollars, we don't disclose the breakout, but it's substantial. I will say it's substantial.
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
What I could say on an average basis in the Lower 48, maybe it's about a $1,000 per rig, per day.
Chase Mulvehill -- Bank of America -- Analyst
Okay. All right. Tat's helpful color.
William Restrepo -- Chief Financial Officer
Now, the new software, we...
Chase Mulvehill -- Bank of America -- Analyst
Okay.
William Restrepo -- Chief Financial Officer
...haven't disclosed anything yet. That's just the legacy software.
Chase Mulvehill -- Bank of America -- Analyst
Got it. Okay. Appreciate the color. I'll turn it back over.
Operator
Our next question will come from Sean Meakim of JPMorgan. Please go ahead.
Sean Meakim -- JPMorgan -- Analyst
Thanks. Hey, good morning.
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
Good Morning.
Sean Meakim -- JPMorgan -- Analyst
So I guess, I appreciate all that the detail, the feedback around the progression that you see in International. As we think about the second quarter and going beyond, given that the contract overhangs, and that's in the past, as Tony said, were in upward trend. Generally from an activity perspective, just give us some of the funkier parts of the portfolio that are a little bit harder for us to see on the outside. So things like Venezuela, how confident are you and being able to call 1Q a bottom and then for International margins, are we highly confident and what are the caveats that you would put to that, any other kind of parameters or numbers you can put around I think will be helpful.
William Restrepo -- Chief Financial Officer
So you want my first born here, what do you want here.
Sean Meakim -- JPMorgan -- Analyst
Yes, I guess. (ph)
William Restrepo -- Chief Financial Officer
I mean, look, calling a bottom -- everyone always reluctant to call it bottom, so I could -- I can just give you context. The context is that all -- for all the reasons I mentioned before, which is increase in visibility, the fact that we think we've killed whatever fires there were from some of these operational one-off issues as well and the commodity price environment, and the fact that the burden of resetting contracts is awful. (ph) So for all those reasons, it looks like it's a bottom. Can I guarantee that Venezuela is not going a blow up in the -- by the third quarter, I obviously not. And obviously some NOCs that we have large exposure to, which is good exposure, good upside have their own drivers. And that's the problem with the International business where you're subject to the NOCs and what in their own timetables and how they do things.
So you know when you look at Mexico, for example, they could decide for cash flow reasons or budget reasons or something to defer a project a quarter or two. I think the main point here you have to look at is the direction. I think the direction is all heading in the right direction here and all the factors that support that are heading in the right direction. The fact is unlike the US, where there's excess capacity of rigs internationally, as you know, we've heard this before from other people, in the Middle East for example, incremental gas rigs, there is no -- there's very little excess capacity. So the market is pretty tight and if there's an uptick, that should have an effect on pricing and you start to see pricing increase as well. So those are the reasons why. But I can't give you my first born, I'm sorry.
Sean Meakim -- JPMorgan -- Analyst
All right. Happy to (multiple speakers)
William Restrepo -- Chief Financial Officer
So Sean, if you put a gun to my head and I have to say something, yes, I would say it is a bottom. But again like Tony said there is some exposure in Venezuela.
Sean Meakim -- JPMorgan -- Analyst
Okay. You guys have really raised the stakes on this call just now both of you. I guess -- yes, that's helpful. I think really Tony referring for is the context. And so high -- is there more -- say how much sizable risk is there in Venezuela? And I think the other piece that I think we have to trouble from the outside is how mix shift among the rigs -- active rigs on a margin basis can have an influence quarter-over-quarter? Those are the points that I was trying to get better understanding around.
William Restrepo -- Chief Financial Officer
Sure. I think you miss something when you look at rig margin internationally, because the mix shift can move even though the EBITDA can go up. So I wouldn't get -- and that's why we've been really clear in our what we said to you today that we think we're going to be low-90s. And -- but I wouldn't necessarily focus on average margin for that reason. Large platform rigs for example coming in that fleet have a big effect on margin. And because the disparity of large gas rigs compared to conventional 1,500 horsepower rig, there's also deltas there, so I wouldn't get hung up on the margin. So because each of the markets internationally is basically a separate market. There's like 15 different markets with their own drivers. So you have to look...
Sean Meakim -- JPMorgan -- Analyst
Yes.
William Restrepo -- Chief Financial Officer
...at a higher level than that. And I'm saying when you cut through it all, on balance we see that yes, and there are headwinds in places like in countries I just mentioned. But on balance, we still think directionally it's going in the right direction.
Sean Meakim -- JPMorgan -- Analyst
Right. Okay. That's all fair. And we talked a lot about cash and your expectations there. William, how that on the balance sheet if we're able to execute in terms of this cash generation next several quarters? What are latest thoughts around the maturity cadence beginning in 2020 and how you guys look to address those over time?
William Restrepo -- Chief Financial Officer
So obviously, ideally we'd like to refinance some of that using the capital markets and the bond market. And we are very focused on those markets and monitoring those to make sure that we don't miss an opportunity. Frankly, right now even though our yields have fallen down by over 400 basis points from the beginning of the year and we've made a lot of progress in that sense, I don't think the markets although all of they're open, I wouldn't classify them as attractive right now.
So -- but we will keep on monitoring and making sure that we don't miss an opportunity for refinancing. In the meantime, well, we have been paring down those early maturities using our cash balances and cash generated by the Company. And we will continue to do so whenever we get surplus cash, we will apply to those early maturities. And once we see an opportunity in the bond markets, we'll probably go into the bond markets and refinance some of those early maturities.
Sean Meakim -- JPMorgan -- Analyst
Got it. Great. Thank you very much.
Operator
Our next question will come from Taylor Zurcher of Tudor, Pickering and Holt. Please go ahead.
Taylor Zurcher -- Tudor, Pickering, Holt & Co. -- Analyst
Hey, good morning.
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
Good morning.
Taylor Zurcher -- Tudor, Pickering, Holt & Co. -- Analyst
Not to beat the International margin question into the ground, but just to follow up on Sean's question. If we think about the seven or so rig deployments that you have visibility toward -- over the back half of the year or Q2 and beyond, I know, the Mexico platforms would be accretive to the mid $12,000 a day margin that you're doing now. But fair to assume those other five or so rigs would would also be accretive to that mid $12,000 a day run rate?
William Restrepo -- Chief Financial Officer
So the average of those, yes, it will be accretive.
Taylor Zurcher -- Tudor, Pickering, Holt & Co. -- Analyst
Okay. And then follow up just on the robotic business. I mean, clearly that you're having some success with that technology in the North Sea. Is there any way to frame for us what sort of EBITDA or cash flow potential that business might have moving forward? I know it's a small piece today, but maybe on a per installation -- from a per installation perspective, and how much EBITDA potential is that business going to amount for you moving forward?
William Restrepo -- Chief Financial Officer
See, I think it's too early to do that right now. I think let us get one of these out and installed, and this is where we have to get a better idea of our cost structures et cetera. But obviously if this concept is viable, I think it gives people in the industry a new choice to move their redoing of their drill floors to a new level. And you know, you could just let (inaudible) we would charge for those kind of packages, we have to be at least at that order of magnitude level or more because the value this stuff creates. But the market is fairly substantial if it's successful in the offshore market.
Taylor Zurcher -- Tudor, Pickering, Holt & Co. -- Analyst
Got it. Thanks. That's it from me.
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
Alison, let's take one more question since we're about to run out of time here, please.
Operator
All right. And thank you, sir. Our next question will come from the (inaudible) of Howard Weil. Please go ahead.
Unidentified Participant -- -- Analyst
Hey, good morning and thank you for taking my question. So I just want to make sure a few things on the cash flow. So the way if I think about EBITDA to our free cash flow, basically what you -- if I'm not mistaken what you guys are saying is, let's say I take $205 million of EBITDA, there's no interest payment. There's maybe a $100 million of CapEx, $5 million of dividend and whatever is remaining that should go toward reducing net debt, is that fair way of thinking about it?
William Restrepo -- Chief Financial Officer
Yes. I mean, the way we look at it though as we look at the last quarter and we have lined up in my script another comments that roughly $200 million worth of improvements versus the cash flow of the first quarter. And in addition to that, we have some working capital target -- a reduction target. So that's where we're coming from. We think we are going to be just on the items that I mentioned some $200 million better than the first -- in the first quarter. And then the remainder will come with some working cash flow improvements, which I didn't quantify, but we have some targets for the second quarter.
Unidentified Participant -- -- Analyst
Okay. And anything that I need to think about SANAD, how that goes into or helps you guys from a cash flow perspective?
William Restrepo -- Chief Financial Officer
Again, SANAD right now is sort of imbalanced. We are -- we have some significant commitments, which is part of the reason we're being very disciplined in terms of CapEx outside of Saudi Arabia, because a lot of our CapEx commitments going forward are going to go toward ramping up our fleet in Saudi Arabia, which means we have to be more disciplined in other countries in the area. So SANAD is just part of our target, so the $400 million, $500 millions of CapEx that we have. And we think SANAD will be nicely self funding despite the big ramp up of rigs that we expect to see in Saudi Arabia over the next 10 years. And then over time and I think, but it won't be before to I would say 2022, then we'll start seeing significant cash flow -- outflows being generated by SANAD.
Unidentified Participant -- -- Analyst
Okay. And last one if I may. Somebody's announcement with Arabian drilling company, does -- how does that play vis-a-vis SANAD, is there any impact, any color that you can provide, how should we think about that?
William Restrepo -- Chief Financial Officer
The transaction is consistent with the trend we've seen in the region of several rig fleets changing hands. We don't see an immediate impact on SANAD since Schlumberger's rig went to into region, but not in the kingdom. It does change ADC, though. These rigs are not new to the market, so we don't really compete with ADC because of SANAD, and we don't compete for IPM contracts with Schlumberger either. So we don't really run into them much, so I wouldn't say there's much of an effect at all.
Unidentified Participant -- -- Analyst
That's very helpful. And thank you for taking my questions.
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
And let's hung with that this morning, that's the call. (multiple speakers)
Operator
Yes, sir. Thank you.
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
We want to thank everybody for participating. And if we didn't get your question, feel free to call us or email us. Alison, you can go ahead and close now, please.
Operator
Yes, sir. And thank you. The conference has now concluded. And we thank everyone for attending today's presentation. You may all now disconnect your lines.
Duration: 58 minutes
Call participants:
Dennis A. Smith -- Vice President, Corporate Development and Investor Relations
Anthony G. Petrello -- Chairman, President and Chief Executive Officer
William Restrepo -- Chief Financial Officer
Kurt Hallead -- RBC Capital Markets -- Analyst
Marshall Adkins -- Raymond James -- Analyst
Chase Mulvehill -- Bank of America -- Analyst
Sean Meakim -- JPMorgan -- Analyst
Taylor Zurcher -- Tudor, Pickering, Holt & Co. -- Analyst
Unidentified Participant -- -- Analyst
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