Nabors Industries Ltd (NBR) 2001 Q1 法說會逐字稿

Ladies and Gentlemen, thank you for standing by, and welcome to the Nabors Industries first quarter 2001 Earnings conference call. During the presentation, all participants will in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question, you'll need to press a "1" followed by the "4" on your telephone. As a reminder, this conference is being recorded, Thursday, April 19, 2001. I would now like to turn the conference over to Mr. Dennis Smith, Director of Corporate Development. Please go ahead, sir.

Good morning everybody. Thank you for joining us today. I apologize for the late start. Just wanted to let you know who's standing with us today, and I will be conducting the call. As usual, Gene will be conducting the call and give a twenty or thirty minute overview of the business and the outlook, and then we'll entertain questions and answers for about thirty minutes, and try to wrap the call up in one hour. As everybody knows, we have to put out the standard SEC disclaimer on forward-looking statements. There will be a lot of things we're going to talk about, the outlook and so forth, and what might be reality may not quite develop by that, but it represents our best guess today. With us today besides Gene, is Tony Petrello, our President and Chief Operating Officer, Dick Stratton, our vice Chairman, and a number of the senior executives from our business units. With that, I'll go ahead and get started and hand the call over to Gene.

Thank you. Thanks again for joining us. As has been our recent practice, we'll concentrate on sequential comparisons, mainly Q1 versus the last quarter before last year, and we'll try to give you some feel for what's the possibilities and what's to be for the next several quarters, in fact for the year. The first quarter of 2001 was our best quarter in history by quite a wide margin. As you've seen the numbers, I'll repeat them briefly. The revenues were up 26%. This was sequentially. Operating income up 124 versus 84, up 48%, and earnings per share of $0.51, up 46% from $0.35 this year. Equally important, perhaps, even more importantly in our view, is the fact that our return on assets employed, reached 20% in March. I think I told you that we reached 15% in December of last year, and we're anticipating with some degree of confidence that this will go higher in future quarters, and hopefully, in my belief, in future years. We're very pleased. This part is a result from many viewpoints. It is increasingly evident that and probably long-term North American gas/electricity outlook puts Nabors in a unique position to benefit its customers and shareholders. We're demonstrating to our customers that we can bring increasing numbers of much-needed rigs to our customers in sizes, locations, that they need them, and that we can operate them safely and efficiently. We'll get into this more later, but two years ago potentially this quarter we were down to an [NBUSA] as a profitably build up full company down to 70 something rigs. Today we are operating 244 rigs in the Lower 48. What I'll do is go over our units one by one and then we'll summarize and open for questions. Everyone of us is extremely pleased. Up this quarter versus the previous quarter, except for Nabors offshore and Nabors International, which will be significantly up by the end of this year starting next quarter and increasingly during the fourth quarter. Let me move to Alaska. Alaska had a great quarter. In fact, the quarter was so good I didn't think I'd have to caution you that the significant part of quarter resulted from our contribution from logistic business in Alaska, which is very seasonal and unpredictable. We had a very significant increase in Nabors Alaska drilling, [Buck sheep] which is our Alaskan business. The rig counts were up substantially 8.6 to 10.7. Looking ahead, the rig count will continue to go up, and I expect that some time in the second or third quarter we'll beat our all time high rig count of 12 rigs working, which was the fourth quarter of 1998, and I think we have only upside from there. We've moved, probably you've heard, to some degree, we've moved a big rig from The Rockies to Alaska. We're now in a position to work. Frequently, we have two or sometimes three operators interested in the same rig at the same time, and I think we can say the light at the end of this particular tunnel is pretty crystal clear, and the upside is pretty good. Canada. Canada we've had extremely good years. We have again an extremely good quarter compared to the preceding quarter, where our operating income was up roughly 50%. The margins were up. We told you last time that our Canadian margins per rig was $4,800 per day. In this quarter it was $5,300 per day, and we only see the rest of the year being better. I see this year being a record year. I think the fourth quarter as being a record year, even though we had almost full utilization last year. We're moving at least one rig from our stacked rig numbers in the United States up to Canada for one of our long-time primarily earlier Lower 48 customers, and that will start working in August, and the outlook generally looks really good. Again, I have to caution you that this market is a seasonal market. We have very likely low almost certainly lower. The question is how much lower our bringing in rig counts for the second and third quarter. Although the year will be a record year. In the USA, I would assume we're going to have a few questions on [NBUSA]. But, basically, the quarter was extremely good. We mentioned last time that the rig count was 195 and small change and the average rig margin was $25 - $25.50 actually the number I have in front of me. In the first quarter, the rig count was 221, and the average margin. This is per revenue day. This is every day $4100 a day and there was a significant increase in the number of rigs. As of today, we have probably 244 rigs working. As of March 31, we had 241 rigs working. Important to us, as you all know, is the fact that the safety record continues to be a major focus of our attention and the results are continuing to be gratifying. Basically, in spite of this major increase in rigs over the last couple of years, really, the continuation and the improvement in the accident rate improvement in the safety risk; basically, our OSHA total reportables went down to a record low of 2.37 in the first quarter. Our off-time incidents rate went down to .2, and those compare with the [IADC] numbers, which only go through last year. For example, the lost-time accidents were 2 points away, which were significantly better than the [IADC], but we have more room to go. Some other things we've been doing that are important. We've been bringing out rigs at a pretty healthy pace. That's pretty obvious. We hope to continue that. We hope to have potentially 100 rigs or 90 rigs. We expect to end this year with approximately 300 rigs able to work in the Lower 48, and we began this year, December 31, 2000, with 213 rigs, and we're doing pretty well on that. I think our folks are doing a masterful on getting these things out on time and on budget, and we appreciate in this connection of good relationships that we've established with our various vendors to get stuff to us on time and on budget and there'll be some questions on this I'm sure, but the average cost of these hundred rigs is going to be about $2.7 million a rig. The rigs we did last year, we had about 34 in our refurbishment program that we completed and they averaged about a million dollars. So, the cost is obviously getting better. But the rigs are still being refurbished, essentially as new in some cases, better than they were when they were new, at well below replacement cost, which is still in the 25% range. And I can't see anything that we're contemplating yet [for some of these] over 50% of the new replacement value. Back to well servicing. Again, as I told you last time, this was kind of a pleasant surprise. We had an outstanding quarter. The operating income was up was up a very significant percentage. Again, an all time record. I'll give you a couple of statistics. The rig hours went from 282 in the fourth quarter to 305 in the first quarter, and the rig rates went from 182 to 196. So, we're getting more hours. We're putting more rigs out as the market dictates, and the profitability, however, measures, whether it's operating income, return on assets, our average is moving not only in the right direction, but in the direction that, as I said earlier, is a subject of pride to us, and I think we still have a long way to go to integrate and optimize as between the drilling company and the well-servicing company. Here, too, safety was important and improved immensely, and we have a couple of letters from various and sundry important customers acknowledging the improvement in safety. International; international was essentially the same this quarter compared to the preceding quarter at pretty good levels, but I think the real zig in the international market is likely to some in the third and fourth quarters. We have major increases in Algeria, which we've talked about probably [this was probably on 07/03], but we're actually operating income this quarter, the April, second quarter, and by the end of the year there will be By the end of the quarter too, there'll be four rigs working full time and by the end of the second quarter we'll have five rigs and there's upside potential from there. Overall, I think what's happening is the US market has improved pretty dramatically and the test, therefore, for employing the rigs internationally. Whether or not we get paid, compensated, in proportion to the incremental investment in other things compared to what the rig should get in the United States. And we obviously are not going to put all our rigs in one basket, but specifically in that context, we will be moving rigs back from Venezuela, Bolivia, Saudi Arabia, and Guatemala to the United States where we potentially have employment for those rigs, and I think two things will likely happen. One, the company will get the profitability on the rigs being employed short term where they could bring a better rate than they could get and be satisfying our customers and, by the same token, we're hiking up the markets from which these rigs are leaving. I think I would like to mention that we do have really good prospects in essentially all of the promising areas as the market evolves to a more favorable position. It's pretty good now in Algeria, as I mentioned. It's pretty good in Columbia, Saudi Arabia, Yemen, where we have our one famous jack-up which is finally going to get a really good rate from some time in the second half. And Yemen is building primary out rigs. So, we're doing pretty well in those places, but now we're in the position where if another alternative we'd be virtually alone to some smaller extend of taking the rig from one market into any number of other markets. There's going to be a [propped up] optimization in our international markets. Offshore was one of the units that didn't have a great comparison to But, there's a lot of things going on there. In a sense, realigning rigs, moving rigs back from the States, taking rigs out of dry dock are repair, so that I would say that it looks like there're going to be major increase in operating income, rig counts, and that sort of thing starting in this quarter, but really manifesting itself in 2003 and 2004. Just to give you one quick indication of pricing and margins there, we have 11 work over jack-ups and as I said last time, even a year ago these things were essentially breaking even. Two of them are on attractive term contracts internationally. The other nine sometime in the next quarter which we will be working in, the leading edge rates for those, I guess, we're asking and hope to get there by May 31st. Our boat business essentially, I'll go through this real quickly, we have 30 boats, we had 30 boats. Most likely the number of boats we'll have for a while. The first quarter was potentially the same as the last quarter, which was good profitability and good return on assets and this particular company of operation we're learning, to our pleasure, you know, there's no [cap ex]. The cash flow is just real cash flow. But, in any event, there's been a price increase effective April 1st, which pleasantly surprised me. On the 180 foot boats we're up to $7500, which is a rate that I thought we'd never see $5,000 and on our new boats, the ones that are not under term contracts, the rate if $11,500, and we have three under long-term contracts. And we're exploring the possibility of converting more to long-term contracts. Take a minute on Canrigs, which is our top drive manufacture. I'll combine that more or less with EPOCH, which is our instrumentation operation. Canrigs; the operation is going great guns, which is, I think, the only way to describe it. We will hopefully be making forty-eight top drives this year, roughly two-thirds, a little more than two-thirds internally, and the rest are up to important, that's by definition, smart contractors, important contractors by definition those who buy top price from us. And we're actually doing pretty well in the rental market even though the supply doesn't permit us to pursue that as aggressively as we can. Net, net, that's serving its function of giving us the top drives so that we can give priority to our customers, and is making pretty decent money. Inter-company stuff gets eliminated, but the rest of the stuff is making very good money. Similarly, EPOCH we're having; oh, by the way, in June, June 1st I think, we have our 200 installations, and we're talking about pretty serious numbers; And on our EPOCH logging and instrumentation systems we essentially have almost full utilization of Nabors rigs. So the more Nabors rigs go up the more we have instrumentation and instrumentation revenue. Our third party program is progressing, not as rapidly as we'd like, but it is progressing and we have gone from actual installations in the fourth quarter of last year a total customer third party of 275 - 365 in the third quarter and by the end of the year we're hoping that that will approach 500 units in stock. Let me talk briefly about our balance sheet. As you know, we have probably, I don't know if we mentioned this before, we did another zero coupon of indenture in the first quarter. That netted the company something just short of $820,000,000. That was up 2.5% five-year no called deal. In essence, that coupon is convertible to common stock at the rate of 7.07 shares per [coupon]. In five years, that price of $93.375. So, that, I feel, is another super deal that increases our flexibility, and the total of the two transactions gives us a resolution of 18.6 million shares, and that's potentially fully reflected in these numbers. The last resolution impacted most of this quarter and potentially there won't be a whole bunch more after that. Let's talk about [Cafex]. The [Cafex] number for this year could be very big. The organic number could be close to $600,000,000 and that's a substantial addition to what we had talked about before. A big chunk, perhaps the biggest chunk of that represents Nabors Drilling USA and those rigs which primarily will be for the US as things change or develop, some of them could be from Canada or our international. Surprisingly, your can do your own arithmetic, but if you take the consensus projection for this year and factor in the important consideration that most of our taxes will be deferred and working capital bills that shouldn't be great. We could do five or six hundred million dollars and be self-sufficient on cash flow this year. I'm not saying we will, but it could happen that way. I think that pretty much summarizes the points I wanted to cover. I think I can summarize by saying the outlook is almost frighteningly good. I think we're in the right place, with the right assets, and I emphasize that the right people to take advantage of this North American gas-driven which I think will last for a while. I think we're increasingly demonstrating to our customers that we can add value to them by the usual safe rigs where they need them, sizes they need, when they need them and quantities they need. I think the same thing is true for our vendors. I think they're getting kind of the volumes they hoped for and with advanced planning and effort I think one things is true for both our customers and our vendors. They both wish respectively that the prices in the lower and higher, I forget which is which on that. Importantly for us, and we think ultimately for our shareholders, is the return on assets, which is decidedly going in the right direction and we do business with a net operating profit after cash taxes over average assets employed and they re-file in the first study was done [by strength throughout the industry] we have the highest return in the industry. And I don't mean among the drillers. I mean in the industry, and I think we're going to, if we haven't already, will shortly retain that and as you all know, I think there's a very significant correlation between that and the share price. Anyway, that covers what I have to say and now I guess we're open to questions. Operator.

Thank you, sir. Ladies and gentlemen, if you wish to register a question for today's question and answer session, you will need to press a "1" followed by the "4" on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered, and you wish to withdraw your polling request, you may do so by pressing the "1" followed by the "3". If you are on a speakerphone, please pick up your handset before entering your request. One moment please for the first question. The first question is from Jennifer Hoo with Simmons and Company. Please go ahead.

Gene, I will ask the question that you have been expecting. For years Lower 48 you mention first quarter average cash margin 4100. What's the current leading average cash margin and what do you expect that average to be for the second quarter?

Higher.

How much higher? What is the leading edge of cash margin right now?

Basically, I think last time when we were 25.50 I said I expected it to go up 50%. I would expect it to go up a smaller percentage to go up this next quarter. I think a good number is, say, $1000 a day on margin on average. The next one is something, I think, we can with confidence that we're not leading it astray one way or the other project. And the leading edge is, I think, we've all heard, but the issue for us is the leading edge is super nice, but we want the leading edge. For example, there's a $13,500 day rate on the 1000 horsepower rig. That might equal $7000 - $6500 a day margin. That, we know, obviously, is much higher than the margin we had in the first quarter. And the trick is to convert that nominal daily margin on the $13,500 to convert that to 365 days a year, with move down time, accidents, the whole thing. So, you've got to remember the differential, and I think we've lost, say a $1,000 a day next quarter, we'll have more rigs, and I think we're nowhere near the end of where we'll get in my view, particularly in terms of the rig inaudible JENNIFER Okay. That's helpful. You mentioned you are moving rigs from international to the US, and do you have in your mind how many rigs you are going to move this year?

No. I think there are two categories of rigs in some markets, like Saudi Arabia, we have 1,000 horsepower rigs and 1200 horsepower rigs which are not really going to be required down the road, so we're moving those back. And another important market, Venezuela. The market has been pretty bad for us for some time. Pretty bad for us and the whole industry for some time. And we have customers really needing those rigs, and they're generally big rigs. We know that they're coming back, but we have six from there, a whole three from Saudi Arabia, one from Libya where the market has been pretty quiet for some time. And that's essentially what we have at the moment. And, you know, we're totally flexible with the demand here persists and doesn't pick up in those markets will come here. If the demand goes the other, which sooner or later it will, these are going to equalize sooner or later and it'll go the other way. I think I should have enumerated about ten rigs.

Okay. Next question. You've just mentioned [Cap ex] of $600,000,000, I think you said. US Lower 48, you're actually around 100 at 2.7 million each, but that's less than half of the $600,000,000 you are spending. Can you just elaborate a little bit on the rest $300,000,000, what's that for?

Well, we have unfortunately, we have maintenance [cap ex] as well in the Lower 48 which is around $90,000,000, and we have both maintenance [cap ex] and road [cap ex] throughout the rest of the company. But, basically, what that says is that 40% of the capital expenditure in the Lower 48, and that's probably about right.

And the rest of them, how much are Canada; how much are the other divisions?

I don't really have that super handy. Oh, I guess I do. This one says that two-thirds of it roughly is Lower 48 and International Well servicing is about $45,000,000 - $50,000,000. International about the same amount. A bigger gross in offshore. Canada's going to have smaller but significant growth. Every outfit is going to have maintenance [cap ex] and I think eventually every is going to have an [cap ex] or a [cap ex] as well.

Okay. Thanks. The next question is from Arvin Singer with UBS Warburg. Please go ahead.

Well, I guess we have the firms mixed up. Arvin Sanger with [Joyce and Bancock] today with a couple of questions. One is on, Gene, just starting to get a sense of what Canada margins and Canada rig counts is doing in terms of the seasonality of, are you seeing much of a drop off. First of all, also on that subject I didn't get the average number of rigs that were working in Canada in the first quarter.

First quarter, I think we have like 29. Let me get a total. The first quarter we had 29 rigs working. We had 23 in the fourth quarter. That's pretty close to full capacity when you think(inaudible). We're projecting to get even higher. The total number of rigs is what? 34? 35. The margins, as I said last time, were 4800 for the fourth quarter and 5400 for the first quarter. I think when we look at the economics of moving a rig from a stack status to a working in the States compared to Canada we can quickly figure out that if you're working on 280 days in Canada, you're going to take only 75% of that cash flow on an annual basis anyway, that's the answer.

Yeah, but seasonally are you..., did it hang up? Yeah, Just a quick question. What is the rig count this quarter right now?

The Lower 48 or Canada?

For Canada.

We had 21 on April 1st. I think we have a few fewer now because this is the beginning of break up.

Okay. And in terms of [sundowners] and international, I kind of got the impression that you're clearly looking for it to go up from there, but how rapidly should we see improvement in contributions from either one of those markets?

I would say...

For some increase there in the next two quarters?

Yes. I would say some improvement back, in essence, is the high preceding quarter for Nabors offshore then fairly substantial in the next two quarters, and I think Nabors International, which was essentially flat this last quarter will see significant increases starting the second quarter, but also, increasing in the first quarter, specifically inaudible ARVIN Okay. And then, going back to the Lower 48. There is a strike now for, I guess, if we were to use a benchmark rig, like a 1500 horsepower, are they generally new rig contract and $15,000 derricks and what kind of terms actually are you having with customers?

Basically, we don't have a whole bunch of rigs long-term, so that we're exploring that. Most of our customers ...A big chuck of our rigs are on terms that's the most prominent is a quality term, three month term which we have with a lot of our rigs. We've gotten a few term contracts where we think that it's appropriate, and we'd be willing to do more of these at some of these prices, but it would have to be a situation where if we have a chap with 25 rigs working for us, and we get a term contract on 2000 horsepower rigs and we accept ten or twelve or fifteen all together with us, we don't get a whole bunch of protection, so he lays off the other eight or twelve. Know what I mean? But, we're definitely moving towards this. More in particular, some of the rigs that we don't have as much long term demand, in our view, we'd like to lock up at attractive prices.

Okay. Than one last question. Do you see anybody else showing signs of following how American leads in terms of any substantial [newbles] on the horizon?

No I don't, but I think if the prices stay where they are, inevitably there will be big increases. I think to put it in prospective, without being too full of ourselves, the new rigs that we brought out this first quarter and last quarter probably equal H & P's fleet. The issue is the rig supply versus the rig demand, and, you know, we're not going to bring out rigs unless there's a market for them. We're not idiots. But, I don't really see what the difference is as to whether we take a stacked rig and increase the supply by one rig or whether we bring one back from in paying for that matter bring one back from South America or if somebody builds a new one. But, in any event, there seems to be a focus and not but I don't see a monstrous increase in rig construction.

Okay. Thank you. The next question is from Jack Freeman with Prudential Securities. Please go ahead.

Good morning, gentlemen. Actually, Gene, I'd like to have you pursue that question that you just raised in a little bit more depth, if you don't mind. As you and I have discussed, there's a practical reality of realizing high returns on assets employed today and what a prudent addition to the rig fleet supply would be for the balance of this year and extending into 2002, and you just commented that, and I think all of us would recognize that you're certainly not stupid, and we all wish that we had been investors with you right from the beginning. But, would you just mind spending a few moments talking about what market opportunities and what evidence that you see gives you the confidence to continue this reactivation program and really just generalize about what you think that supply and demand balance will be as we progress through 2001 and into next year.

I think a lot of analysts are saying that the number of rigs that are likely to be in use by the end of this year are going to be constrained by supply. I'm not sure that's not right. Basically, we probably have, I don't know the precise numbers to date, we probably have a couple dozen rigs committed beyond the ones that we have working today. So, we're not...it's the other way around. Guys are saying give us a rig and we're say we're not going to commit too much ahead of time kind of thing, or three months ahead of time, unless it's one of our established large customers with whom we have this program. But, basically, we see the demand continuing. We're not calling through the beginning of time until now. I just am awfully convinced that electricity is going to keep gas prices in an attractive range for our customers. I don't see any extraneous supply of gas for the next three, four, five years, and I only have to worry the next two to answer to answer your question. I just see the demand continuing, and I see a little bit more of the deeper cut and that's logical and I think it's possible that the rig count could be 13+ by the end of this year. In fact, I think it...I'll bet on that, and I think that the land rig count will probably be 11.25 - 11.50 by the end of the year and we're premising our program on that. Bear in mind just that if we can build something at $0.15 - $0.20 cents on the dollar compared to somebody else who has to build something at 100 cents on the dollar, or even $0.30 cents or $0.35 cents on the dollar, we have a whole bunch better odds to made our commitments.

So, just to summarize then. You're saying that between now and year-end we will add approximately another 50 to 60 rigs and that you have, in effect, customer commitment for about a good 40% of those incremental reactivations?

And everybody's highly confident that the rest is doable. But based on... look at who our big customers are and look at what they're drilling programs are. Their capital expense programs. And that doesn't even count the small customers.

Okay. Do you want to comment at all, Gene, on the fact that you do have a billion dollars, a billion three on the balance sheet and any thoughts?

A better us for it than, you know, five or six percent?

Right.

But the worse case scenario is it's a good thing to have done compared to not to have done. As you know, we've discussed, and I've discussed this with a whole group before and I think that just adds a whole bunch of flexibility, fire power, etc. to us. Out of that's something we can do by virtue of our size, our credit rating, whatever else is in the picture. We're simply not to have mention something else, I've look at...You know we're in S&P 500. We got in there on the 12th. Wall Street Journal did a study of the thousand biggest, highest, profit companies, whatever, by various groups, and if you look at the investor returns over the last ten years, for example, you take Integrated Oil, P&C, drillers and equipment guys, I'll give you two guesses as to who the highest is. We were highest with 26% in terms. So I'm saying is I think we won't pee away the cash and if we can find a real good use for it. Great. If we have marginal uses for it, it will be better off than if we had not done it.

I just have one quick last question. Under any of these indentures of these zero coupons, Gene, are you precluded from buying into your own shares?

No. We came close a couple of weeks ago.

Okay. So you are not then. There are no limits on the fact that if this stock were to pull back you feel comfortable you could buy in shares from treasury.

Yes.

Okay. Thanks. Our next question is from Kevin Simpson with Merrill Lynch. Please go ahead.

Thanks. Gene, I going to go in a couple of directions. First, one would be on rig rate have risen substantially even though gas prices are strong. We keep on kind of wondering when your customers are going to start whining about how high rig rates are. Are you beginning to get any greater backlash over the last month or two from the key customers or maybe ones that aren't so key on rates?

I think there are some customers that will complain. They complained when the prices were $8. You know, like we used to say, all the time they didn't get to be big, good, strong, customers by being patsies. On the other hand, our biggest single customer defends us among other participants in an [AFD] on rig prices. There have been maybe a...I don't know if its in a pro-cancel light. I know of one rig that came down on price. It was a sizable rig where the guys were talking about taking it away. I don't mean sour grapes, but literally, the guys were talking about taking it away from that customer because he was pretty lousy when times were lousy. You know, when times were bad. And there have been a couple of small rigs. We obviously would like to tie up the small rigs, but we have more confidence with our customers with the bigger rigs. So, there have been a couple cases where the last price increase was mitigated on a couple, three small rigs. But, that's essentially it, and there are guys out there, for example, [Roen] put a rig out at $2000 a day for delivery [or whatever it was], but the customer apparently couldn't get a rig from us or anybody else with that he had a lease expiring, so I think that last situation is more representative of what the situation is. These things change pretty quickly, but as I told you I have for the first time since I've been in this business a pretty strong feeling about the gas/electricity and the indications for gas prices situation and what that implies for us, and I haven't heard one operator say that he thinks we're going to have an easy time even at $5 or $5.50 to find the gas that the country's going to need in the next three or four years.

Okay. Good answer. What about on international? On yesterday's Santa Fe call Safe Harbor was pretty bullish on Venezuela. They've done a little better than Nabors' has in that market over time, but I thought it was curious that you're moving rigs out at a time where Santa Fe, who's a player in the market as well, is seeing strength. Is there a correlation there that the reason they're seeing strength is you're moving rigs out and are you beginning to see some of that as well?

I mean H & P are not idiots either, and they're moving them.

I'm not implying you're idiots, Gene. We'd never do that.

Well, okay. I'm sorry. I would say one consideration is that they cannot move those rigs to the United States, which is a more attractive at the moment. And, yes, it's conceivable that anybody is better, but I frankly doubt it. We've been Venezuela a long time. We have good rigs, good relations. It 's just that they don't have an alternative, I think. And it probably is getting better. I mean, they should. We've been saying for two years that they should be drilling more. They have the economy to production, but until we see it one the bottom line with a contract, your know, political philosophy doesn't impress us too much.

Right. So you have...you're talking about optimization and alternatives that you have.

Yes. And on the last bids I think we were probably the highest of anybody, weren't we? In some cases, by sixth highest than the next highest. Are we going to put 5 7/8 drill pipe and two other strings on it when the top drive and end making $6000 a day. Why the hell should we? We won't.

Okay. That's a firm answer. And then you're wrapping up in Algeria finally, and haven't been in that market for many years. Is there a risk that we're going to need some start up costs here in the first quarter out of the box and maybe...and I guess the other question...I'm going to hark back a few years ago to a to next level in Saudi Arabia and to those... and you ended up having to eat fairly large mobilization costs for that market. And the stronger market where it is now presumably you have more options, but your comfort level that you're pretty bulletproof here. I'm sorry to use that for Algeria, but pretty bulletproof.

I would say I'm pretty confident that whatever we did wrong...we've done a lot of things wrong in several places, many places...that we learned from that one. I think we have a real good understanding that this particular customer... and this is not the first thing we've done for him... is not a state oil company. We've worked elsewhere for this guy and we've moved rigs like this from other places. In fact, one of our issues is we have a rig that hadn't worked someplace else, why do we have to send $3,000,000 - $4,000,000 more to move the rig again. But, that's life in the international market. So, you know, I would not guarantee a thousand percent, but we wouldn't have approved that capital in the deal if we thought there was any significant probability of not meeting it. I think we will.

First we can spot it, Kevin, is that there is no, you know, big macro infrastructure obstacles or anything like that. As it was, we(inaudible) rig in several years ago where a brand new field opening up that did have growth by the time those issues were present there. The first rig hadn't sputtered or anything.

As it were, we figured out better this time.

Okay. Thank you. 00The next question is from Sam Spell with UBS arburg. Please go ahead.

Question for you, Gene. Can you just give us a little bit of a breakdown of how much of the inventory that you've got left of rigs breaks down between and SCR's and the mechanicals and what the current fleet breakdown looks like or if you want to even maybe for a breakdown horse power directions.

Yea. I think I can do it for most of them. I should be able to do it and we can get you later on most of them. But, the first... we essentially started this active reactivation program around the fourth quarter of last year and the cost to load and reload and the first thirty-four rigs, which of this overall program we did last year, were like twenty mechanical and fourteen SCR, and I don't have really handy here the sizes, but I can tell you that of the 380 rigs there are about 30 rigs that are 750 horsepower or smaller and we've deferred doing that. But basically, we take a rig out if it's smaller than 800 horsepower. We pick it up if we have market for it. Otherwise, we're not doing it. So, we have a lot of 1000 horsepower and higher, mostly SCR and as I said at the beginning the ratio of SCR was higher. I would say over the next 100 rigs or so, which is not the whole total, will be roughly 30 - 35 rigs. 30 rigs, say, SCR, 70- 75 rigs mechanical. The SCR tend to be larger rigs. In other words, probably the average is around 1500 horsepower including a couple 3000's, a number of 2000's, a significant number of 1500s and 1000s.

And can you give us a sense of what the rate differential is right now, or the margin differential between say the 800 - 1000 horsepower rig and 1500 - 2000 horsepower units?

Well, I would say that the 2000 horsepower in the first place let me say that the 2000 horsepower is much more likely to have a top drive and other stuff on it. But, if you take the well-publicized [Roen] 2000 horsepower at $20,000 a day that's, I think, a little higher. But, it's obviously a rate that's out there for somebody to pay. So let's say $17,500 for 2000 horsepower without a top drive $2000 - $2500 for the top drive and at that rate, I would say on a 1000 horsepower, you know, good customers will pay something less than this, but I would say the highest rate we have now probably is $14,000 - $14,500. I don't mean that that man is not a good customer. I mean he doesn't have a couple dozen with him. And for in between it sort of graduates and a lot depends on when the deal was done. Obviously the bigger rigs, even when they have one well contract some of those wells last a long period of time and some of them are still lasting; it seems like forever. One or two. But that's essentially it. I'd say we have really substantial move April 1st and then I think right now the rate is not materially higher, a little bit higher, but not certainly higher than it was April 1st , but there's a lot of room between our average rate and the marginal rate. And that's not only a function of contract, but also a function of geographical area, size inaudible SAM And then my second question. Just kind of circling back to offshore. How many rigs were active in the first quarter out of the fleet and what sort of activity are you anticipating in the second quarter here?

I can give you that, but that's just so much apples, oranges, and grapes in the number of rigs that it's really hard. One second, I'll give you. We had 36.9 average rigs years in the fourth quarter and we've had 36 in this quarter. But the important difference is what the day rates were, which high volume rigs or high rate rigs weren't working and stuff like that. We had, in fourth quarter, we had 8.2 [jack over workups] were put for whatever reason, relocation and stuff like that we only had 7.4 in the first quarter. But, we'll find that in the third quarter and fourth quarter we should get to 10 -12 in my view of the jack-ups. You know, that's well known and that we know that margins there are probably...we get $35,000 - $33,000 for a rig we're probably making $20,000 - $21,000 per day. So that that's really important. And the platform work over rigs...our expectation is, for example, that April 1st we only had 17 working and about up to 50% more than that 23 - 24 working in first quarter.

Okay.

With the [mace]rigs we have a real good deal, a long term deal, working with British Gas and thathasn't generated a ton of money, but while we're waiting we finished with BP and that, but that's going to be like, probably firm of a year and a half. It will probably be longer than that and that's a real good day rate, for example and we're going to get God knows how much equipment that they've put in. It changes. I think the general principle is that the shallow stuff and the [mace] rigs are employable right now and its just a question of lighting and the jack ups. I'm not going to talk right now and when we get everything lined up in terms of relocating the rigs, doing what we have to do to get them out of the shipyards and stuff like that, that'll be there and the only remaining issue will be what's going to happen with the under-utilization of the [APR] rigs.

Okay. Thanks. That's very helpful. The next question if from Bill Sanchez with Howard, Weil. Please go ahead.

Gene, in the press release earlier today you made mention of the fact that you're going to allocate several of your smaller drilling rigs to your well service operation in the US, Lower 48. I was wondering if you could further comment on that with the size in terms of total rigs you would be allocating.

I think we have a question right now. Of the 380 rigs, and actually there's potential for a couple dozen more than 380, but of the 380 rigs that we've been talking about specifically there's a little more than a couple dozen of the 750 horsepower and smaller. That in plain English if market develops in the Lower 48 drilling we'll be finished out of drilling rigs. Otherwise, they'll be considered for work over rigs, which will take smaller [cap ex] and with ratio we could put them to work there. So, where they will go is not yet certain, but it could be a couple dozen. But bear in mind that these would be probably pretty good mobile rigs and bigger rigs than the average work over rig, but, they, Workover Company still has a couple hundred rigs that are stacked.

Right. But in term of...as we end the year, you talk about as many as 300 land rigs available for the US market. Clearly we should lower that number. We're trying to get a kind of quarterly average by a couple dozen.

I don't think that...I'm not....we're talking about around 300 without including those 25 rigs.

Okay. That's helpful. One other question for you. I guess, just to kind of circle back on Jamie's earlier question. In talking about the spreads that you're seeing in the cash margins between maybe SCR rigs versus mechanical rigs in the first quarter and what you see going forward. I know in the fourth quarter you commented you saw as much as a $1400 a day cash margin spread between SCRs and mechanicals. Where was that in the first quarter? What do you expect you're going to go in forward?

I have right hand with two fingers up, so I think that means $2000 a day. Or a couple $1000 a day. The other issue here too is we're prepared to invest a little bit more in terms of what we think the long term position will be monthly. If you're talking 1000 horsepower mechanical rig and 1000 horsepower SCR rig, it pays in our view to spend the extra bucks now even though the differential may not be an enormous amount but we've looked at how much it's likely to work over its life. We err on the side of longer-term quality in that specific regard.

The last question for you , Gene. Are you still receiving the same kinds of wells of ancillary revenue from, say, scheduled mobilization as a percentage of day rate during that time and also standby rates? Have you seen any change in the market? There operators willingness to pay that kind of rate to you?

I don't know if I have the quantification, but its big time. In other words, the move rate essentially there's very few exceptions in regard to 85% or 90% of the day rate plus the actual third party cost to move with the risks of weather and waiting and all that junk largely on the operating inaudible BILL Great. Thank you, Gene. The next question is from Mark Ernest of Solomon, Smith, Barney. Please go ahead.

Yes. Good afternoon. Gene, I wanted to ask about your appetite for acquisitions and obviously you've done a lot of acquisitions in the past and you've got a real good opportunity to invest in your fleet here in the Lower 48, but, you know, at pretty attractive prices, you do have an awful lot of cash. Could you comment of your appetite for acquisitions and whether they would be land, offshore, international or domestic?

I think we're open to anything that but I mean the fact the we can bring out rigs that let's say $4,000,000 worth given SCR rigs doesn't mean that we wouldn't buy an SCR rig for $6,000,000 or $7,000,000 if it fits the picture. That's partial response to your question. So, I would say that we have looked at a number of international fleets and will continue to do so and sooner or later we may end up with one. I think we're also continually looking at things that can augment the installed base we have with all our rigs. We're doing 55% of the directional work in the United States, we still do, every quarterly report I tell you we'd be going less than that if we found the right vehicle. I can't think the only thing that I'm not really interested in investing in is speculative anything, especially speculative Apart from that, I think that normal theoretically that our profit capital is marginally lower but that is In other words, the fact that we have the money doesn't really effect a whole bunch because we always had a couple hundred million unused bank lines and we could always raise as much money as we wanted. Anyway, that could augment us, but I think we have a real zealous position. You know, some of you guys have come up with $6 - $8 have hit cycles, targets for capabilities. A while ago you were saying $3 and something way in the midcycle and now that's a low estimate for next year. We could do a whole bunch with what we have and I think when we're prepared to invest money. We're looking at projects now that take $25,000,000 - $50,000,000 even though they're not acquisitions for individual projects.

Okay. My last question relates to your comfort with the current consensus earnings expectations for this year. Last quarter you provided a range for us. Can you comment on whether or not that range should move up?

Inadvertently, last I said 205 to 215. I think I should caution you two ways. One is of the $0.51 there was almost $0.02 that I sure hope doesn't happen again. We lost a rig in a blow out in Mississippi and while there was an accounting gain, it was economic loss. So, hopefully, that's not recurring. On the other hand, it's clear that away from that the strength is pretty apparent. We also caution you that Alaska and Canada are going to be lower this quarter. Having said all that stuff, you have to pay at the price of $205 to $215 before its got to be $0.10 or $0.15 higher now that it was then.

Okay. Thank you. The next question is from Bill Sizowen with Davidson Investment Advisors. Please go ahead.

Gene, I don't believe commented heretofore whether there's any difference in the behavior of the majors versus the behavior of the remaining parties out there. What differences or similarities are you seeing between them in terms of budgets and type of drilling that they are doing?

Well, some of our top customers, whether it B.P. our top customer in the Lower 48 and is our biggest customer, Exxon is picking up a lot of big rigs, Shell is too. So, I don't know. All I can say is everybody seems to have some [ancillary] rigs. I would say... yeah, I kind of could say I was going to say Exxon and B.P. seem to be equally. That isn't true either. With the [Wamsutter] of and stuff like that. So, I can't distinguish them.

If we go back 18 months or two years ago, at that time, if I recall, it was pretty much the little guys that were, I say little guys, anyone other than the majors, it was pretty much driving the...whatever activity there was at this time, but indistinguishable today.

I don't think its true and also the little guys, like [Anodocco and Patchy and Devons,] they're not little.

Right. My final question for you, Gene, something that I have struggled with from a big picture prospective. There are a number of OPEC countries, as you alluded to today, that probably cannot actually meet their current quotas, and yet, we still haven't seen spending pick up dramatically within a number of those countries. Would you be able to help me understand what I'm missing. I perceive a disconnect there and I feel like there's a link to the puzzle that I don't understand.

It's just that city is not lucky, that's all. I have no idea. We've been saying that Alaska should be producing and working a whole bunch more and finally there's evidence that that's happening. I mean, just to have the kind of crude prices we have for example and some kind of low activity levels we have in Alaska. Similarly, I have no answer to way things are so lousy in Venezuela relative to their prices. And also, the heavy stuff there is even more valuable because, you know, they have the big quality hits and the big locations. I don't know why there's not a whole bunch more activity in Venezuela. At least in Saudi we feel that that is coming. That's visible now. But in Venezuela the only people who think it's really visible are guys who have rigs in Venezuela and have nothing else to do with them. They see signs of hope, but I don't really see...I don't understand it.

Thank you. The next question is from Bruce Pave with Morgan Stanley. Please go ahead.

Gene, assuming that exploiting deep sea gas reserves in areas such as southern California and The Rockies, they're part of the long-term solutions meeting requirements. From your vantage point of view, could you describe any bottlenecks or preferably any technology developments and completion in other areas that can help us exploit these things on a cost effective basis.

Firstly, the West has a humungous difference between obviously the offshore and Rockies. Secondly, if you look at potential reserves, The Rockies are much bigger than both Florida and California and the rest of the put together and thirdly, that would be great for us, and I think that the governmental interference is the main problem. Whether it's access, whether it's roads, whether it's the zillion permits, that sort of thing. I think in terms of our contributions to the technology we can certainly build a rig in a 3,000 or even building one with 4,000 horsepower. We can drill anything that we drill. We have the equipment, the tools, all that stuff to so that won't be a problem. The question is what's going to happen like when we stop drilling in the deep and the again. I think we, the industry, will do it better than, by a mile, than we did last time. I think our equipment will be better than anybody's. I can't tell you until it happens, but from our viewpoint, opening The Rockies is the most important thing by a zillion miles compared to Alaska, compared to off shore, obviously.

Okay. Thank you.

Operator, I think we've exceeded the time we allowed. I would like to cut the questions off, and we certainly invite anybody to call us if there's any other questions. Thank you very much for participating in our call today.