Nabors Industries Ltd (NBR) 2002 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Nabors Industries first quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time simply press star, then the number one on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, you may do so by pressing star, then the number two. As a reminder, if you are on a speaker phone please pick up your handset before presenting your question.

I would now like to turn the call over to Dennis Smith, Director of Corporate Development. Thank you, Mr. Smith, you may begin your conference.

Good morning, everybody and welcome to our earnings conference call for the first quarter of 2002. Gene, this morning as usual, will be conducting the call. We'll have a twenty or thirty minute presentation by Gene reviewing the overall results and the outlook for all our various business units, followed by a question and answer period. We will try and limit the call to approximately one hour.

With us this morning besides Gene and myself are Tony Petrello, our President, as well as all the heads of our various business units.

I just want to remind everybody that a lot of what we're going to be discussing about qualifies for our quarterly earnings statements and as such it's our best guess on what the outlook is near-term and farther out. However, there can't be any representations or assurances that that's really what's going to materialize. And with that, I'll turn it over to Gene.

Thanks, Denny. Welcome to our first quarterly earnings telephone conference. As has been our custom I will review our overall results, spend some time on each business unit, then generally try to give you a picture, not only of the next couple of quarters, but what looks to be in place for the period thereafter.

Again, I'm going to emphasize operating earnings. As you know, our emphasis is on net operating profit after gas taxes divided by our average of employment. We won't get into all of that stuff now, but I will talk about and I will make some comments on the tax rate .

Overall our income has dropped, operating income that is, dropped from the fourth quarter to the first quarter from $85 million to $65 million, which although it's a substantial drop is a far smaller drop than occurred between the third quarter and the fourth quarter when we went from $165 million operating cost to $85 .

To summarize the whole story, I think we have one more quarterly drop, namely the second quarter and thereafter we increase in operating income earnings per share and we exit this year with clear upward momentum such that I think the probably are totally ambitious targets for 2003 will be hopefully concretely visible.

I think it's important in the context to talk a little bit about tax rates. In the third quarter, fourth quarter, and first quarter respectively our overall corporate tax rates were 36 percent, 29 percent, and 25 percent. This is almost primarily, almost exclusively a function of the percentage of the pretax income that came from the U.S. and Canada, high tax domains, and international which is a relatively low tax.

We're projecting about 25 percent tax rate for the remainder of the year which tells you that we're looking for not a super recovery in domestic but I'll get into all that in a second.

Looking in summary again at the first quarter versus the fourth quarter, we actually had a drop in operating income of a fairly substantial proportion offset substantially by increases in other areas. The declining areas were basically in the USA, oil servicing, offshore i.e., offshore and a little bit in . And that was offset by fairly substantial positive results in Alaska, Canada, international, and various other in the aggregate substantial but fairly small individual pieces .

On an ongoing basis we see the possibility, and again, I'll get into this more specifically, for modest continued drops in the lower 48, increased fairly substantial turnaround in well servicing. But the real issue for the next quarter however is seasonally and cyclically now that Alaska -- excuse me, Canada is likely to become a bigger part of our business. Assuming we do Enserco, the second quarter drop is going to be fairly substantial in Canada.

On the other hand, again, I'll get into this a little later, Canada is the visible element of North American gas where without a super boom, we see record earnings for Nabors in the third, and fourth quarter, and thereafter.

Let me go through these things unit by unit. In Alaska we had very good operating results, even though the rig count went up only modestly between the fourth quarter and the first quarter. We had pretty good results from our Peak oil field services operation, not only pretty good, very good results, such that we had a fairly substantial increase in income over the period. We see practically a modest drop, and I can't tell you how modest or immodest that drop will be.

BP is cutting back a little bit seasonally. We don't do as much with the oil field service people, services in the first two quarters as we do in the third and fourth quarter. And in general there is likely to be a decline in Alaska operating income.

Canada similarly, we had fourth quarter, we had 19.7 rigs working, first quarter we had 27 rigs working. I see a decline in rigs operating in the third quarter. I see that coming back in the fourth quarter. I don't see a real attrition in these rates, although there'll be some modest negative impact during this very weak period. But by the third quarter I think we'll have, again, the third quarter will include a whole bunch more rigs. We'll have record earnings in Canada and by the fourth quarter, the beginning of next year we should have basically twice the record earnings we've had historically, or three times. And we'll get into a little bit of that when we talk about third quarter.

Canrig alphabetically comes next. It's pretty small but I think it's kind of important that with no actual sales in the first quarter we actually made a decent operating income and that's because of their past sales things like that. So that says it's getting really well established. It's doing pretty well.

Nabors Drilling USA, in this quarter we had 107 rigs working compared to 145 in the preceding quarter. And the good news is that the rigs working have essentially been the same on January 1st until now, although there is the possibility of a modest drop off in quantity of rigs working in the second quarter. We see the upturn in the third quarter and fourth quarter in the USA, however it is an area where I can't tell you when we'll get the .

In terms of cash flow, of gross margin per revenue debt, that's the way we described it, let me talk. There are some complications which I will get into, but basically we probably have an adjusted cash flow of around $3,000 per rig per day, even though the operating income is higher, but that includes some extraordinary things. And we see it going down to the mid-20's and that if that in fact is the case, our long-expressed hope that the bottom this time around would be equal to the high the last time around, high to mid-20's, which we may well fulfill.

Our accident rate, positively our safety record is doing, knock on wood, incredibly good. We have an incident rate in the first quarter of -- that's incident, that's not accident. Incidents of a little over 2 per 2,000 hours. And our actual lost-time accident rate was 33 -- 0.33, excuse me, which is like a third of an accident per lost-time accident per $200,000, which is almost ten times better than the industry, that is taking our numbers out of the industry.

I'm sure there'll be questions on these areas as well. Oil servicing. Oil servicing had a real good fourth quarter, even though overall it didn't get anywhere like the hit that we got in the U.S., it was down fairly substantially in the first quarter. And I think it's our feeling that that might be the low bar for the year. You may recall that our business in the lower 48 was over 70 percent roughly geared to oil, particularly the high market that we have in California, and the oil price, as you know, is at least satisfactory, maybe a littler bit higher than satisfactory. But anyway, that outlook looks good, and I think there's a decent chance we hit a record in that in the fourth the next three or four quarters.

I think that's also a lot true for Canada. And in terms of Alaska I would say within three or four quarters I expect we'll get an all-time record.

The international business is doing very well both quantitatively and qualitatively. It was one of the businesses that had an increase, one of the relatively few, unfortunately, businesses that had increases in operating incomes in the third quarter versus fourth quarter. And we see substantial increases, fairly substantial increases for each of the next two quarters and beyond.

And I think, let me make that kind of a general comment, I think the quality of our operation is generally being recognized, and whether we get the payoff short-term, or medium-term, or long-term I think there's a payoff, specifically on the international. This is, I think, one of the ones to be top operator in, but clearly we're one of the top couple there in terms of the criteria that they measure and publish, in fact, and post. And I think that's a factor in our ability to put together a couple of special deals on with and that's one of the areas we expect to grow.

Qualitatively and quantitatively another area for growth for us is Algeria, and we're getting our house in order for the 5 rigs we have working for and affiliates. Probably even more importantly from my perspective is that we've been consistently seven, eight, nine days ahead of curves on wells that are scheduled for under 30 days and that's great for the customer. We're not going to drill ourselves out of work. They have plenty, thank goodness, plenty of work to do there. But I think that helps, helps us. It helps us with .

We're also doing pretty well in Colombia. In general, we're doing pretty well internationally. I think one of the logical questions is how is the chaos in Venezuela affecting us. Well, as you've heard over the last several quarters, we were the market leaders and we couldn't make money in Venezuela, so it doesn't affect us. In Argentina we have a pretty small operation and we're monitoring that fairly closely but there is no major difference on a day-to-day basis, or actually it's a quarter-to-quarter, month-to-month basis where we're watching it.

The offshore business has been pretty dismal, that's the domestic offshore business, not the international offshore business. And we had a fairly substantial drop off between the fourth quarter and the first quarter that's the workover, workover, the matrix, the working domestic rate, et cetera. And we're looking at a modest continued decline in the forecast that I'm looking at. However, I think it's entirely possible and maybe even probable that that arena has shifted to a more positive one. We've been looking at what's been happening in the gulf and also looking at what some of our other operators, well service, drilling operators in the gulf are doing and it's entirely possible that we've underestimated the timing of the up-sizing. There's no question in my mind that the upside will come there.

again, the shallow shelf has been adversely impacted from the complete, essentially the which we call the super 200, they have had and are likely to have a 100 percent employment. The rates are good, they're still -- we have three of them on firm five year contracts at prices, which prices are below the current market, which are good prices. We have two others on three year deals with price reviews every day. And the average return in is pretty good. The return on everything in this business is pretty good. And we probably will see a recovery, just again, we're conservatively not yet projecting, as the shelf, or shallow shelf is cleared.

business is doing well in spite of the fact that the number of units is less than it had been by virtue of the units on the rigs that are laid down, not working, but generally that's pretty good.

Let me go to the summary stories or analogies, then I'll talk about the balance sheets. We have again, almost a billion dollars in cash and we're looking at the long-term asset and cash equivalent short-term. It's around $900 million. And the net that's a cap, is around 27 percent. And the interim coverage is a ridiculously high number and if anything I think from a rating viewpoint the next move is likely to be groups compared to anything else.

Capital expenditures, depreciation is around $200 million a year. Our sustaining cap ex is probably 60 to 70 percent of that. And then we have enhancing cap ex and acquisitions, and we hopefully will have very substantial acquisition costs this year. But sustaining and enhancing probably shared about equal our cap ex this year and whatever opportunities we have for acquisitions will be versus , and that's going to be enhancing investment is here to opportunities in investing.

Let me talk about the inversion, there was some unusual publicity on that three weeks ago. There was overall institutional investments questioning it. That represented around 40,000 shares owned by three or four union and union affiliates associated with the activity on the north slope. And we have had a union election and we've been negotiating in good faith but nothing has come of it, and they're trying exert pressure that way. They also will have the corporate governance issues which and will readily be defeated, but that will be in our proxy this year and that, on top of the union thing, and we've also had OSHA complaints and a whole bunch of harassment associated with the union thing.

Anyway, I personally think the publicity on the inversion might have been related to that, but if the inversion is, we're going ahead with that anyway, a vote on June 3rd on the inversion. Everything we need to do is pretty much clear, except we have an the S3 which we're trying to get finalized this week -- excuse me, an S4. Anyway, S4 is going to be finalized this week, and as far as I can tell every shareholder is in favor of this because it's done for the benefit of the shareholders and there's long-standing emphasis on net operating profits after cash taxes, which is pretty clear that's in addition to the operating benefits of the inversion. And the management benefits of the world-wide tax benefits are something that we think is relevant.

The Enserco transaction, we have the vote the 26th -- 24th, and my full expectation is that that vote will be favorable. Favorable is defined as two thirds of the shares voting. We had a lock on 30 something and we may have 40 something, so it's total . We might already have already two thirds of those who actually vote. But my expectation is that will happen. And again, this is an integral part of our north American strategy.

I will tell you again briefly in Canada the tax rate is lower than, before the cost of capital, is lower in Canada than before by virtue of the kind of financing that's doable and the tax rate from that financing. And we have pretty substantial synergy between the and the people that will now be in Canada and our ability to grow organically, to interface with a whole bunch of good things.

Before concluding my comments let me talk briefly to the position we have for South American natural gas outlook. I think the first thing I should say is historically there's been like a four month -- there's been like a four month lag between commodity prices and rig utilization. And so I don't think we can expect an immediate reaction to what now might be pretty favorable commodity prices. But if you look at the industry compared to what we were looking at three months ago, or five months, or six months ago, I think things are falling into place for a situation that will be ideally suited for Nabors to show what Nabors can do.

The issue in terms of gas drilling I think was the function of a bunch of things that were big questions before and are smaller questions now. The crude price is okay. In fact, it's probably a little higher than I would like it long-term. The economy looks like it's going to be pretty good. The demand for gas in terms of the price of gas versus the price of alternatives, the price of gas relative to say, injection and holds for the chemical, manufacture, industrial use, all those things creating pretty good demand. How much that demand is, I cannot tell you. It's pretty clear that we have more gas demand than is explainable by the records at the moment.

On the supply side I think it's also pretty clear that we're no closer than we were three months ago. In fact, six months ago, in fact I think we were further away from the pipeline from Alaska. I think Delta is not likely but not nearly as -- not as certain as it was three, six months ago. And there's going to be a series of cancels, drops in supply, and there's no visible means of filling that gap. I think that leaves the North American continent pretty aggressive cap. Namely, I think these represent a 13 today of gas and if we have a clearing price of say $350, $375, give or take 50 cents, I think there might be more demand than .

So the whole question is can we, the industry, economically drill 13, 14 of these a day. And if the answer is yes, we'll hope we'll have rig utilization that will make last summer's rig utilization normal, not extraordinary. And to the extent we get close to that I think we'll do it well.

As I pointed out, the other operations, other than the North American gas, who we went through, is already doing pretty well. So on that we're pretty bullish. I think if I had to summarize that, I'd say at this quarter we're a little better than I expected. But some of it has nothing to do with anything except the inherent strength of our balance sheet and business and our conservatism. For example, we've bad debt, which none of you would have definitely would have settled and I wouldn't have. this quarter that we didn't normally have. increased medical costs, our actuarial numbers, we beat our actuarial numbers by a couple million, things like that.

And for the next quarter is I think going to be down. How much, time will tell, and I think it's pretty crystal clear to me anyway that the third and fourth quarters are potentially upwards. And depending on the timing of this gas and the timing and the accuracy of this gas story that I've related to you, very well or super well .

Operator, we'll go ahead and open it up to questions, please.

Thank you, Mr. Isenberg. I would like to remind everyone who wants to ask any questions please press the star, then the number one on your telephone keypad at this time. If your question has already been answered, asked and answered, you may withdraw your question by pressing star then the number two. As a reminder if you're on a speaker phone please pick up your handset before presenting your question. Please hold for your first question.

Mr. Isenberg, sir, please hold for your first question.

Your first question comes from Kevin Simpson with Merrill Lynch.

Good morning.

Hi.

Gene, I wondered if you could give us some sense of what your big customers are saying and what might be the trigger point for them and maybe what they're looking for from you, you know, in the U.S. particularly. And I think Nabors have been somewhat of a lightening rod for producer unhappiness about higher costs, you know, rig rates having gone up so much, you know, but they need you because you're just so big. So I'm just wondering, I just have to assume that there's pretty good dialogue going on right now with gas prices up. And, you know, I'm wondering what they're looking for and what you might do different than you did last time?

Well, I would question this lightening rod comment. From you it's okay.

Sorry about that, Gene.

I think the real concrete thing here is for competitive reasons I don't think I want to get into super detail. A very important account decided -- actually there are three. One of which companies has already done a deal which encompasses U.S. and Canada and two others have come to us and said you're big here, you're big in Canada, now you're big in Canada and we'd like to try to deal. Actually two other companies are likely to have deals pretty quickly.

And basically my longtime theory has been that the overall supply and demand and the concentration of demand in big companies is going to work to our benefit, particularly when times are tight. So I think we'll get some of these things in place. I mean, for example, was really happy in Algeria and that spills over, both positive and negative. We both knew that.

So I think things will get -- I think that people have a lot of questions, Kevin. I haven't heard anybody say what they'll do except they're going to be flexible. BP I think is cutting back in Alaska. has an enhanced program in both Canada and the United States. Already other people are looking at what's going to happen. In other words, I think the $350, I don't know gas prices today, you know, if these prices were held or if guys who were small enough so that they could have these prices, we'd have a lot activity.

Anyway, the few signs we have are positive but it's nowhere near -- I can tell you, they're either going to start going up next quarter or the quarter afterward. The guys who have probably said they're going to go down like the taxes, but they're going to go up, at least in the lower 48.

Okay. I guess you said for competitive reasons you don't want to give out any real specifics but, you know, in general the nature of the deal that you signed and what people are asking for, I mean is it --

It would be above the market now with their expectation and our expectation, and I hope it would be below the market a little later with commodity price tickers.

And term?

Yeah, term, we're not going to do anything super long because, you know, basically right now unless there's some reason to the contrary, and I doubt it, I wouldn't do anything beyond the end of -- we wouldn't do anything beyond the end of 2003. The reason simply being is when you have a longer term contract, and we didn't do it many years percentage-wise, particularly from the other guy. But even then you have blood, sweat and tears.

We have one lawsuit and the guy might go broke. And we have another guy who's with us who's pretty unhappy, and a guy with five rigs who's looking -- you know, we spend more time with lawyers than with operating guys on some of these things. And I can't believe that the of this world aren't having problems with it too.

And what that basically says is you really can't win on these things, and you shouldn't win if it's really going to put the operator at a big disadvantage or put us at a big disadvantage. So the trick is to do something other than just a bald-faced, you know, fix the pipes, the line, stays with a certain rate. And I think we're ideally suited to do it because we can do it on multi-continents and in particularly the emphasis lately has been in Canada and the lower 48.

Anyway, no long-term deals, more business and better rates short-term, presumably they think it's good to pay out on the other side by the end of 2003. And I hope not, well, I hope it does pay out for them. I hope the rates do go up. And with an escalation on gas prices.

Okay, that's great. I just had one other quick question more specifically on this that you bought any, you know, update on contract potential there?

Yeah, the contract is pretty clearly going to be 25 days at least later than we thought. the time between four to six weeks. Did you hear that? The time is four to six weeks. There was a catastrophic accident in the shipyard and a lot of people were killed. Our boat wasn't damaged but there are wrecks, sunk wrecks between us and the way to get out basically. And it will take us, say, six weeks to get out, and that's six weeks that we won't have the men working and generating cash flow.

Okay, thanks, Gene, that's it for me.

Your next question comes from with Salomon Smith Barney.

Gene, I wondered if you could talk a little bit about drilling activity in the Middle East. The rig count's at the highest level since the mid 1980's and it seems a little bit inconsistent with companies like Saudi are drilling so aggressively when they have excess production capacity.

You know, I'm not -- my answer to this is going to be my own personal judgment without high level contact in Saudi, but I think for a long time it's been true that they needed gas for and other purposes. They still have a humongous population growth there and issues related to it. I think gas also can displace the oil that's being burnt in power plants and things like that. They also have a . I can't tell you what it is, but it's not zero. And they also have a program for drilling, for higher API i.e., which bring more dollars for OPEC.

And beyond that I can't tell you except they're, number one, . And number two, we see signs that they are adopting for the first time in quite a while a normalization process where they somehow factor in to us the total that ability of the contractor to perform. And all that stuff this is pre you know.

Okay, I have one other question on the U.S. drilling activity offshore. We're seeing a pretty big emphasis on deep drilling for greater reserve potentially. Are you seeing more deep drilling in your land business?

Not really, although intuitively we expect that. I can't say we -- I mean there's a lot of drilling, deep drilling going on in California at the moment but I can't even tell you how that's likely to come out.

Thank you. Good quarter.

Thanks.

Your next question comes from James with Banc of America Securities.

Good morning, Gene. A little bit of a follow up to Kevin's question. In 1999 all these companies were pressuring the service companies to sign up for long-term contracts, trying to take advantage of the weakness that was seen there and try and lock in rates. Are you seeing the pressure as much this time as you did in '99?

No, I think the conversation goes something like this. The fact there's an activity, the fact that, for example from our viewpoint, we had maybe four or five thousand people in a real tight market and we improved our safety record while doing it. And actually we've had to layoff maybe four thousand people now so that there is a drag on profitability, return both by the unused capital and by, you know, the unused people resources, which the same thing is happening on the operator side.

Anyway, so we're really saying is there's some way we can provide more continuity, take a little bit off the bottom and a little bit off the top. The difference, Jim, I think is this is the first time I've heard this except when, you know, rates are low. I mean usually when rates are high they worry about it. And here's when you use a contract for locking stuff in for long-term. As I told Kevin, the one or two locks that we have are gas price related and they're not really long-term.

Okay. That would portend to be fairly optimistic and surprising for BP companies.

On your cap ex comments you were talking about sustaining cap ex and enhancing cap ex. Gene, I apologize but I missed about what should be your sustaining cap ex and what do you expect to be your enhancing cap ex.

Around 65 percent depreciates, so say $130 million will be sustaining. Enhancing probably $70 million. Enhancing, the difference between enhancing and acquisitions isn't logically clear. In other words, we buy a rig for $30 million, we fix it up for $15 million, it probably should be $45 million new acquisitions. The way we do it, $15 million is enhancement. And most of the enhancements like some, you know, safety and operating generally, but a lot of them are geared for specific profits which are going to generate money long-term. Sustaining and enhancing you've got a roughly equal out appreciation.

Okay. Now, in July of last year when the rig count peaked you had been on an enhancing spending program for awhile to put more rigs to work. You had about 107. Now how many rigs do you have that you can put to work in the U.S. and in North America without significant further cap ex?

In the lower 48 without any cap ex, which we have 105, 110 working right now. And in Canada after the Enserco we will have 80 rigs. And Canada generally there's probably 25 rigs working right now in the industry.

Okay. So you're ready for a recovery if and when it happens.

We're ready for recovery when it happens.

Gene, I appreciate it, thanks.

Thanks.

Your next question comes from George with .

Yes, good morning, Gene, everyone else. A question on the international area on land rig rates. Can you share with us the differentials that you have going in your new Algerian activity and what you're doing in Saudi Arabia, for example?

Things haven't really changed a whole lot. I'm expecting an with a big bonus because we're beating the curve by so much. The rates never really got down. I think in the international, particularly Algeria, which you asked about, I think they had a quality rating who could deliver the stuff. And it wasn't really high, it wasn't low. And we've never had the volatility internationally that we have domestically, or in Canada, or in the Gulf.

Okay. Can you share with us gross margins at all on these different --

I don't know how it would help you and I don't know what it would do for me, but, you know, it's been what it's normally been. I would say, you know, if I had to say, it's way less than it was domestically at the time we signed the contract and probably $9,000 or $10,000 a day gross margin in Algeria. That's X the overhead.

Okay.

It's depreciation.

All right. On the view ahead here in the second quarter, looking at a pretty mediocre U.S. land situation. What kind of a gross per rig day margin would you be looking at relative to this $3,000 you were talking about?

In the next quarter domestically?

Yes.

I think there's every chance that they'll all drop. Let me put it this way, the leading edge rate pretty much has stabilized, i.e., the new contract rate is pretty much stabilized. So we have a number of contracts, particularly I'd say in California but some elsewhere. But we have long-term 2000, 3,000 rigs on long-term, and the rates are higher than they would be today. So in due course those are going to roll over into lower rates.

Okay.

There's been a decline in the leading edge rate, i.e., the new contract rate has been in decline for awhile. It's just that some rates, particularly on big rigs on wells, you know, are still working under the old contracts.

Okay. And your comment on the decline in workover activity in the Gulf of Mexico in terms of what you saw in deployment in the first quarter. Do you have any sense of that turning around in the second or is that kind of --

Yeah, I think I said our forecast is that there's no dramatic change in the second quarter. In fact, essentially no change, and I'm now thinking that hopefully that's an accurate depiction. But the feeling I have mostly in terms of what our guys are saying in terms of rig activities and rates and stuff like that, and let's take what financials are saying and, you know, I think they're right. I think the likelihood is that there'll be a recovery sooner than we had projected in our numbers. So we'll be able to cope with that.

Okay. And lastly, in Venezuela what equipment do you have there now and what might you be doing if there isn't a turnaround? Of course everybody's hoping for such over a period of time but --

As you well know, we have said we've been the leader in getting to zero in Venezuela. We have one rig, maybe two small rigs in Venezuela. Two small rigs cutting our overhead down pretty low, and three people and . And actually we had 15 rigs working at one time and you recall, you know, there was this business they were going to go up to $50 million a day and have a zillion rigs working and all that good stuff. But it's been a long time.

Well, Venezuela provides only upside from here for us, and it's been that situation for a significant period of time already. And you know, I'm hoping they square things away, but I mean let's face it, with Chavez coming back in there, crude prices went up.

Okay. Thank you.

Your next question comes from with Deutsche Bank.

Thank you, good morning. Gene, a couple of questions. One is I'm trying to understand why it is that in the drilling business the shelf seems to be coming back stronger than land and yet in the workover business it seems to be a flip-flop of that, and you know, anything that could cause the offshore to come back stronger than kind of your more cautious comments that you had on that.

About the only thing I can say is the workover business my explanation is the definitive is geared to oil in the lower 48, and I don't know what the story is on gas in the lower 48.

I have a very strong view as to what's going to happen in due course on the related to the North American gas picture that I see evolving, which I think you do too, frankly. But I can't tell you what's going to happen in the next two quarters.

There has been this four month related lag. We talked to the guys publicly. One day they're saying in effect we're going to pay off debt and the next day prices hit $350 or $375. That's the trigger point for looting. I think there's not a lot of delay in terms of prospects or anything like that at this level. But I don't know what the answer is. Maybe will proceed. Because the Gulf looks like it's evolving quicker, than we thought, say, a few weeks ago even, certainly a few months ago, and maybe that will happen on land. I don't know what the answer is.

On the land side can you give us some order of magnitude in terms of how much in terms of rig hours or demand, any other matrix that you see turning up by, you know, 5, 10 percent a quarter for the next couple of quarters, how modest or steep is the recovery, and then the pricing also?

In terms of the land drilling?

No, land workover.

Workover, yeah, we see the hours going up and we see prices haven't been actually pretty badly, and I think they'll do pretty well.

We think we see the hours, I don't know, the hours -- for example, in the first quarter -- well, they're down maybe 20 percent, 25 percent, 20 percent from the peak, and that's the hours. And the hourly rate, it doesn't look like it's 3 or 4 percent -- okay, 1.5 percent down. And we see that coming back.

Okay. And one last question, trying to put all of this together with kind of the cautiousness of the U.S. land drilling outlook and then some optimism in a lot of other markets, where does that leave us in terms of your view on, you know, how quickly do earnings for Nabors turnaround here, you know, second quarter? Should the lower U.S., lower 48 land business be offset largely by the other businesses or will you still get a drop in the second quarter and the second half?

I would say we have a North American story that's kind of weak this quarter, not just Nabors drilling USA I really do not know what it is. Earlier on people were talking about, I think the first was like 45 cents for the first half or something. And you know, I think there's no basic reason to change it.

I think the environment has changed, the things are probably in place that are going to make things better towards the second half which we originally said, and thereafter. But, for example, I think that a major step, assuming this Enserco thing goes which I'm assuming. It's been a major improvement in our position to exploit, take advantage of what I think's going to happen in North America, but yet, that per se is going to make us weaker in the second quarter. Enserco will likely lose a little bit of money this quarter, even though as I said earlier by the end of the year our overall . And it's not unknown for our position management to sandbag a little bit.

Okay. I appreciate it. Thank you.

Your next question comes from with .

Yes, good morning, Gene. Gene, I was wondering you made a comment earlier when you're talking about your lower 48 that you could see a modest drop in activity in the second quarter. I'm kind of curious, what are you seeing there that would indicate that activity may fall off here very near-term?

Well, basically we've been about the same since January 1st activity.

Right.

I don't know. We have three, or four, or five rigs working on the deep in California, and I frankly don't know how that's going to work out in terms of good wells, bad wells, and that sort of thing.

And if that works out well, the possibility of decline is less remote and the possibility of decline in average is less remote, although . So there are some of the geological areas, California being one particularly.

I think the U.S. shelf is another area. We have, as you probably all know, decided not to do . Life's too short, and we think we're good enough to do what we have to do without it. But in the U.S. Gulf there is a reasonable number of jobs that are going to turnkey. And as you know, we feel, and we learned not only analytically, but by experience that there's no free lunch in that business. So those are a couple of things that are possible downsides.

Okay. And, Gene, in terms of these long-term contracts that you've signed and looking at signing, have these customers given you any idea as to when they would, you know, increase their drilling activity programs?

No, I mean they obviously think they're going to do more -- well, yeah, I would say the one I mentioned Company, they have a pretty aggressive program in Canada in and the lower 48 in .

Okay.

So that's . We haven't done anything. They raised the issue, which we should have raised and that's basically these rigs and our ability to supply them in Canada and the lower 48, and the ability to save money by supplying them and pass on some of those savings to them.

But their increase in activity is more of a third quarter event or mid-second quarter event?

I think it's second quarter.

Okay. Very good. And lastly, Gene, with respect to the Enserco acquisition, can you give us some indication as to how much you're going to have to pay in terms of cash and stock for that deal?

Let me back up a little on . The Canadian stuff is a function of .

Right.

Okay, Enserco, I don't know. We originally thought there was going to be mostly cash. I think we've been hearing, some people are kind of aiming the ten day average price and the average exchange rate, such that if the price at the end of the period, the exchange rate is higher than the average price it pays for them -- there's an there theoretically and between -- in other words, the exchange rate of 0.24 for example, and our stock goes up, so if it goes up to, say, 70 cents or a buck versus the average then it would be 25 cents a share, more per share to take the stock.

Anyway, we have bought about $160 million Canadian dollars so far, you know, in terms of expecting it to be $300. You know, the truth of the matter is if we can make it all cash anyway because whatever they take in terms of exchangeable shares we can just go buy on the market here. In other words, 3 million Nabors shares in terms of exchangeable shares, in fact we can go buy 3 million .

Right. Any thought to you making it an all cash deal regardless?

Yeah, that might upset the market. I don't want the market to go too high. No, I'm kidding.

But yeah, I think we're not committing to do it but we have seriously thought about it. We would have . We would prefer they take all cash.

Okay. Thank you, Gene.

All right.

your next question comes from with Fidelity Investments.

Hi all. Going back to last July I think, Gene, you were even surprised at the productivity of your equipment, your land rigs and what margins they were able to achieve. We never had a chance to see that in terms of a final report, but I'm just kind of wondering are these longer term deals do they kind of -- that you've alluded to, take away the potential muscle leverage in your margins?

In the first place, the percentage of our rigs covered by long-term deals is minute now and I don't think it will get stupendously big, at least there's no sign that that will happen now.

Secondly, the bulk of them are geared to the between Canada and the U.S. A guy has a lot of rig needs in Canada and a lot of rig needs here, and we have rigs in both places, parenthetically we're the only one that has a lot of rigs in both places, good rigs, so we should find a way to exploit it.

Good --

Also while I'm at it, I don't really think that the rates we reached last July are needed again. You know, I mean we have, to an earlier question we have 110 or 105 rigs working right now. We have 290 that could work we have probably utilization of 55 percent internationally. We have another 110 rigs that we could put on the market domestically, or a fraction of the . But not in supply to the market at substantially lowering .

So I don't think that it'll ever get as high -- well, ever is a long time. But we should have 300, 400 rigs working there before it gets to the level it got to last July.

Appreciate it. Another question, like BP, north slope, I'm just kind of wondering is there any concern that you have that they have bigger fish to fry now with their interest in Russia? It just seems to me that's just, you know, just a huge frontier and nothing's been done in fifty years and, you know, so you have to relay modern technology there when you go. And so therefore they might divert their energies and wind down some of the areas that they have in the U.S.

I think roughly it's a function of economics. They have a big program which they always have, reducing costs by a buck and a half per barrel over the next five years. And they've already I think stated publicly that they'll keep their incremental exploration stuff pretty close to existing structures, not any . And even now they always have been very rigorous on budgets and now that they're because of budgetary reasons. So I think it's the status quo.

I mean three, four years ago you could have asked me that question and mentioned western Venezuela, or Colombia, or the western province of the North Sea or all that stuff. So I think that they're smart enough that it's economics. And I think the economics are really good now in terms of what the crude price is and all that stuff.

I appreciate it. The final question is the accuracy of the rig rate. I know along the way here you said you had laid off more rigs than were being counted, and I'm just kind of wondering on the upswing here is it any more accurate or have they improved their batting average?

Well, basically yes, we got hit, you know, we went down faster than -- we went faster than the industry through the end of the year.

Right.

Now, we haven't gone down at all. I guess the industry hasn't gone down some.

But I guess on the overall eyeball count are they any more accurate than they were?

Accuracy, I think the accuracy is not terrible.

Good, thanks a lot.

Okay, Neal.

Bye.

Your next question comes from with Raymond James.

Hi again. Denny, could you give us a little more clarity on the regional rig counts, you know, what Alaska, Canada, international, et cetera is doing. And primarily to the international issue, Gene, you mentioned you're looking for substantial increase. Where do you see the rig count going now?

It's more -- I can give you the rig count but it's more a function of the kind of rig. For example, workover rigs, drilling rigs, offshore rigs and all that stuff. I can give the kind of breakdown we have now. We have 52 rigs in the first quarter, against 55.7 rigs. This is the aggregate in the fourth quarter, even though, as I told you, the margins, the operating income went up.

So on the land side drilling rigs went up modestly, workover went down, but that's Argentina. And offshore, pretty much a wash before. On an ongoing basis, I see the land rig count going up fairly substantially including five rigs on the drilling side and about a wash on the offshore side. So we think on the drilling side is going to provide some of the momentum. Also as I think I said earlier we're driving Algeria awhile ago in terms of what we're bringing home, the bottom line against the same day rate. diminished from our viewpoint. is good, all that stuff.

So there's some of that too. But there is going to be an improvement in the number of rigs. atkins: Okay. You mentioned you had 107 rigs in the quarter in the U.S. lower 48. Canada, offshore, do you have those counts?

Yes, I do. You've got to wait a second though. In the U.S. we thought it might go down slightly which means a couple or three rigs. But it might go up. But actually the numbers aren't -- we're numbers down a couple, three rigs in the USA And we have the rig count going down as well second quarter. We have the rig count going down almost 10 rigs in the second quarter versus the first quarter.

That makes sense easily.

And I don't know what the precision of any of those would be, but they're probably not wildly optimistic about the second quarter either because of the and stuff like that. And offshore, pretty much the same, although I think there's a significant possibility we'll have more rigs working next . We're actually at a modest loss in offshore. I think we'll get in the black.

In terms of the rig count we had a pretty substantial drop from 21 rigs, 15 rigs. And again, that's apples, oranges and grapes, but it's a pretty good reflection of what's going to happen. We do see an improvement in the next quarter, which the improvement is more than we see improvement in the margin. So there's in that market between aggregate rig count and -- I mean you go down in a . That's equal to three, four, or five of the other rigs. And we are going down one in rig at the moment.

Okay. One last question here. Looking at the fully diluted share count I notice it's down pretty meaningfully. Can you walk me through what's going on now?

Yes. Basically the zero it assumes to be converted if they're diluted. In other words, if they're you don't convert them. And basically we're at a low enough earnings rate that one of the two issues was and therefore was taken out. I think the fundamental issue is right now if they don't get converted in due course when the earnings come back up we'll have like 8 millionish shares from both issues which will be and we'll put back into income the interest thereon. But whether that could happen say in the third quarter, fourth quarter .

As you know the first zero is likely to be put to us in June of next year and that's unless or thereabouts. And, you know, my expectation is that that will be a major .

And also it made almost no difference in EPS because to do that alternative calculation you take the interest out.

Right, yeah. I saw that. I just wanted to make sure I understood it.

It's really close to that switching back . It's the first time in recent times that earnings were low enough to switch and, you know, by the third quarter, fourth quarter to be back into the .

Okay. That's helpful. Thanks guys.

Your next question comes from with Davidson Investment Advisory.

Thank you. I wanted to follow up on the future acquisition outside of the North American region. And, Gene, would you provide your perspective and comments there, especially in light of I believe in your opening remarks you referenced that you hoped this year that you would have significant expenditures in the acquisition arena.

Well, I mean basically we have a budget which is potentially going to equal depreciation, a little less than, and anything we spend above that will be something that we just respond to an opportunity we weren't sure we were going to have when we did the budget. So whether that's three, four, five, six on incremental rigs to take it internationally on a term contract or a or company, whatever it is, we always hope that we can have opportunities to enhance our capitalization. So that's what we . But, you know, I hope to God there's nothing more than that. There's literally nothing on the horizon, but there almost never is before we get working on something.

I think the lower 48 land acquisitions, consolidation is going to largely occur without . I think some of the are going to spin off big shelf or other stuff which we'll look at.

Internationally there have been -- and maybe some of the offshore guys will propose a plan which we'll look at seen one as yet. Internationally we from somebody else. We didn't buy -- . There are companies that we'd be interested in buying but there's no indication they'd be interested in selling.

Would it be fair to say that from your perspective there are still lots of interesting candidates, now whether the valuation fits or not, put that aside, but lots of interesting candidates remaining outside of the U.S. and Canada arena?

Yes. My most interest in Canada is to go from 105 or 110 rigs to use the next 180 that are idle . That's my best candidate.

Free is always good. Thank you.

Operator, I think we've achieved our allotted time. With that we'd like to terminate the call and thank everyone for participating. If you have any questions, feel free to call us.

Thank you for participating in today's conference call. You may now disconnect.