Nabors Industries Ltd (NBR) 2002 Q2 法說會逐字稿

Thank you for standing by. Welcome to the Nabors Industry second quarter 2002 earnings conference call. During the presentation, all participants will be 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, please press the 1 followed by the 4 on your telephone. This conference is being recorded Thursday, July 18th.

I would like to turn the conference over to Mr. Dennis Smith, Director of Corporate Development. Please go ahead, sir.

Good morning, everyone. Thank you for joining us today. As usual, Gene will be conducting the call, and we'll have a 28 or so minute presentation, overview of the operations and our outlook on the business followed by a question and answer session. We will, again, terminate the call within approximately one hour. I wanted to just remind everybody of the forward-looking statements that a lot of what we're talking about is the best estimate of the near term and longer-term outlook on business and actual results may vary significantly from that. In addition with Gene and myself, is Tony Petrello, our President and COO, Kathy Ellis, our general counsel, Bruce Coke, our Vice President of Finance, and a number of our Board of Directors following our board meeting here yesterday. With that, I will turn it over to Gene.

Thank you for joining our second quarter earnings report. This conference call is being conducted from Barbados in connection with a recent inversion and in particular with our Board of Directors meeting here yesterday. I'm pleased to report that we had 100% attendance by our Board members since we had not only the normal matters to consider, but some governance matters that I will report on later. As has been our recent practice, we'll emphasize sequential, i.e., quarter-to-quarter comparison, overall by business units and try to give you some flavor of what we see ahead in the next 2 to 4 quarters. I'll also have a few comments in corporate governance and recent inversion, i.e., becoming Nabors Bermuda.

Our income from operations, which I still believe we should focus on, went from 61 million in Q1 to 37 1/2 million in Q2. This will be, I believe, will be the low quarter in this cycle, and the I hope the cycle lasts a little longer than it has in the past. Hopefully, this is the low quarter, and the low quarter will sometimes go beyond and 2004. As an overall comment, I would say we're much better off right now in spite of the recent pessimism than we thought we would be six months ago, but clearly, we haven't progress as much as I --

Sir, go ahead.

Frankly, we had a technical problem where somebody called in, and I'm not quite sure where we finished, but please don't call the hotel directly.

I think I went through our income from operations, which is our focus. It went from 61 million in Q1 to 37 1/2 million in Q2. The biggest element of that drop was in Canada, which is seasonal anomaly, exacerbated by the fact that we had a little bad technicality there that we had in North America, but the main element was our exposure to Canada is now, roughly four fold what it has been before the acquisition. The other drops were in Alaska, which is a reflection of a drop-off in winter exploratory drilling and NB USA was a factor although, NB USA was also a factor even though, --

They will be able to hear you at this time.

Hello.

Mr. Isenberg, we're unable to hear you, but if you would like to resume.

Can you hear me now?

Operator, can you hear us now?

Yes, I can.

We're having all kinds of luck here, and I'm going to go company by company assuming you got the message. Of the drop we had Q1 to Q2, more than half was in Canada, and that was seasonal, cyclical and it was exacerbated by the fact that we increased our position in Canada roughly four-fold in terms of the acquisitions we've made and a little less than a quarter in Alaska because of the seasonality of the exploratory work in the winter time and NB USA which took a modest hit having already taken a sizable hit, and I will try to go through, -- and I hope I'm not being redundant, and I will go through quickly unit by unit, and ion Alaska, as I suggested, we had a drop-off in the development. Modest drop-off in development drilling, the sharp drop-off in exploratory drilling which normally occurs in the winter, on ice and all that sort of thing.

We also had a significant drop-off in peak in oil and AIC operations, which are also geared to exploratory drilling, and I think by the third and particularly the fourth and first quarter, we will be, again, setting records there. We have a bunch of new operators in addition to the relevantly new operators we had before. Armstrong will be drilling up there probably this winter as of this winter and next winter in addition to Phillips who are relatively new who will be drilling, and we have a couple of operators in Keni (ph.) platforms, which can only add to the approach, so this i significant upside potential over and above the normal business, but it is true that BP are pulling back a little bit on their development drilling.

Canada, basically, everything is working out super well in Canada except for the short-term numbers, and that oxymoron statement is explained as follows. You know, we have bad seasonality, a whole bunch more income in sales vulnerable to that, but we didn't buy Canada or increase our position because of the short term.

All of the tangible evidence of how we're doing there in terms of our customers' reactions and we're doing more business than we had done before, the cross-marketing between our service business and drilling business is working real well. For example, Shell, we're their primary drilling contract, and we are now getting a shot at work over at business there and others similarly. We're also optimizing -- or beginning to optimize the relationship between Pool Oil Field Service, operations in the lower 48 and bonus operations in Canada. For example, we moved to underutilized coal equipment from Canada and California. We will be looking to move stacked equipment from the U.S. to Canada. We've had good integration of people. In fact, surprisingly good, and we're developing our significant savings on all kinds of purchasing soap and dope spares and capital equipments, which will really only get manifested when we have more business.

In the quarter, the numbers basically reflected a drop in drilling rigs, even through 11.4 rigs in the quarter. We had a drop in day rates, and basically, I'm pretty confident that the rig count will go back up pretty quickly, but I think the margins will go up a little slower than we had expected. The recovery even in the third quarter is going to be double digits in operating income, and I think by the peak quarter, which is the first quarter of next year, we'll be setting all kinds of records in Canada, which we should considering the investment, but also, I think, we'll be getting close to our desired returns on assets. Canada, very quickly, we're doing very well considering the level of activity in the market.

Third-party sales are good, but more particularly, the servicing, the install base was a thousand a day. Refurbishments and recertifications, selling spare parts, maintenance and stuff like that is creating pretty steady business for can rig so it's relatively profitable and it will actually be profitable this year, which is good news. NB USA, the big enchilada, basically, we've taken pretty substantial hits already. We're down. This quarter, we went down just a couple rigs from 107 and change to 105 and change. The day rate went down practically so far less than I had expected. We went from 3,300 average margin in the first quarter to something modestly above ,500 in the second quarter, and my expectation is that this is the low end volume, and the day rates may have a modest drop as we roll over some of the long wells that had been multi-month wells at previously high rates, but I don't see that going much below -- modestly below 500.

The safety record is excellent, and I'll point out that even though we already had a good record, the six-month comparison on total recordables we down almost a third from 3.38 recordables per 200,000 hours six months last year to 2.21 this year.

I will start out with the capital expenditures in Davis Drilling USA because while they have 70 million of the 190 million depreciation, this is a pretty good example of what's going on in terms of the maintenance cap exit. There's not much way in the way of acquisition in the lower 48. In the first half, we had 35 million, as I probably just said, appreciation. Against that, we had 5 million third-party capital expenditures. We had 9 billion capital expenditures, maintenance capital expenditures that we took from purchases that we had, but not used before, i.e. economically used it, and then in addition, there was $8 million of capital which constituted roughly the following. If we had stacked rigs with new and better equipment like CAT engines, the newest kind of CAT engines or things like that and there were other rigs working, and I think the philosophy was put the good stuff on the rigs that are working rather than let them it is on stacked rigs. I think that's largely putting our best foot forward, but no matter how you try to, no matter what it is, cap x cash is going to be pretty low, and the economical cap x is going to be low appreciation in this environment -- now matter how you cut it, no matter what it is, cap x cash will be pretty low, and the economic cap x will be pretty shaky in this environment.

Well servicing, we clearly stopped the bleeding in Q2, and as I've said in most of the recent quarterly reports, we are pleasantly surprise with the operation. We are essentially flat to Q1, modestly better. We had a modest increase in rig hours. We had a modest decline in rates. The safety is real good. We've become the preferred supplier with a number of people, and again, we're cross-marketing, beginning to be noticeably effective with our drilling operations. For example, Oxion (ph.) in California and also cross-optimizing, if you will, between -- beginning just between pool and bonus.

Rig hours, I'll quote these because we have them. Q1, 243. Q2, 2626. On the one hand, hourly rates, Q1 for the rigs, 210; 203 for Q2.

International -- Internationals is we're clearly on an upward trend and the upward trend could be significant. In the meantime, however, we were down very modestly in this quarter, and I think that's a temporary abhorration. You know, I could explain it, but I won't. I think it's a number of nonrecurring items that seem to recur every once in a while and timing issues, but one thing I would just make a flat assertion. It's my guess that, say, the third quarter will be up at least 60% compared to the third quarter last year and will continue to grow. What's happening, basically, is we're not only, -- in the first place, the international market is clearly more robust.

Secondly, I think we're getting a continually better reputation than we had before, and this can be manifested by talking to customers who used five or more of our rigs internationally. Also, what we're now doing is aggressively pursuing the movement Not only land rigs, but what have been Nabors off-shore rigs. For example, as you know, we had purchased two jack-ups recently in addition to those that are already out on the P/L and will be on the P/L during the third quarter. One of them, we purchased recently, and we will shortly be moving to Mexico for a contract we have. The second one, 657, Key Bermuda. It's got delayed. It will be ready to work by the fourth quarter. That will work. We have partial benefit now, but a lot of benefits in the third and fourth quarter with the incremental rigs, three rigs in Saudi, a rig in Yemen, three rigs in Malaysia. More than that, for example, in addition to the one jack-up in Mexico, there were four more rigs that we're currently bidding that are primarily high heat, jack-ups.

We don't have jack-ups. They will be asking for bids that fit our stencil, and some of the good customers in established parts of the world are asking for us on a preferred -- hopefully, a preferred basis to provide them with rigs elsewhere in the world, and again, I don't want to overstate the prospects, but international clearly is an upturn next quarter, the quarter after and for a while beyond that. The Gulf of Mexico, and incidentally, I should have quoted, it's pretty astoundingly good safety records internationally. The total recordables, this is half, 1.7 of the quarter. .7 total recordables and LTA, .2, which is certainly good. Gulf of Mexico, Gulf of Mexico is continued to be pretty poor. Lousy is what I have noted here. We will have some improvement. In other words, it wasn't the work. It continued to be the same as it was in Q1. There will be a modest improvement, we're pretty certain in terms of awards and activities in the third quarter, and then there's a good shot of pretty substantial improvements in the fourth quarter. This lateral improvement should be tied to the improving market in the Gulf of Mexico for jack-ups based on 200-foot map and get better price and steadier utilization are our work over jack-ups. The work over jack-ups are among the assets that they're looking to move internationally, as well.

The boat business, good utilization, good prices on the Super 200s. Amazingly, they're still almost 100% utilization. Rates are modestly over 10,000 a day. On the other boats, we're doing pretty well except the prices are now back modestly under 5,000, except for the two. We have two 220s that don't have dynamic positioning capabilities, and we have a couple of special boats. We're doing well there. We have continued, satisfactory return on assets, and you know, good part about that business is the return on assets is one thing, but the appreciation is not chewed up at all by maintenance Cap X.

Anyway, let me talk briefly about the balance sheet. We still have an excellent balance sheet. Our debts are worth, on a growth basis, 42% net basis, 27 or less. We still have 800 million in cash, and I ask you guys to remember that the long-term cash equivalence, i.e., treasury instruments that are over days -- huh? We report it as long term, and from time to time, some of these otherwise analysts get up against a couple hundred plus million dollars here, and I think I talked about a depreciation for NB USA. Let me give you the whole story. The company's depreciation will be 190 million roughly this year. Maintenance Cap X will be , enhancing 89. Acquisitions and new construction, about 315, so apart from acquisitions, which are opportunistic, we're looking to spend 535 this year, of which in the 6 months, we spent all about 100 roughly.

I think with respect to the balance sheet, let me make a couple of other comments. Fazb in Q2 changed, a couple of minor changes which are requested in our balance sheet. For example, there was no more category of extraordinary gain, which was a logical change. What had been extraordinarily primarily in the fourth quarter of last year, just the return on category disappeared and gets moved into other categories. It doesn't change a darn thing, except it's more logical. The other thing that was changed, both of these changes occurred in the early second quarter, by the way. The other change that incurred is we're now required to report reimbursibles where we spent money for operators to get a marginal, 10 percentish kind of fee. We had been recording the net, i.e., the 10% and now we're required to report the whole thing. Which doesn't affect anything except the percentage growth margin that impacted that about 1%. Stock outstandings did not put, with these kinds of earnings, does not reflect that conversion, i.e., the delusion of the zero coupons.

Our tax rate, again, we're projecting to be 25%. We're continuing to talk about the tax rate relationship to the inversion. That's something that has to be played out as a fluid, legislative situation. We are inverted, but as we told you in our disclosure statements, you know, and in our comments generally, we have not projected any savings until we see how that works out.

On corporate governance, I think in previous reports, we have probably stated that we're in the S&P 500 and the top 10%, and now I can tell should tell that we're in the top thousand companies, CFO and CEO are now required to certify the truth and accuracy and completeness of financial statements, which we will do, and I emphasize that we do that with no real hesitation. I think in terms of corporate governance, we have set up a new committee which met here for the first time, new governance and nominating committee comprised of all the independent directors, and we will be announcing the new director, new independent director soon, and I think the investment community will be pleased with this guy, and we've been -- the philosophy is we will try to get another one before the end of the year, if we can.

Just a few comments in terms of the relationship between our management and the various and sundry things that you heard or read about. I personally with my wife own more than a million and a half shares of Nabors which I felt for almost 15 years or maybe up over 15 years, i.e., I didn't buy them, sell them high and left the shareholders bear the burden of low prices later, and I will take income tax -- capital gains tax on all of those, in spite of what you may have read. Also, the incentive contracts that we have is based on operating income, so whatever cash saving we get from the inversion won't affect our compensation in spite, again, of what you have read. I think, finally, I think our compensation committee is totally aware of the environment, and they will probably come up with a shift away from equity-based compensation for the top executives in line with everybody else. In general, however, I think we will not -- not however. In general, we will conform fully. In fact, I think we already conformed fully to the suggestions by the New York Stock Exchange, the American stock Exchange, NASD and various sundry folks.

To summarize briefly, I think the outlook for Nabors is pretty good. I think we're showing strength away from the north American gas story. I think the North American gas story is valid and will manifest itself in the next few quarters, but in my mind, it will be a surprise of where we are this quarter, and I think the outlook is -- remains very bullish or deferred for a quarter or so, and I think the Nabors' stock price reflects that -- full bullish for a quarter or so and, and I think the Nabors' stock price reflects although deferred for a quarter or so and the neighbors' stock price reflects that. That finishes my comments. We will take questions.

Ladies and gentlemen, if would you like to register a question, 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 would like to withdraw your registration, you may do by pressing the 1 followed by the 3. If you are on a speaker phone, please pick up your handset before entering your request. One moment, please, for the first question. Our first question comes from Bill Dzellum with Davidson Investment Advisers. Go ahead.

Thank you. I was curious to Encirco (ph.). I understand over the course of the 12-month period, that acquisition will be accretive. However, due to the low activity level, seasonal activity levels in Canada, would it be fair to assume that that acquisition was dilutive in the second quarter?

Absolutely. I should have perhaps made it clearer. Both acquisitions, and not only the Encirco drilling, but the bonus workover, everything was dilutive. We actually were in the red in Canada, which we've never been, at least in recent times before because of these increased acquisitions, and also the seasonality and cyclicality compounded by the shock increase in exposure, but I think all of that is going to turn around pretty quickly on a pure seasonality basis, and I think ultimately it's decentral enough to the American gas strategy.

If I just heard you right, there's no reason to feel that this sling shot effect won't begin taking place in the third quarter?

I think that's right. In fact, I almost know it's right because we have a lot of stuff booked already, but we'll be positive. How positive will it be? My guess is, and I think we mentioned we had a double digit negative first quarter versus second versus first, and I think we essentially got more of that, more than that, pretty close to that. Maybe more than that, and we can do much better in the following quarters.

Thank you. The next question.

The next question comes from Mark Earnest with SalomonSmithBarney. Please go ahead.

Yes, Gene, I wanted to ask about the level of inquiries for rigs in the lower 48. Many of us are surprised that we haven't seen more of a pickup in June during the summer months here. What would you attribute the resonance, if you will, of some of the larger independence to pick up their spending to?

In the first place, I don't know. They vary a little bit. I talked to some of them personally, but I think it's a combination of when in doubt, improve the balance sheet. Secondly, a lot of front-loaded -- I think the guys are getting more prospects and pretty good prospects. Are you still there?

I lost you for a second.

A lot of the front-loaded prospects there's a material difference between starting a project when the going-in gas prices and they treat it starting at 275, if you get a bunch of production in the first , 18 months and you still get production, so there's I think there's a bunch of that, and I don't know, the guys must be asking themselves and they're taking a lot of heat by reducing production. Anyway, what's the difference between starting now and starting three months from now? And I think -- I mean, I've heard directly from guys saying that when we had 350 price, which we had not so long ago with the strip that there were 40% returns that they could drill. You know, I think we will be back there. So I don't know what the answer is. That's the impression I have on some of the gas marks. I don't think it's permanently gone, let me put it that way. I think the guys are piling up prospects, and I think with the right price, they'll culminate, and the other observation I have, and I kind of generalize this. A number of guys who two years ago who wouldn't dream of hedging are now hedging which will make life more level.

I will let somebody else ask a question. Thank you.

Our next question comes from George Gaspar with Robert [Behr]. Go ahead.

Good morning. Question on rig deployment in three areas if you could give us numbers, current versus maybe quarter going -- the view going forward here quarter for Alaska, South America, and Saudi Arabia. Can you give us some specifics?

Yeah, I think I can give you Alaska, and I think Ziggy can get you another breakdown. I'm giving him two or three. Alaska, we went from 11.3 in the first quarter to 9.6 in this quarter. I think it will stay about the same on an ongoing basis. You know, the further we get out, the less certain what the numbers are, but I don't see any reason that they'll decline. Saudi Arabia, Zig?

First quarter, we had 16 rigs running. Second quarter, we're picking up -- basically, by third quarters, there's three.

Is that counting joint venture rigs as a rig or half a rig?

That's everything.

Thanks. South America.

South America, stable.

Not our business market, stable and upgrade. Are we doing pretty good in Colombia? Nothing in Venezuela. Argentina, we're happy that we're not losing money there. We're making a little bit, but we're not getting hit at all there.

We picked up some control in Colombia.

and GHK, we're drilling for, so it's not materially different from what it has been.

Again, the question on Saudi, if I heard you correctly, you were at 16 in the first quarter. That's about where you are, but you're looking at maybe going to 19 in the third quarter. Is that it?

we were 16 in the first quarter to .

All right. How many would be joint venture? How many do you operate solely yourself in the joint venture numbers?

Joint venture, if we translate it, we would multiply 7.5 and give you a Nabors' interest.

Okay. Can you say anything about the Saudi market as you're looking ahead considering the broad discussions underway on the gas development activity that's in negotiation currently? How do you view that market going forward intermediate to long term?

We think we have a superb position there, and I think it's manifested by their willing to take unsolicited bids for us for jack-ups. I think they consider us the preferred driller there. If you talk to Saudi, they have various sundry performance records and safety records and all that stuff. We're doing pretty good. Outside comparison, we have mainly the -- there's not a whole bunch of rigs in the country and Saudi RAMCO knows that and some of the guys who have long standing Saudi vendors haven't been performing whether it's the Indian company relatively new or the Chinese company relatively new, and we're kind of hoping that that manifests itself in a normalization program. It certainly does when they take an unsolicited bid from us, and that's like a negotiated bid, and the fact that we've been doing that, I think is a big cause of it.

All right. Thank you.

Thanks.

Our next question comes from James Stall of UBS Warburg. Go ahead.

I have two questions for you, Gene. One is going back to the lower 48. Can you give us a sense of, you know, where your rig activity is today and can you talk a little bit about you lost quite a bit of share on the way down here. Can you give us a sense of how you see that playing out as activity that comes back up, and my second question is, you made reference to some changes in corporate governance that you talked about with this new committee. I wonder if you can just elaborate on that, you know, what kind of things should we be looking for as a result of some of these changes that you're looking at?

Let me take the second one first. I think we'll have incremental directors, independent directors, you know, probably we'll start with one or more from 100% in the industry. We've required all the directors to call in outright a bunch of stock, which I've done, and maybe I have more. Maybe I should have lightened up a little bit in '63, and as I suggested, the compensation committee almost certainly -- will certainly look at and probably modify the traditional policy we've had of top loading my compensation and the top compensation with performance and, i.e., equity base, and we'll probably move to something that's more in line with the times right now. I think, you know, I'm not overjoyed with what's going on, and I'm on the NASD board and the AMEX board, and we're going both of those places and examining standards for corporate governance, and some of those are over the well. We will adapt all of those. The one thing I'm not really overjoyed about is the relationship between the whole board and the selection of auditors, but whatever we have to abide by, we'll abide by down the road. Does that cover what you wanted?

I was just kind of curious. You brought up the issue of auditors. One of the big questions these days is the separation of you know, auditors and consultants.

We already have that. There are two different kinds of consultants. There's the pure consulting and the juicy stuff and probably unrelated [ Inaudible ] PWC settled the conflict yesterday, I guess, and then there's the consulting that's an integral part of the audit procedure like we estimate workers comp or things like that or they do the tax return on a consultant basis, but we don't have any consulting that they're talking about, but whatever the rules are we'll abide by, and right now, we need an audit committee approval for anything -- all fees including assignments other than pure auditing. But that conflict just has not been a factor for Nabors. It's a conflict between consulting and audits.

Mark, this is Tony. Yeah, with respect to the auditors, I mean, we do not have PWC doing MIS projects or anything like that. In fact, you know, any special projects away from the pure audit, for example, registration is what Gene talked about is a normal bailiwick over the accounting, and we use other people. You know, with respect to auditors, we're very comfortable in terms of our relationship. It's been really mainstream, and you can see that in our disclosure in terms of the numbers attributed to what we paid PWC, which is in your proxy information, which is zero, I think, so --

And then, just, Gene, going back to that question on the lower 48.

I would say that generically, the shallow oil stuff, we haven't participated in largely by design. The performance drilling, i.e. turnkey and footage, we haven't participated in buy by design. Although, we're going to have to re-examine that if things stay lousy because when business is bad, the percentage of performance drilling goes up substantially historically from the industry, and finally, we're impacted by drops in California where we have the very large, and we're still doing pretty well there, and as that activity backs down, we -- you know, we lose both margin and rig counts, which we have an extraordinary good percentage of over 8,000 and 7,000 feet, even though we still have Oakhills but the East Lodge Hills stuff which was lucrative in a lot of rigs is going down, even though they have prospects there. To answer your question, when the rig count goes up, I think our market position goes up, and in addition to which we're looking at stuff that will enhance the market position even at lower levels overall activity.

It sounds like the third quarter that you're looking at really a modest gain on the NB USA stuff. Most of the improvement quarter to quarter is coming from the other parts of the company.

You're 100% right. Modest, modest increase in volume. Possible, very modest decrease in price. For example, some of these California things that might roll up, we have margins that are a multitude, we take 3, 4 rigs, new cutting rigs to get those margins, and in a sense, a lot depends on what happens geologically out there. I would say essentially flat. The improvement, which will be substantial would be away from NB USA for this quarter anyway. This is the third quarter. Next question, please.

The next question comes from Scott Hill with Simmons & Company. Please go ahead.

Yes, good morning. Gene, if I can follow up to that last line of questioning with respect to the lower 48 operations, as the business starts to pick up toward the latter part of the year, kind of talk to us about your strategy on price versus market share?

Basically, I think what traditionally happens and what we'll go along with is as utilization goes up, market prices go up, and as operators start to worry about whether or not they get the quality rigs into places they want, you know, prices go up, and as guys stop worrying about time you have now, you can trade off increases in price now for volume and plus volume now for assurance of supply and maybe protection against price increases for the guys later on.

The overall strategy, Scott, is to optimize on a month-to-month basis. The only thing I can tell you is we don't see the margins and day rates getting as high as they were at the last peak for quite a while, and we have maybe 110 rigs working today. We have 290ish that could work today except for crews and we have most of the skilled positions staffed now and beyond the 290, we have about 110 now that we can bring out at a substantial discount. It's in our interest, you know, with we get up to a decent margin, I can't tell what you that is. Time will tell, and we will then be interested in getting our rigs to work rather than encouraging, you know, having high prices, which will serve us, serve the industry, frankly, and we will discourage other guys from building rigs that the industry doesn't need.

Is it fair to assume that as rig count increases here in the third and fourth quarters, not to expect too much on the cash margin front in terms of how we model the company?

I think that's right. I think a lot more is dependent in the short term as to whether California hits, whether we're using 3,000 high power rigs. As lousy as things are, we still have 20 top drives augmenting our margin on the day rates that you hear.

Yeah. In other words, it's more of a mix at issue here in the near term.

Yeah. I don't expect the volume to go up fast enough to have general overall increase. I think it's the kind of drilling, as you know, California is the manifestation of the drilling where we haven't had geographically. Generally, the deep drilling is in a place where we have an edge, and also, increasingly customers, not fast enough, but increasingly, customers are looking to do multi-regional deals with us.

Gene, my last question, third quarter earnings, I was wondering if you can quantify that guidance for us. There's a pretty broad range on the street right now.

Yes, the range is probably, what, 90 to 115 or something?

Well, the earnings guidance for the third quarter?

For the year?

Yeah, that's correct.

I think we will be within that range. I would say, you know, frankly, I don't know. I don't think anybody knows. I do know that we're having strength internationally. I do know that later in the year, we'll have strength in Alaska. We don't have winter drilling. We don't have winter construction, and we just said it will be about the same. Canada will be a big rebound, you know, that won't be the whole story. So I think we'll do minimally what we did in the first half, and you know my hope is we do better. I don't know how much good guidance that is, but that's the story.

Gene, if I can push third quarter a little bit, it seems to me with Canada improving, making up sort of what you lost in the first quarter, lower 48 not recovering what was lost versus the first quarter. It seems to me that the third quarter, you know, should be lower than Q1. Is that fair?

I think probably that's a good way to put it. I would say the third quarter should be above this quarter and lower than the first quarter.

Thank you, Gene.

Operator, I think we will extend our call beyond our deadline and take two or three more questions.

Our next question is with Terry Darling from Goldmann Sachs.

Couple follow-ups on the U.S. business first. I was wondering if you can tell us where your rig years in NB USA are today?

110.

And secondly, we have seen capacity adds of since the 2000 period from a variety of your competitors. Wondering how you're looking at that from a competitive perspective. Whether you think that's a pricing issue going forward, you know, under normalized scenario.

Yeah. It isn't going to help anything, including pricing, and what can you do? We have a pretty competitive market and a couple of guys are entering the business and agencies are building new rigs. Life goes on. I can tell you in terms of addition 1 and addition 2 of these flex rigs, they haven't been materially serious problem except that they convince a bunch of customers to sign term contracts and some of those rigs are stacked. Frankly, we beat them hands down in the Rockies with our other rigs. Yeah, you know, the market's competitive, and life will go on, and we'll do our thing, and we're making inroads, I would say. Everybody we have a term deal with, which isn't a whole bunch, but they're doing deal with us, and it's going to be an H & P flex rate. Not big numbers, but enough to make me smile.

Yep, okay. Also very helpful breakout in terms of the sequential drop in operating income, but I was wondering if you could speak more specifically to what happened to the non-North America business. It sounded by your comments that it was flattish, but I just want to confirm that?

I think that's right. To tell you the god's truth, it was minus a tiny bit. Not a teeny bit. I'm looking right at it. It was a little hiccup.

Can you give us the order of magnitude? It's going to be up in the third quarter somewhat. Can you give us an order of magnitude of what that looks like at this point?

I would say that the -- well, what I said earlier, I think, year over year, we're going to be up to 60% in the third quarter. We'll be up, I would say, oh, I don't know, 25, 20, 25% versus this quarter. Beyond that, there are a whole bunch of things, Terry, that aren't locked in yet. It's just the tenor of things. More specifically Nabors offshore. We used to talk about moving land rigs from the state to the international market. Now there's big promise in moving, you know, Nabors offshore rigs, primarily platform rigs, a couple of jack-ups that we have and all of these things become term projects with good rates, and that includes the Persian Gulf, Mexico, possibly even the Far East, and I don't want to get you too excited and I don't want to say we had a hiccup again, but I can't believe that we won't be significantly and steadily improving our operating offshore and onshore.

On Mexico, Jim, you were awarded a recent contract on the offshore side with Penn X if I'm not mistaken, and some others indicated that the contract terms down there are pretty challenging. I'm wondering if you can speak to that. You know, they look like there are numerous opportunities following this recent wave and wondering if that, you know, you think you're well positioned for more of that.

I think you guys all know that we're as tight as anybody in the world as far as contract. Did we buy the insurance? We actually put in the fee, and I think we're going to try to cover the things that we didn't like in the contract with insurance, and it's like $1,200 a day. I don't know if we bought the insurance or not. We probably will buy it. I don't expect anybody to have a rig that didn't get a contract to say that we did a great thing. Particularly anybody who sold us a rig that we put to work. You know, we worked in Mexico a lot. We worked on land there. We've had platforms before. We have a supply boat, Halibrex (ph.) supply boat working down there pretty steadily. We've had a contract with boats away and we worked on land down there. We worked down there. We have the mechanism. We have the organization. We have a good agent, et cetera. I mean, we're not perfect, but we're not virgins down there. We know what we are, and you can ask that if we sign lousy contracts.

You're pretty optimistic about your opportunities to get some of the additional rigs that look like they'll be coming out over the next 12 months or so.

Yeah, I think so because we have a market-leading position. I mean, this kind of market doesn't demonstrate conclusively that, but I think that's, in fact, the case, and we have a bunch of rigs that we own that will it is down here, and frankly, what we've done is put European standards of, you know, information, safety, systems, procedures, high-tech, a whole bunch of things on our international operations, which we need to do for customers like BP, Shell, and generally international operations, and that's been a major change, and I think we'll make hay in this market.

I think we're as good as anybody in terms of assets and corporate reputation and experience with infrastructures in all of these places. I mean, you know, for example, our land competitors are really good, well respected. They try to operate in let's say Saudi Arabia and Venezuela, and they can't do it because they don't have the know-how, the infrastructure, and don't have a bunch of other things even assuming their people are as good as ours.

Last question from me on the U.S. federal government issues with the tax inversions, I am wondering if you can elaborate on that. The risk reward, various scenarios, what you think is the most likely scenario, and just to make sure I understand where your tax rate would have been were we not in the inversion position already. You were already in the mid-20s last quarter, but there were some issues related to where the U.S. business was headed, I think, at that time.

I think basically, Terry, what I tried to say, I will say again. The situation is so fluid on the tax situation, and unfortunately, the fact is the risk was already taken, and it remands to be seen what the reward is, and this is precisely,

I think what we put in our disclosure documents, and we have not led anybody, encouraged anybody to use anything except pre-inversion tax rates, and that's still the case, and that's kind of the 25% rate, which is primarily a reflection of lower, high-tax revenue, high-tax regime income and lower international, higher lower international rates, and as the mix becomes better internationally, the rate stays around 25%. You know, other things may accrue when North America gets better Canada. As North America gets better, without the inversion benefits, our tax rate will modestly go up.

Okay. Thank you.

Our next question comes from Kevin Simpson with Merrill Lynch. Please go ahead.

Thanks. Gene, you've gotten more active in offshore. I know a lot of it is basically opportunistic in terms of contract opportunities that you guys perceive you have an edge in, but Transocean is going to spin off and sell off its shallow rigs, the barge rigs and then the shallow jack-ups and presumably, you know, there will be an unofficial dual track on that. Would you guys be interested in those assets?

Didn't they announce they were going to IPO that, Kevin?

They did. Let's assume that the IPO is -- s-1 will be an official unoffering document. There's no reason they couldn't sell it if somebody wasn't interested.

Yeah, I have not had any direct contact with the company or its banker since this announcement, but you know, they hired a CEO, and I think they're going thank you a whole bunch of enforcement if they didn't actually believe they could make out better with an IPO. Yeah, we would be interested. We told the guy who's running the sale for them or the IPO or the sale assignment, and he knows we're interested. Yeah, we would be interested in looking at it. The one to two billion, you can bet that we wouldn't be on the high end of that range, and they probably figure correctly that we're the only guys who could successfully buy it and negotiating with only one guy isn't the best thing in the world.

Especially you guys, yes.

I knew you were going to say that.

Well, okay, the other -- are there specific opportunities overseas? You mentioned it in the press release. You know, away from the opportunity, you know, the Mexico situations and then whatever your negotiating with the Key Bermuda, you know, kind of put a carrot out there and made it sound like there's more out there.

I think I cautioned. You know, what I meant to imply, I think accurately is, yes, we are looking at a bunch of thing out there. A lot of them are based kind of newly on utilizing Nabors offshore corporation, not only their assets, but their know-how on various insundry projects, which is kind of a new thing compared to just plain landry, and I mentioned what I care to mention. There are a couple or three other things that are pretty competitive. There's no point broadcasting it. We will be the first to tell you after we have a letter of intent, but yeah, there are other things.

One of which we'll probably get pretty quickly, which we haven't mentioned and another one will be a bigger Cap X thing. Two possibly Cap X things and they're the customers that were happy with us with projects in new places.

Again, I don't want to overpedal this, but we will have substantial improvements internationally, which is not news for you guys. I mean, you've been saying that international is important. All I'm telling you is that we have an international dimension that's going to pretty relatively promptly and steadily this half and beyond hit the bottom line.

on the specific opportunities that you're talking about, I mean, would that be by the time the 3q conference call likely to have, you know, been awarded one way or the other that you can be announcing?

Hopefully, but I hope it isn't like, let's see, Algeria. You know, five quarters, but we got it in the end, and it took us another two quarters to get the margins where to they want to be.

Operator, in the interest of time, we will limit it to one more question, please.

Our next question comes from Ole Slorer with Morgan Stanley. Go ahead.

Good morning.

Hi.

Just a little bit more on the offshore expansion. I mean, if I'm correct, you just picked up the latest jack-up around $20 million according to the rig broking circles. Can you give us some commentary on what your predicted cash margin after you get that rig to work after your cost of operating in this environment and what sort of a turn on capital you can achieve and if it's possible to do more deals like that, you know, looking more and picking up individual offshore assets and then deals back to back and whether it's available to do those types of rigs in the market other than that big block of rigs that you all know about?

Actually, this rig we actually paid . It will cost us 3.5 to refurbish it, and you know, quarters, other things to really upgrade it, and we'll make a little bit of money on the move, which will get back maybe a half million of that, and we have a 1,500 day contract. The day rate is in the low 30s. We should pay the thing out and make a little bit of profit in the term of the contract, and as you know, this is using very low cost capital. Then, the degree of the return will be a function of the residual value of the rig. It, frankly, it doesn't have -- the two things that we brought to Key Bermuda and whatever the other key was, Key Victoria, sorry about, those are really good long-term rigs in terms of deck load. We've strengthened or we've enhanced the depth capacity in terms of mechanical legs, and these things have the really valuable attribute of being able to get over shallow sandbars up to seven and eight feet and then drill deeply. I would say that this rig that we bought, the last rig isn't of that. It's more generic rig without the same kind of quality. A deal like that, we would only do it if the risks were low, and obviously, the guy who sold it to us didn't have the ability or the confidence in the Mexican infrastructure that we do, and you know, we virtually got the contract with buying the rig. That one isn't as good. Now, whether there are going to be others out there, it's kind of hard to say.

it looks like a 20, 25% return on capital, which provided the right kind of value. I think as we go before re-employing, it will be very good.

in this market to buy a rig asset in that magnitude and back-to-back in a contract, I mean, you have the cash flow in that contract, it comes close to paying it off in the first contract, and it's still --

I think we do pay it off, don't we?

It's still pretty good.

It looks like it is good. If we can operate them in the tricky environment. I mean, how many more opportunities like that --

We actually have one relatively low-end assets, and two, I would call the keys high quality assets because they have long term. If you were going to build a rig for operating in the Persian Gulf, that's the kind of rig you would build. That's one of the few damn rigs that you would actually repays the way it is, so that has longer term value, and the ultimate return is the function of how long they can work. The first rig we bought was a low-end rig which we more than paid out in the first contract. This one is a lower-end rig.

We don't want to be competing with this kind of a rig in the U.S. Gulf after this contract, but it's a long damn contract.

Yeah. It looks like it. I was wondering how many more opportunities you have.

It depends on whether we have opportunities to buy rigs in market where we have an edge compared to the guy who is selling it.

Absolutely.

We don't know of any, but we didn't know about these before it came up.

Things look more sensible instead of paying public acquisition and paying assets out.

I think that's precisely right, and I emphasize that it's not that we're in love with exposure to the offshore. I think we're in love with the fact that we have really good relationships with Arasco (ph.) which manifests itself in a lot of ways and being able to go there and negotiate contracts for those rigs is a big plus for Nabors' position in the country. How does that sound, okay?

Yeah.

We're pretty confident that we have a good position in Mexico. I think by the next quarter, we'll be able to tell you how much of that got converted into awards beyond this one rig.

When is the start-up date for this one rig?

End of August.

I have a couple of questions and I will take those off-line. Thank you very much.

Thanks. Operator, with that, we'll wind up the call today. Thank everyone for participating, and look forward to speaking to you next quarter.

Ladies and gentlemen, that does conclude your conference for today. We thank you for your participation, and ask that you please disconnect your lines.