Nabors Industries Ltd (NBR) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Nabors Industries third quarter 2002 earnings release.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Wednesday, October 23, 2002.

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

Good morning, everybody. Thank you for joining us again for our third quarter conference call. With us today is Gene Isenberg, our Chairman and CEO, who will be conducting the call; as well as, Dick Stratton, our Vice Chairman; Bruce Koch, our VP of Finance; and Kathy Ellis, our General Counsel; as well as, several of our heads of our business units.

As usual, we want to give about a 20- to 30-minute presentation by Gene on some of the developments during the quarter, how the various business units fared, what we see the outlook near term, and so forth. And then open it up for questions and answers. We will limit the call to approximately to one hour, so if your question doesn’t get answered, feel free to call us at any time.

And it’s, of course, I have to remind everybody that a lot of what we talk about is a forward outlook in our estimates in the markets and the way things are going and, of course, that’s defined as forward-looking statements under the SEC regulation. And as such, things may vary a little bit, but if everybody understands that.

And with that, I’ll turn the call over to Gene.

Thanks. Welcome to our third quarter earnings teleconference. As has been our recent practice, we’ll emphasize sequential quarter-to-quarter changes and try to give new -- an indication of what the envelope looks like, business unit -- that business unit. I will also, as we have been doing, focus on operating income.

As you’re all aware, we felt it necessary to pre-announce third quarter earnings earlier -- in fact, this was a few weeks ago. As our earlier guidance was based on rates second quarter pick up in activity -- picks up in activity in the Gulf of Mexico, Canada, or even in the Lower 48. Those pick ups turned out to be a [indiscernible] and actively reverted to low levels.

However, I am pleased to say that we hit the high end of our revised pre-inversion earnings per share -- 12 cents per share. Also, our operating income, although down, was down under 15 percent from 37.5 million to 32.1 million, not [indiscernible] as the other measures.

According to the U.S. cap, not only are we forced to record actions based on the inversion transaction we did in mid June, but we’re further required to estimate the tax rate for the full year and take the full year-to-date impact in the third quarter. And we did that in our gap-type numbers. However, we also explained on a pro forma basis -- which we think is more relevant for these discussions -- what the earnings would be on a pre-inversion -- I mean, without the tax benefits of the inversion.

And I don’t plan to spend a whole bunch of time on it, so I’d like to just emphasize the obvious, mainly that time will tell whether or not they’ll be an impact of a lower tax rate for inversion or precisely what will happen, both for the statutes and to the status of Nabors Industries.

Let me also, while we’re talking about the balance sheet, briefly mention some other items on both the income statement and the balance sheet before we get into the specific business unit discussions.

You undoubtedly will notice that we had a pretty sharp increase in GSA from the June quarter to the September quarter. A big chunk of that is in circle. And they’re rather complicated, but not significant developments. I think the more important thing to say is that number will go down sequentially. It will be down by at least a million in the next quarter and at least a million more than that in the subsequent quarter. Specifically, for example, Nabors Petroleum U.S.A. has recently implemented some GSA cuts, which probably aggregate $1 million per annum going in and probably they’ll meet their target of total GSA reduction of 1.8 per year. Most of our business units are acting accordingly. So that’s one thing which you should bear in mind.

Secondly, our depreciation in cap ex -- I’d like to talk about that and I’ll answer any questions you have. We’re now running at around $52 million a quarter. An increment of $4 million is because of the Canadian acquisitions. And if you look at what we’ve done for the year, we’ve again made a bunch of investments in the future. For example, year-to-date -- we have to make our year-end rule out invested on a capital basis, $575 million, of which $325 million will be acquisitioned. Also, the rest of that is -- 140ish -- will be sustaining and that’s against a depreciation of about 200 million. The company can -- about 110 million [indiscernible]. I think this -- not to make a federal case out of this -- but of the 575, some of the acquisition -- the shareholders -- elected to take stock so that basically, when you get through with everything, we will have a major program of enhancements. We’ll keep up-to-date on maintenance and we have a pretty aggressive acquisition program, a new construction program and still our cash will essentially will be unimpaired -- will be within $100 million of covering 100 percent of the cap ex.

I think the other thing worth mentioning is that cash and [indiscernible] securities are approximately 1.3 million now. You will note that we did a dead offering -- what was it? -- six weeks ago.

The 22nd.

On the 22nd where we raised a half a billion. Let me take a second to tell you why we did it. We’re unduly conservative and we think that the stock might not be up at 65 by next May and, therefore, the first half -- the first year [indiscernible] might be put to us. So we wanted to finance that when we were certain we could finance it.

We also thought that the interest rate was pretty good. We did our deal at something like 4.18 for ten-year treasuries. And that was the lowest rate in 40 years. You may recall that subsequently we went to the lowest rate in 45 years. But now it’s modestly over 4.20.

But the point I want to make is, we didn’t make that -- part of that money just so we’d have cash in the balance sheet and have $6 or $7 million a quarter of interest only partially offset by interest income. We hoped -- I mean, preferably when we refinanced the 4.8 -- 480 and 90 million that will put to us. And secondly, we hope to make good use of the cash, even the availability. We will [indiscernible] even to have it there helps us a lot.

And also, we’ve been doing some things which will mitigate the negative [indiscernible] we recently put on a [indiscernible] where 200 million or our long-term debt goes essentially to [Libor] plus .65 points we’ve also protected ourselves a little bit on liable. We’re going too high, but, that in of itself, will probably 2.5, 3 basis points savings for that. We’ll optimize that too. So I think my overall point is, don’t look at the balance sheet, the income statement for the quarter and draw all kinds of conclusions that we’re going to have undue interest or undue reload taxes or any of that stuff.

Let me now go through the business units -- business unit by business unit -- starting with Alaska.

Alaska is to me is pretty good. This quarter versus last quarter was modestly down. Next quarter will probably seasonably be down again. And the first quarter will be very good again, pushing close to the recent all-time highs we’ve had in the last [indiscernible] operating [indiscernible]. You recall we had Nabors Alaska growing in a couple of oil fields. There’s another service company up there.

I think overall, our dominant position is being maintained. The good news is there are more than one shared service -- buyers of our services up there -- three or four. I think the bad news is that, given the price of $28, $29, the level of activity, to me, is surprising we know. And some of this is due to the bigger companies, like the BP’s of this world don’t move really quickly. They have their target [indiscernible] prices for crude oil. And it’s probably -- I don’t know -- might by half of the [indiscernible] prices are now or a little better than half. And they don’t move really quickly.

And unlike an independent, where the cash flow at impact is spending pretty quickly in a specific location, that isn’t the case up there. Some of the other operators up there also have priorities which need everybody to sign off in the [AFE] and that hasn’t been rapidly as it could. However, there are operators who have made investments up there who don’t have really good alternatives the way BP does, for example, and the investment’s going to come here.

There also has been another decent -- we’ve known about the shallow heavy oil up there. [indiscernible] a lot a long time. But now it actually looks like that stuff is going to become economic even without the $30 price. In the first place, it’s heavy oil -- 18 to 20 degrees. There’s a zillion tons of it there. And it’s 3,000 feet vertical depth, but 13, 15, 16,000 feet [indiscernible], you need a real rig to do it. And so far, they’ve been getting maybe $300,000 a day with an economic target of maybe half of that. And the question is, what kind of decline rate will they see. But if that works out, there’s a lot of possible work up there. And you’re all obviously aware of all the other possible work up there. But basically, I can’t tell you that anything is zooming upward on the horizon.

Canada. Canada is probably not the American [indiscernible] story that has, I think, a lot of promise and I’ll talk a little bit more about that in connection with the U.S.A. But the promise has been reached. Quarter to quarter -- we improved this quarter over the last quarter both in our drilling and our well services operations. So that it might be the first time that I can recall we had a loss last quarter up there. And we’re in the black this quarter, so there’s, you know, a decent improvement quarter-to-quarter. We’re looking for a significant improvement again in the fourth quarter. But the first quarter -- by every indication we have -- the issue is going to be, can we get crews and are there going to be enough. It really looks [indiscernible] for that quarter and for a variety of understandable reasons. So they’re having the same decline curve or same operators are getting a fair amount of cash based on the high commodity prices. The gap between produce ability and demand is increasing.

And we’re also, I think, doing pretty well there. I think I’ve told you in the past that we have a primary alliance with Shell and they’re going up there. Apache, we’ve done a deal to increase. But we’re talking about those two companies, for example, going from an aggregate of 7 or 8 to something approaching 20 in the first quarter. And that’s the kind of thing we’re seeing everywhere [indiscernible]. So in terms of where they are now compared to where they are told they will be. So that outfit looks really good. And I’d like to emphasize that one of the reasons we’re not doing as well as -- one of the reasons we had to pre-announce was that Canada isn’t doing as well as everybody hoped it would do. But I’m still confident that the acquisitions up there will prove to be profitable. And in this case, I think, by the end of the first quarter, the deals will prove to be good deals.

In the U.S.A., basically, we first go through the simple statistics. Second quarter we had 105 rigs working. Third quarter we had 103 rigs working. Right now, we have 101 rigs working. In terms of the margin, I think I told you in the second quarter, we have something a little -- modestly above 2,500 per day. This quarter we had something as expected, only modestly below $2,500 a day. And, you know, I’ve been hearing a lot about what our position in the Lower 48 is, etc. Let me just make a few comments.

One is that we are not geared to hit our prime when the industry is running 700 rigs. If you think we’ll run 900 or more, we’ll do really well. And if we run anything more than that, we’ll do extremely well. Right now, we have to balance [indiscernible] volume and we do it in -- you know, it isn’t a simple deal. But I would rather have what rigs we have working now at the margins we have working at than 15 percent more with the whole 100 percent plus the 15 percent at $600, $700 a day lower.

Similarly, we have to balance between cap ex and incremental cash flow so that, whereas, for example, I’m pretty convinced that we have the best cold weather designed rigs actually working, not only for 2 or 3,000 horsepower, but actually lower than that in Canada and available for the Lower 48. The question basically is can you spend that money and where do you get the return? We also pretty obviously can do anything that any competitor can do with so-called technological rigs. And the question is, when do we do it. And the issue is at 900 plus rigs, we’ll be hitting our peak, or getting close to our peak. And at 700 rigs, we have not to react unless we think that’s going to be a permanent status. In which case, you better not own any of these stocks, if you own any, but [indiscernible] international operations, etc.

The other thing I think I’d like to emphasize here is that we have to look ahead a couple three quarters. The Canadian situation is a perfect example of that. Right now, last quarter it looked like it was a terrible investment. Now it doesn’t look great. But I think by the end of the first quarter, it will fit pretty well everything.

Qualitatively, we’re still doing great in Canada. Customers -- well, we’re doing great in Canada. In the U.S., our customers relations are likely getting better and, you know, I’m anxiously awaiting for very specific signs of improvement in drilling levels and, I think, the signs are there that that will happen.

U.S. well servicing -- we’ve done pretty although, we were down this quarter modestly and we’ll be down seasonably through the next quarter. That’s a business where -- which is a function of holidays and weekends and that sort of thing, as well as seasonal [indiscernible]. But I see that business growing again in the first quarter and thereafter.

Offshore. Offshore is bad, but it’s improved. We’ve gone from -- the number of rigs working went from say, 14ish to almost 15 in this quarter. But also, the mix was better. And while we’re -- we’ve probably improved a couple million bucks or more last quarter versus this quarter. And we’ll do another couple million in the fourth quarter. And I think by the first quarter, we’ll be significantly, materially noticeably in the black. And the rig count [indiscernible] from around 14 to 24 in the first quarter. Now, a lot of these things, we have pretty close to firm contracts on already.

International. International -- we did about the same as we did last quarter. One of the things I’ll mention now -- which will evolve between now and the year -- because we’ll try to do as much as we can more in terms of helping you guys understand the business unit by unit for modeling purposes, and we’ll try to do that in such a way that we give you all the information that’s useful to you about compromising our competitive position or our position with customers. You know, for example, if we have a handful of rigs working in Alaska, we break Alaska in great detail. That doesn’t really help our position any which way. But we can find ways around that.

But let me start about talking about international. Actually, even though this quarter’s essentially the same as last quarter, the operating income for international was $18 million this quarter. So not chicken feed. And I’m sticking my neck out on behalf of international, but I’ll tell you that we should be pushing a 50 percent increase in that by the first quarter. And these are essentially contracts that we have or based on everything we know are extraordinarily likely to have.

And, you know, the increase is actually relatively evenly divided between offshore and onshore. Onshore, I think we have very, very big conditions in a number of places where we’re the lead contractor. And offshore, what we’ve been able to do is to take a number of our assets, which were with Nabors Offshore Corporation, and redeploy them internationally at, you know, better margins, better terms, that sort of thing. As you all know, we’ve acquired a bunch of jackups, all of which are one [indiscernible] will be deployed in the fourth quarter.

I think the other thing worth mentioning here is that we have contract awards for five reconnect [indiscernible] one jackup and four [indiscernible]. And one of them is a mase rig. And those are really good [indiscernible] rigs. They also have supply boats with them. So in addition to everything else, we make a significant margin on the boats.

Anyway, that picture is a strong growing part of our business. And while, unfortunately traditionally, they’ve been a little late in coming through with the bottom line; they, in fact, have come through and I’m confident that they’ll come through with increased bottom line in the next couple of quarters.

Sea Mar. As you know, we’re in that business, but we have sold the management to -- 100 percent -- well, 75 percent to 100 percent American equities. So we lose a little of the margin there. But that business is still basically good. And that’s going to be augmented by four rigs which are essentially stacked right now that will be going to Mexico under Mexican flag. And there will be a little cap ex on that, but those contracts are around four years earned and the returns will be excellent.

The big boats -- the Super 200’2 -- are all working pretty well. But they’re very close to 100 percent utilization and so very high margins. You may recall half of those are on our term contracts. So we’re getting a little bit more integration of all of our units, including the boat business [indiscernible] drilling business and that sort of thing. Because none of the Super 200’s is going to be on a Mediterranean job six, nine months with a plat arm rig. But then again, there’s much more interaction like that.

We’re doing pretty well in our [cam] rig and epic -- actually, as you can imagine, there’s essentially no domestic and internal [indiscernible] of the rigs right now. Unfortunately, we have probably 60 percent of top rigs in the Lower 48 not working right now. Nevertheless, in terms of the business of [cam] rigs, they’re selling maintenance, repairs, upgrades and we’ve got -- I think, it’s like 11 rigs sold to Russia in this coming year and a significant number away from us generally.

Anyway, I’ll come back in response to your questions. But let me briefly summarize and leave some time for your questions.

Overall, we have to say the lack of the industry visibility is an issue. Now, but the fundamentals, I think, indicate a very, very strong future. And I think one thing that -- I’ve been trying to talk to most of our E&P customers, the leadership thereof. And one of the things that strikes me is, that the high prices we have now for both crude and natural gas are doing a couple things. One of which is, they’re increasing the cash flow of these guys. And almost without exception, all the independents we’re talking about cap ex being limited by cash flow. Not prospects. But in any event, the high prices enhance the prospects and projects and increase the [indiscernible].

Even the majors mostly say what they have competitive projects. And it isn’t an issue of, you know, whether there’s a good incremental project in Alaska. It’s how that competes with the replace [indiscernible]. But the big independents, most of their prospects, I think, at these kind of prices are going to be in -- a lot of them -- and not in only in North America, but will be [indiscernible] again. I like the returns and also the [indiscernible], the cash flow that these things -- these prices enter it.

Also, I think part of that is that the North American supply -- gas supply picture is evolving in a way that’s pretty [bullish]. And I don’t see how you can do anything but conclude that. And I think it’s also not as quantitatively demonstrable that the value of North American clean-burning BTU’s are politically safe and don’t have a bunch of CO2 -- that they’re going to be more valuable down the road and that’s where we are.

I think the company has really a great near-term future. And, you know, I think the manifestation is going to be in the next couple of quarters. And I think that the operating income is going to be up pretty sizably, particularly, starting the first quarter for the company.

I think in the U.S.A. for the company generally -- well, let me put it this way. Away from the U.S.A., I think all the business in [indiscernible] is doing well on a prospective basis. Alaska’s doing decently and will do better. But it has to do better sometime assuming in the light of modern crisis and world politics, etc.

International, you know, we’re doing great. We’re the leading driller in Saudi Arabia. We’re the leading driller in Algeria. We’re entering that the new garden spot -- Indonesia -- for the first time is a good project.

And in the U.S.A., I’d say it’s -- the analogy I’m using -- it’s like the pre-season here. You know, just wait until the regular season, wait until the playoffs. And if the recount gets to be anything remotely what I think it might be and what other people who study it better think it might be, we’ll probably be in the World Series.

I think financially, we’re very strong. Again, I explained why we did the financing. I explained that we will end up not having to pay a whole bunch for a bunch of cash. And even having that -- for example, one of the deals we did in Canada, we would not have been able to do if we didn’t -- weren’t in a position to study. If we want all cash, you give out cash. If you want a Canadian exchangeable stock, you’ve got a Canadian exchangeable stock. And if you want Nabors stock -- and Nabors stock is good too, but to a lot of people, it’s not as good as cash. And I think that helps.

And I think we talked briefly about the buy-back. We had an internal screw-up on the back-back [indiscernible], so we got a -- well, we got a couple $3 million on [indiscernible], which we collect today. Is that right? We only bought 100,000 shares.

But one of the things we’re considering, we will buy more -- one of the things we’re considering is that I’m acutely aware of our relationships with the rating agencies and I relish the A3, A minus and, you know, in due course when the industry upturns, I think we’ll both go up. But, I don’t think they’re in love with our buying stock net cash. In other words, we do it for cash flow. That will be fine. And we’ll do it from cash flow when we don’t have the investment opportunities we think we have now. But anyway, it’s still on the table, but we haven’t really done a whole bunch yet.

The customer relations, I think, are excellent. I think we have been approaching almost everybody and the outlook is good. And I think particularly with the big [indiscernible] where, I think the -- excuse me -- the big independents where, I think, the North American [indiscernible] story is going to be most importantly reflected, I think, we’re in great shape.

Personally, I’m still optimistic. As you probably know, I have not sold any stock for two and a half years, nor have most of our guys. And if you look carefully, my family acquired 350 or 400,000 shares about six months ago, taking stock back from what had been an exchange fund. And we’re perfectly comfortable with that.

And just let me also say that, I’m sure there will be questions, but let me see if I can preempt an answer on the inversion. If you really want to know what’s going to happen, I suggest you call your congressman, because I don’t really don’t have any great idea. All I know is that we should do our projections based on a conservative thing and that’s why we have the pro forma. Some guys told [Danny] this morning that’s the first time they’d seen a pro forma that was lower than the actual gap numbers. But, you know, time will tell what will happen there.

And otherwise, I think we’re in good shape and I think the good shape will be manifested in the next quarter or two. Dick.

Operator, we’re ready for questions, please.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three tone prompt to acknowledge your request. If you question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you’re using a speaker phone, please lift your handset before entering your request. One moment please for the first question.

The first question is from the line of Jim Wicklund with Bank of America.

Good morning, gentlemen. Gene, a question. You had said that offshore will be permanently in the black by about the first quarter. Was it not in the black in the second or third?

Yeah. [indiscernible].

I’m sorry.

[indiscernible]. In other words, right now we have offshore which is only about to Mexico. It had been but the offshore included the international offshore.

Oh, got you.

We’ve separated out the international offshore. And Nabors Offshore Corp. now is only the Gulf of Mexico.

Okay. And you had mentioned that the international generated 18 million in operating income. Now, I’m assuming that’s gross because you only had like 21 million in just income statement operating income.

I think we had 32.5.

Oh, okay. 32.5 --

But also, that doesn’t include my computation and all the [indiscernible]. U.S.A.

Okay. You had mentioned the margins for the second and third quarter. Are margins currently running above or below where you average for the third quarter?

It’s hard to say, Jim. Because, I mean, frankly, we’ve been expecting a sharper drop in margin. Those higher margin rigs came down, particularly in California. But, you know, the details are now -- since the ball rests -- we haven’t really had time to do yet.

Basically, I can tell you what I think. I think that the volumes are going to be essentially the same and maybe a little bit more positive. But I can’t project a monster increase --

Okay.

-- on the volumes. But on the margins, I’d say -- I would say we’re just modestly below 2,500, which was a pleasant surprise particularly, since I saw some of our competitors [indiscernible] with a much lower margin. And I would say something between where we’re at now and something north of 2,000 is where we’re probably going to end up and that will probably be the bottom.

Okay. That wouldn’t be bad. On a different note, insurance costs. You guys have a killer safety program that you’re proud of, and appropriately so. Insurance costs for everybody seem to be going through the roof. What are you guys are seeing? What’s going to be the impact?

Yeah, I would say that they’re going through the roof for us too. I think, knock on wood -- and I appreciate the comment we’re doing pretty good on safety -- and hopefully, we’ll do better. And that’s almost -- while we’re insured there -- it’s very significantly self-insured. So that’s going to be the case there.

On the options and directives, in this environment you kind of ask a guy to be a director without having 100 million, so we went up to 100 million. And, you know, that may be probably $600,000 more than it was last year. Which, one of the one good reasons for being a big sizeable company is that on the -- on the really significant [indiscernible] casualty, we are very substantially self-insured. I mean, we have a very sizeable deductible and we’re hopefully insured for catastrophic risk. But the first very significant number of millions of dollars is ours.

And all I can tell you is we’ve had potentially a bad loss in the jacket that went down. And we had to swallow that deductible unless it’s demonstrated, which I think is the case that somebody ran into it. Net is still working out pretty well compared -- not only, to what it would have cost for insurance -- but, what it was really in the preceding year.

Thanks.

Basically, we’re coping with it by putting our money where our mouth is and saying that we have, not only, a better safety record, but we have a better -- if you will -- accident prevention record. We have a big enough [indiscernible] so that it pays for us not to pay these super premiums right now and bare a lot of the risk. And so far, it’s working out. Although, it’s a risky thing.

Okay. Yeah, there was someone running around the Gulf of Mexico, running into everybody’s risk from the sound of it.

Also, last question. Canada.

Only three of them.

You had mentioned moving into the black there as well. Did Canada lose money in the second quarter?

[indiscernible].

Okay. Okay, gentlemen. Thank you very much.

Okay.

The next question is from the line of Scott Gill with Simmons & Company. Please go ahead.

Yes. Good morning, Gene.

Hi, Scott.

Gene, I was wondering if you could just give a little more color into the current environment in the Lower 48. Yesterday, one of your competitors, you know, showing rig count increases continuing into the fourth quarter. Just help us understand the market dynamics. Is this a function of geographic mix, pricing, or what do you think is actually happening out there?

I think those are a couple three of things. I think that specific company -- you probably also notice, although it isn’t emphasized -- but, the margin per rig was down pretty dramatically the last reporting quarter compared to this quarter. And it’s 700 plus dollars per rig lower than ours.

Has there --

You know, forget it. They’re doing what they’re doing. But, I mean, the point of the matter [indiscernible] is they have a dominant position in west Texas -- particularly the shallow work -- and we don’t. They have probably 15 to 20 rigs working on -- under 8,000 feet and we probably have a handful in the whole bloody company. We don’t do any footage or turnkey. And, you know, if they have one accident that’s serious -- and I don’t wish anybody to have an accident that’s serious -- but, that’s the problem. You know, I’m trying to say, Scott, we try to balance volume and price. We’re not running our operations as if the rig count was 725 forever. And if it does say that much, [indiscernible] we’ll do some stuff differently.

And, you know, that’s life. I think their count is probably -- was 137 at the end of the month, I think, was probably 132. We -- let me just tell you one thing. We watch every one of these things every bloody week. Not just that competitor, but every competitor and every customer. And so far, let me put it this way, I don’t see any reason for dramatic reaction to that. If the rig count was up and the margin was comparable to ours or higher, than we’d have [indiscernible].

For example, even in west Texas, we got a job from one of the [indiscernible] at a -- on a deep well which has a good margin [indiscernible] one of the majors which has 2,000 [indiscernible] rig with a decent margin and has a top rack. So we’re probably getting on that rig probably, what, four or five west Texas shallow rigs or six west Texas shallow rigs could do in gross margin assuming, you know, everybody is subject to this big hit on worker’s comp too, you know. You have seven crews and you have one accident, and again, I don’t wish anybody -- anyway, that’s a long answer to a good question.

Okay. And, Gene, Canada, can you give us some guidance as to what you think your rig activity might be in the first quarter. And then after you answer that, kind of, what would be the risk of fulfilling that expectation?

Yeah, the risk is everything has been slower in coming. That’s the risk. I would say we’d have trouble from [indiscernible] rack. Now, we were projecting around 35 rigs this quarter. That’s [indiscernible] obviously. And, we actually came back a few rigs from where we were at the end of the third quarter. But, I’m pretty confident that we’ll average pretty close to 60 rigs in the first quarter to directly answer your question. And I think our maximum capacity is probably -- literally every single rig would probably be 80 rigs. So I think we end up the quarter pretty close to everything working that can work. And I think comes a lot of people up here, including ourselves, but not just ourselves, are really worried in terms of what the customers are telling them that they’ll want in terms of crews and rigs and all that. We’ve actually got guys looking at whether we can move rigs from the Lower 48 up here. I mean, I don’t mean to make a mountain out of something that isn’t even a molehill yet. The outlook is -- the [indiscernible] up here is pretty bloody strong.

That’s a good number. Any -- would you care to tell us what you think cash margins would be in the first quarter then on 60 rigs working?

Yeah. Unfortunately, I think they’ll be lower than they were in the first quarter last year. And the issue is how much lower. In the first quarter last year, they were like 5,700, 5,800 a day in the U.S. And they’ll be, I think, almost certainly lower than that this year. Because some guys are -- when things are lively, guys are committing ahead, you know, at summer rates for winter work -- as they say in Canada -- which is not the way to go. And we’re competitive. We’ll have to be competitive. We’re not going to have zero rig for the high rigs.

Thank you very much, Gene.

Sure.

The next question is from the line of Kevin Simpson with Merrill Lynch. Please go ahead.

Thanks and good morning. Gene, I just wanted to follow up. You kind of -- the zero rigs at the very high rate and if the market’s that tight, then, I mean, doesn’t it make sense to hold off a little bit and try to optimize here if there’s more demand than, you know, what appears to be potential supply up there?

You’ve got to -- right. I mean, you know, these things are real complicated and especially complicated for the guys who are responsible for it[indiscernible] even me or for you. Now --

It’s very easy for me to make the call, Gene.

It’s even easier for me and [indiscernible] guys here. But the point of the matter is, the customer -- the good customer -- and somebody is offering him a bunch of rigs that you want to work that each agreed to give to you and they’re offering him a thousand bucks a day less -- hopefully, Canadian if it’s less -- and you’re not going to sit there and say, screw you. I mean, you know, you’re going to do something.

But, yeah, basically, you’re saying if you really want 50 rigs, I’m going to give them to you. I’m not going to go anyplace else. And yeah, I’ll -- but that’s basically why I said that it will be lower than it was in the comparable part of last year. But, you know, hopefully not terribly much lower. But it will be a pretty good rate. It will be well above what they are now and which are essentially summer ending rates.

Okay. On international, you’re -- as a company have been, you light more often than not on where you expect it to be. I feel pretty confident here that on the -- you know, on a big increase on op income. Is that just off of the -- lot of Mexico rigs going to work and, I guess, the question I have is what could wrong with --

[indiscernible] traditionally -- I mean, things go wrong everywhere. Internationally, we’re a lot more moving parts basically. I mean, you’ve got to get a rig there. You’ve got to go through red tape, the import, you’ve got to have six months’ worth of spare parts if something goes wrong. You can’t call up and have them fix it in the middle of the night from a yard here. You know, it’s just more complicated.

On the other hand, we’re used to it and that should be reflected in our projections. But all I can say is, the contracts are good. Our relationships with both the operators and the [indiscernible] oil companies, as the case may be, are good. And it’s not just Mexico, but Mexico’s a big chunk of it. You know, the first rig is working there. The other ones are on their way down. And my guess is, you’ll notice I talked about this quarter versus the first quarter in international, not even the fourth quarter. We [indiscernible] a little bit of a hedge on that.

But I think it’s good. And I think the other thing is rather than [indiscernible].

Yeah, that’s true. For sure. One other question. We’ve all been kind of waiting for the signs of, you know, an increment of gas drilling here in the U.S. Are you getting approached at all by any of the big players who you’ve had alliance-type relationships for, you know, deals that tie rigs up. You said, you’ve been talking to the principals of a large number of most of your customers.

Yeah, I think -- I mean, everybody is puzzled. I mean, I don’t know anybody who says I have a 100 percent understanding of what’s going on in terms of high commodity prices and lousy oil service activity, and especially drilling activity. But I would say the guys who are the most analytical -- and you know who they are -- they’re projecting increases in rig activity, including more typically, their own. They’re projecting increases in their production. And some of the ones who are most foolish aren’t even educated on the theory that prices will be better to hedge in the first part. Others, you know, are -- and almost everybody’s in the same boat. Particularly, if you take the United States and Canada and put them together -- I’ve mentioned this a number of times, but basically, everybody saying that [indiscernible] company that you’re talking to, we have prospects and we’re going to be a decent amount of money, particularly at these prices. We don’t need these prices. And the only limiting is this cash flow. But, with all the limitations being considered, we’re going to produce more oil or gas [indiscernible] next year than this year that the rest of the industry won’t.

So of that group of people, I mean, are they -- are you in -- I mean, are they approach -- are you approaching them, them approaching you about, you know, packages of rigs for next year? Or is premature again?

I don’t think it’s -- I don’t know. I think, we are, have been, and will be talking about that. You know, you get into the other question that you mentioned earlier. Anyway, it’s not easy. But, you know, we will be doing that and we have been doing that. We’ve got one -- the only one we really have to watch in a real firm fashion is the one mentioned last time and that’s the relationship with Shell. And just in case you’re wondering, I’m looking for Shell to buy every goddamn company in North America.

That’s not an [indiscernible] prediction though.

No.

Thanks, Gene. That’s it for me.

Okay.

The next question is from the line of Terry Darling with Goldman Sachs. Please go ahead.

Thanks. Good morning, everyone. Gene, I wanted to try to get a sense about the impact of the reduction in demand for ancillary products like for [cam] rig and epic on this margin. If we look on a year-over-year basis, it looks like you’ve lost $3,700, $3,800 a day on that U.S. Lower 48 margin. I’m wondering if you can help us out with the extent to which the profitability of the ancillary equipment has been depressed even more so than the rigs in percentage terms.

I think that’s an excellent point. I haven’t done the calculations. I can give you the basis and maybe we can do it for you. Basically, in the Lower 48, we probably have about a third of the cap guys working 23, 24 out of 70, 65, 70 -- something like that. Is that right?

[Indiscernible].

Okay. And those things were margining $1,200 to $1,500 a day and divided by a bigger number of rigs, Terry. But, and then on the epic stuff, basically, with the way that work is, we put it on a rig and we save Nabors Drilling U.S.A. -- we save the 35, 50 bucks a day that would go to unmechanical [PVT] -- mechanical recorder. Then on about two-thirds of the rigs, we sell a full package of rig watch. You know, all the instrumentation and everything -- and on that, we put the prices by 225, 250 a day. And a big chunk of that is margin and we can figure out -- we had essentially on every rig, two-thirds of the rigs we had this extra [indiscernible] and that’s all gone. I mean, it’s gone from 260 to 100. And, I guess, some of our third-party sales are also getting hit too, Terry. But it’s a good number.

So I mean, on the top drives for instance, have you reduced rates there or has it just gone to zero?

No. I don’t think we’ve reduced rates very much. What was the rest of your question?

No, that’s substantially helpful. I can work through some math there. I had a couple of sort of modeling questions. First one, it looked like on your balance sheet, equity was down sequentially. Why might that have been? Is that the dynamic with the boat business or is there something else going on there?

Maybe a little of that, but I kind of explained it.

Actually, a big chuck of that of will be with Canada. Our net asset position so much because of the acquisition, just the exchange rate change [indiscernible] strengthening. It goes through our cumulative translation.

That was through the balance sheet.

Through the balance sheet.

How much of the hit was maybe 20 --

25 millionish. Okay. So Q2 to Q3.

I never even noticed that. But 20, 25 million would go right to the balance sheet in terms of the dollar versus the Canadian dollar.

Okay. And then also, you know, your interest income was essentially flat sequentially despite the doubling cash in the balance sheet. Obviously, it did the cash chuck, probably closer to the end of the quarter. I’m wondering if there’s any sort, you know, anything else going on there that we ought to be aware of, and/or, if you can give us a sense of where that should be on a billion 3, you know, in the fourth quarter.

Yeah, I think -- I haven’t figured it out. We haven’t discussed this totally, but I think the following, I think, is true. We switched -- well, for one thing, interest rates are firming up. So basically, the cash is -- we have it pretty short term on the expectations that it will firm up. And, so the 1.3 million has an average maturity of about three months or something. Six months, okay.

So we’re looking for that to go up. Also, we’ve done 200 million in stocks so far. And those stocks are -- [indiscernible] let’s say 60 or something that. So that to the extent, we do it that way. We save on the fixed rate and also we neutralize -- we sort of hedge against catastrophe which if liable goes up, the returns on the short-term cash will go up. I don’t know what the answer is, but we’ll [indiscernible] until it’s not too high a cost to carry. We won’t have too much -- we’ll pay something, but not too much to have the cash available when we might need it compared to having to get it when we might need it.

Okay. I guess a good follow up there as well. And then tax rate on the fourth quarter, you know, on a pro forma basis effectively, where should that number go?

On our pro forma, I’d say 20 -- you know, keep it at the 23 percent, which is our per year projections.

[Indiscernible].

Yeah -- pre-inversion, inversion -- ask your congressman. No, I’m being facetious. But, inversion. You know, I really don’t want to discuss it. It’s just too much up in the air and it’s too -- you know, obviously, it will be a low tax rate.

Okay. That makes sense. And then lastly, just so I can put your previous comments into context. The increased activity in Mexico, are you going to, you know, is Mexico offshore allocated to Gulf of Mexico offshore or allocated to international?

International.

Okay. Great. Thanks very much.

The next question is from the line of Michael Urban with Deutsche Bank. Please go ahead.

Good morning. In terms of the pick up in inquiry levels that you’ve seen. At what point do those need to turn into firm commitments in order to hit the kind of numbers that you’re talking about the first part of next year. And, I guess, what I’m getting at is -- did you see something equivalent to that earlier this year, you know, kind of the [indiscernible] fake that you talked about and then it didn’t materialize?

Now, this -- I don’t know. But I think there are two places were we’re talking about seeing. One is international where there’s specific requests for proposal. Specific edges we don’t have or don’t have. And a pretty good assessment of the probability of getting stuff. That’s one. And that level of activity is increasing probably more -- we’re net gaining position big time, I think, in the areas that are relevant overseas. And that would be like Algeria, Yemen, Saudi Arabia, probably in reverse order. And, you know, for example, we don’t participate yet in Venezuela, which is improving.

I think the next important area is Canada where, you know, we talk to Canada relatively frequently. We talk to a lot of the customers who are common customers relatively frequently. And I think there’s a very high probability that that will be converted to contracts. They won’t be year contracts, but they’ll be decent contracts.

I think the other thing I should mention is that historically -- you know I’m not a big man for these correlations -- but, there’s been a real good correlation or relationship. And I think for good reason. Between drilling activity in Canada and drilling activity down here. And it’s generally preceded us. Canada’s preceded us down here. And I’m not only looking forward to having close to 60 rigs working there at decent prices, but I hope that will be an introduction to what traditionally has followed down in the Lower 48. But, I think Canada and, you know, they’ll be converted to contracts within weeks or it won’t happen.

Okay. Thank you.

The next question is from the line of James Stone with UBS Warburg. Please go ahead.

Good morning, Gene. I just wanted to clarify a couple points. Number one, when you were talking about the kind of number of rigs in the Lower 48 that Nabors would do very well at in terms of rig counts, I presume you were talking about just the land rig count as opposed to -- so 900 land rigs is the number you’re referring to; correct?

Correct. And, you know, my hope is it will be a bunch more than that.

The second thing that I was just kind of curious about is to what extent have you had any kind of feedback or pushback from the Coast Guard regarding the sale of the ownership of the boat fleet and then keeping real effective control of it. Can you just talk about that a little bit and how that relates to the Jones Act.

That is probably a pretty sensitive issue. Basically, we followed the rules outlined by the Coast Guard, everybody in his sister had months to comment on the procedures. And whatever the procedures were, we followed them with really good legal advice and we didn’t do anything in terms of the conversion until we had everything 100 percent set with the Coast Guard.

I think the important thing from my viewpoint is, in terms of bottom-line principal, we are a company that’s more than 75 percent -- well over 75 percent owned by American shareholders, whether it’s the leasing company which is the mechanism that’s being used, or -- and the directors are American and the officers are American. So we’re essentially American. I think there is a convention that says because Nabors Industry is at the moment a Bermuda company, that maybe doesn’t count as being American. And that’s why we went through the Coast Guard procedures on leasing.

What’s happened subsequently is -- and again, we did it. The boats have been certified. That whole business is right. You know, it’s okay. And what happened is, there are a couple of other guys. One is a French company called [indiscernible] who is working with guys who used to be with Tidewater, but didn’t become CEO. And they’re talking about set up a foreign-owned leasing company and evading and avoiding -- depending on your viewpoint -- the Coast Guard regulations. And I think they’ll get a pushback up the gazoo. And I think the pushback is not so much from the Coast Guard, the pushback is from every American flag vessel owner.

But it’s bigger than that. You know, there’s a Canadian company -- or an Australian company that’s doing this big time on the West Coast. There’s the [Aucard], which is working the U.S. [indiscernible] which everybody’s pretty -- not everybody -- they tell me they’re pretty much convinced that it’s not 75 percent owned by Americans.

I think the thing that distinguishes us are firstly, we got it done. And we have it signed, sealed, and delivered. Secondly, at the end of the day, we’re American, you know. Who cares that the guys that they’re really aiming at are un-American. And the Coast Guard isn’t the pusher. It’s the -- you know, also, the other question is, what can happen to BP if they’re going to give up their U.S. flag tankers from Alaska. I don’t know. I don’t really care about that.

That’s a long answer for a short question.

Okay. I appreciate that level of color though. That’s very interesting. That’s all I had. Thanks.

The next question comes from the line of Michael Lamotte with J. P. Morgan. Please go ahead.

Hi guys. Most of those operating questions have been addressed. But Gene, I wanted to get back to your point on cap ex, and specifically the comment of a ramp up in cap ex for enhancement. Can you provide some more detail in terms of the hard numbers there?

I would guess that a lot of that is the Mexican rigs. When we take a rig from Mexico that had worked in the Gulf of Mexico, there are quarters, there are redundancies for international operations of the extra strings. I don’t have the numbers really in my head, but it was probably 6 million bucks a pop for the Sundown or Super Sundown and maybe the one mace rig that’s going there, it might have been twice that in [indiscernible]. Is that about right?

[Indiscernible].

And I don’t know how we do it, but let’s say we bought a rig in -- where the hell is it? Brazil, which is now working in Mexico. We bought the rig for 21 and we probably put 4 million or so on that. Is that enhancement? Probably enhancement. But anyway, it’s that kind of thing. It’s -- enhancement, typically in the better market is, you know, you put a top drag on a rig and things like that. And in this kind of market, it’s mostly incremental investment in an asset so that it can be deployed for multi-air lucrative contract internationally almost always. Sometimes in Alaska too.

As you’re beginning to plan budgets for ’03 and obviously, the 140 is your maintenance or sustaining cap ex level. Do you have on the docket any programs for enhancement?

No, I think what we’re doing things like in the normal course enhancement compared to maintenance, California goes through a -- on a mission standard -- we switch engines in California. In general, we have a program for upgrading [indiscernible] engines, stuff like that -- what else? Pumps.

[Indiscernible].

Yes. Does that count as cap ex or maintenance when you do the 1,000 day? That’s maintenance, it’s not cap ex.

So if that -- so when business is [indiscernible] -- when business is lousy, most the enhancement is for incremental work.

Okay. And then, just looking at this kind of cash flow, cash on the balance sheet into ’03, stock prices that are down, are there acquisition opportunities that you’re currently looking at that may further grow the fleet in strategically the direction that you’ve been talking about?

I don’t know. We just recently completed a relatively small one in Ryan Technology in Canton. There are a number of things we are looking at. There’s nothing really on the front burner. But for the last three, four, five years, if you asked me, there would have been nothing on the front burner, but we still did a whole large number of deals. I don’t think we’re likely to do much or deals in the Lower 48.

Right.

And, you know, we have room to do deals in Canada and we have to room to do deals internationally. But, we have a pretty big infrastructure now, pretty broad opportunity of operations so that there should be asset-type deals that are continuous to our existing stuff rather than [indiscernible] acquisitions. But we never know what will happen.

Has there been anything in Russia? I know Luke Oil’s toyed with the idea of trying to sell all, or part of it, services, businesses. Any --

Yeah, we were --

[Indiscernible].

A number of the customers -- I mean, a number of the companies there were in relatively close touch to one of them, which is not Luke Oil. We’re in relatively close touch to the bank who was helping Luke Oil though. So, you know, we are very interested in that and we’ve got some guys doing surveys out there -- for which we’re getting paid by the way -- with various [indiscernible] companies.

Okay.

And it’s prospectively big. And the high of these -- as long as these prices stay high, the more of those companies over there are going to upgrade their image and also their operations.

Okay. Thanks, Gene.

Operator, we’re up against our time limit. Maybe we’ll entertain one more question, please, and then terminate the call.

All right. The last question is from George Gaspar with Robert W. Baird. Please go ahead.

Thank you. Further question, Gene, on margins looking forward beyond 4/2 here in this $2,000, $2,400 range. Can you give us any insight based on your sense of going into next year where you might see this Lower 48?

I think it’s 100 percent a function of the relationship between the [indiscernible] rigs and the availability rates and the result in prices. I think, you know, basically I think the curve is going to be a little less steeply inclined than it had been in terms of utilization in price because a lot of the big price increases came when there were no rigs available. And guys were bringing out rigs and they had three or four guys competing for the rigs and the prices promptly got too high. And I think, you know, there are plenty -- unfortunately, or fortunately -- there are plenty of rigs are available. And fortunately, or unfortunately, we have most of the available rigs. And, you know, I think the market will go up it more slowly as a function of capacity utilization than it has the past.

I think the one thing I feel is it shouldn’t get as high as it was before -- before we had prices well above the [indiscernible] numbers and that isn’t good for anybody, especially workers for us. So I can’t tell you, George. You tell me what the demand for rigs is going to be and I’ll give you an estimate of what the price.

Okay. Well, that’s a good explanation. My other question is on Mexico. Can you give us a little color as to when all of this equipment is going to be deployed you’re talking about on the units that you disclosed earlier here. And can you give us some --

[Indiscernible].

Pardon?

It should be completed in the fourth quarter, no later than January 15.

Okay. Can you give us some margin range on the equipment?

Yeah, I would say high.

[Indiscernible].

Well, operating income -- I don’t know.

Whatever you want to throw at us.

$20 million for five rigs.

Per annum.

Per annum. Okay. Thank you.

That’s the margin on the boats.

I’m sorry. What’s that?

That’s the margin on the boats.

Okay. All right. Thank you.

Operator, that will finish our call for today. We want to thank everybody for participating and feel free to call us with any additional questions. Thank you very much.