Nabors Industries Ltd (NBR) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Nabors Industries fourth quarter 2002 earnings release conference call. During the presentation, all participants are in a listen only mode. Afterwards, we'll conduct a question and answer session. If you have a question, please press the 1, followed by the 4 on your telephone. This conference is being recorded. Today is Thursday, January 30, 2003. I would like to turn the conference over to Mr. Dennis Smith, Director of Corporate Development. Please go ahead, sir.

Good morning, everybody. Thank you for joining us this morning. We'll conduct the call today in the usual format, trying to hold it on an hour. Gene will make about 20 minutes or so of opening remarks on the quarter's results, full year, and what our current outlook is.

As usual, we need to remind you a lot is our expectations of things under the forward-looking statements SEC and may or may not materialize, but it's our best guess. Just one technical note, we'll made reference the press release is both Excel Worksheet and PDF format will be available on our website on 8 quarters of historical data in the new format we're reporting in. That probably won't be available until tomorrow morning or maybe late today. We have finalizing on footnote language we're trying to do and we have to file an 8K under the fair disclosure rules so as soon as we get done that will be available when we're done. It's not there yet. With that, today we have obviously Gene will do the talking with us, Tony Petrello our President and COO, Bruce Koch; VP of Finance, Bruce Taton our General Counsel, Dick Stratton, our Vice Chairman and a number of our Business Unit Operating Presidents. Gene.

Thanks. As it's been our recent practice, we'll emphasize sequential results and try to give you a flavor of what the next quarter or two -- and even the year look like.

We'll do this business unit by business unit. And that connection, in the interests of maximum transparency, we'll break down our drilling revenues by operating cash flow into five drilling categories. U.S. land drilling, which includes Alaska and Lower 48, Canada, which is drilling [INAUDIBLE], U.S. land, well servicing and international. And we'll keep the separate categories we had -- category we had for manufacturing and logistics, which includes Canrig [INAUBIBLE], Ryan, as well as [INAUDIBLE] Service and AIC in Alaska. Not only in the interests of transparency, but, you know, we also hope this enables folks to get a better idea of the potential upside of the totality of Nabors. I won't -- I assume you all read the numbers in the earning release and I won't go through them again.

I will comment on our focus metric, which is operating income. This was 39.3 in the fourth quarter, compared to 32.1 in Q3. This is our first sequential improvement in five quarters, and I'm highly -- confident whatever the appropriate degree of confidence is, reasonably sure that the next part will be next better. I will point out as we did in the earnings release that the fourth quarter included a 6.4 in effect advance receipt of revenue by virtue of collection on a business interruption policy. And I think it's also unfortunately true that during the fourth quarter, we also have deferrals. For example, in international alone, the deferrals of income from the 4th quarter the future income period was the same amount. Our range per share was 15 cents per share, excluding the inversion tax savings of 3 cents a share. And for the year, our earnings per share after tax was 72 cents, including 9 cents of inversion savings.

The pre-inversion tax rate for the year was around 23%. And for next year, we think that will be probably again pre-inversion, probably around 20, maybe modestly lower. After inversion this year was 14%. I'll comment a little bit more on the inversion situation later.

Now I'd like to move into our business units. Business unit by business unit. In the case of Alaska, I'll stick with the old format, namely, I'll comment on drilling AIC and peak. Together in [INAUDIBLE] after we'll address our comments with them. Alaska is down in the fourth quarter slightly. The main reason was somewhat smaller number of rigs working. They were still a real good quarter. The first quarter next year is going to be excellent. And this is partially seasonally driven, as you know, in terms of icy roads and things like that, and winter exploratory drilling. Beyond the first quarter, I think the outlook should be good, but the visibility is really clouded by primarily the enigma of BP's activity. And I think although we have lots of newcomers and we have a good position with them in terms of assets and people and relationships elsewhere, people like Anadocko, Pioneer, and [INAUDIBLE] and others in the Cook Inlet, it's all those are positive, but the visibility in terms of specific contracts signed is not what it will be. You know, for example, we don't have anything in there for with a price of 30 plus. We don't have anything in there for the shallow heavy oil in Alaska, which cannot stand the ground very much longer at these prices. This quarter was decent. The quarter, we can see firmly is -- is going to be excellent. And the makings are good for business beyond that, even though the visibility is not crystal clear.

Canada, Canada is the case where the logic of what should happen is in fact happening. Canada had a good -- not a great, but a good fourth quarter, and it is going to have an outstanding first quarter, and I think this is one case where you think I can comment on the year where almost certainly, the outcome will be more or less what we hoped with our increased acquisitions and activity up there. But the rig situation in Canada right now is where at 60, little over 60 rigs. We could have probably 65, 66, 67 rigs, average for the quarter. If we could get the crews and one other good thing, it's about Nabors, and I hope that will be one of the many hedges we have by virtue of our worldwide operations is we may have crews available from other operations and Nabors which we can divert into Canada for the critical pre-break-up operational period. I'm hoping that will be the case. The specific numbers at recount, we went from 24 and small change rigs in the third quarter to 30 in the fourth quarter, and I'm hoping we do 60-plus this quarter. The margins are pretty good. As they traditionally have been. I think we're at mid $4,000s in U.S. dollars and I think we'll approach 5 dollars in the first quarter, although the first quarter won't be as robust as it would have been had the wrap-up not been so slow.

Nabors for USA. We had a decent quarter. We went from 103 rigs in 3Q to 96 rigs in this quarter. Again, in the future we'll combine into USA with Alaska, but this is NB USA. First quarter will be 105ish . I think we're a little above that already. And I think it will be higher than that in the future. The margin, gross margin per rig at the rig level was a little over 2500. In the third quarter, it's around 200 dollarsish above 2,000 in the fourth quarter, and I think the next two quarters -- well, next quarter I think will be about what it is this quarter, give or take a hundred or $150 dollars per day, and I think it will go up beyond that in the second quarter and hopefully thereafter.

I think I'd like to comment on two additional things, the conventional comment on safety, the record still is extraordinarily good. Always improveable, and in fact the total recordable did improve 202 from 2001. A total recordable was 2.23, including a lot time accident rate of around .4. Those numbers compare with the IEDC industry numbers which numbers include us for about 30%, and they don't include a number of the small guys, whom I'm sure which guys have the worst records but the industry was 6.48 in total [INAUBIDLBE] and 1.59 in lost time active so we're at least four times better, and I think better than that. The other comment I'll make is we have reemphasized technology. I think this is something that is always been an important focus of Nabors Industry worldwide. But I think in the light of the pretty obvious, press you've been hearing about, some of our competitors, we're not only doing stuff on an accelerated basis, but we're also trying to make the world more aware of what we are doing. I think everybody is pretty familiar about what we do in top drives.

I think some of the other things that we have really remarkable improvements in, includes rig moves, where we've gone in some areas from six days to 3 1/2 days, and not on an anecdotal basis but in terms of average. We've added Ryan Technologies to the capabilities of epic and cape and what we're going to do is try to refocus those emphasis not so much to make money from third parties but to ensure that Nabors Drilling Worldwide has a sustainable edge, which converts into more employment and higher dollars for employed. We are also storing and will be installing a whole bunch of high-tech stuff, including automatic drillers and various -- diagnostic things. I think I've said this often and I won't go through the story again. I think that I -- I believe in the natural gas story. I believe we have at least 7 really good years ahead of us. I think it's every day is teaching us that domestic sources of BQs are more valuable than nondomestic. And while I'm not -- we don't have our head in the the sand with respect to liquefied natural gas, got to figure how long it will take to get there, not only to get there and quantities but also, when does it become the marginal supply that determines the price? And also, would it help if we had shut in LNG from Nigeria or Venezuela right now? I mean, the U.S. factor is not trivial.

The well servicing business is still doing pretty well. It's still not doing as well as you would think it would do if you just looked from the vacuum of say commodity prices, where our activities are, but I think we're holding our own competitively in terms of the metrics. Third quarter, we did 260,000 rig hours, fourth quarter 250,000, which is the holidays and such like that. We expect that to go up in the first quarter and gradually rise through next year. The critical rate, a critical rate, is the rig rate per hour. And whereas we were at 210 at the beginning of the first quarter, we were 205 in the third quarter and 203 in the fourth quarter, we essentially think that will steady more or less flat. International is becoming really important in growing part of the business, and it has its own tradition already of being quite on what I tell you we're going to do in operating income, and essentially that's still the story.

We are up this quarter over last quarter, not nearly as much as we hoped to be. Next quarter, we'll be up even more. Q2 will be up more, in terms of the prospects that we bid on and been awarded, this is going to be a business of $150 million dollars per annum, operating income, probably at that rate in the next three, four quarters. But in any event, some of the things, fiber -- we talked to you about, a lot about -- we're finally at the point where four of [INAUBIBLE ] And hopefully at the last one will be [INAUDIBLE] within the next week or 10 days. Part of this was because of the hurricanes and bad weather here and there, and part of it will get compensated or not penalized on a -- basis. But in any event, that stuff is starting to be on the clock, and will be generating its projected profits probably not fully in this first quarter but by the second quarter and thereafter. We have just recently won an additional award for another platform rig, and we have pretty good relationships here.

Let me jump ahead a little bit in terms of Mexico. By virtue of the infrastructure there, we're able to do a deal with Pen-Exxon on top drives because our five rigs have top drives. We have a maintenance infrastructure there, so we have two -- additional top drives with Pen-Ex away from our rigs and that number might increase by 6 more shortly. We have some 20 epic systems there, which do two things, they make a little bit of money, but also they are the best kind of advertising of the technological capabilities that Nabors has, and establishes our basic relationships or enhances our relationship and we hopefully will get our Ryan Technology down there.

In addition to the things we talked about, and I probably have talked to you about these before, we have things coming up in Malaysia, I think is on already, India coming, Indonesia coming. Each one of these things have follow-up high probability follow-up rigs and activity so I think the outlook is the usual or the most recent story, the outlook is good.

Contract awards are good. And unfortunately, we continue to be modestly delayed, but in every case we ultimately deliver what we thought we would. Offshore, Nabors Offshore is not good. It's weak. I think the only good thing about I can say about Nabors Offshore -- well, we're in the black this quarter, excluding this insurance, and that's first time for a while. But the good thing about it is a lot of the international diversions from our viewpoint have been from Nabors Offshore assets. Way back we moved land rigs from the United States to Yemen and Saudi Arabia and places like that, and now almost every party I described has come in from -- Mexico, for example, India, Malaysia, Indonesia, they're all Nabors Offshore, and I think with respect to the Gulf itself, one of the things that solely missing and surprisingly so in the light of commodity prices is, for example, workover jackups. Anyway, my feeling there is the economics will ultimately prevail, and I think by the second half of this year we'll be dealing pretty well. Semar. Semar is our boat company which has management company 75% owned by American citizens. But in any event, the overall situation is that the bulk of economics are in the super 200s for the new boats, and we have 10 of those. And the average utilization has been 9 or 10 of the 10, five are in long-term contracts and the others are doing pretty well. The average margin or at least the average day rate there is close to 9 to 10, and of the other boats which are having utilization and rate troubles now, I think the big advantage we had is we're able to move four of those to Mexico on an average of 3.6 years contracts, with real good prices, and work for 365 days a year. And there are more prospects like that.

The other part of our business, the remaining part, is the manufacturing with CanRig, Epic, Ryan. CanRig is doing in my view surprisingly well in the light the of the horrific industry conditions. The use of a top drive is a function of the first derivative of an increase, and in other words Rig use has to go up before we sell top drives. If they stay the same, you don't sell top drives. However, this year, we're selling 13 of them in Russia, and these are all -- margins not the greatest in the world, but they're L and LCs and we have four of these ready built, already booked. So that's doing pretty well. And that doesn't include the probable six incremental top drives to Mexico, which we may take from our stack.

Epic is doing pretty well. Ryan is doing pretty well. Metric for Epic, their install base, and the Nabors installed portion is smaller because the rigs are -- active rigs aren't as big, going from 176 to 185, and that's continually increasing. Those businesses I'm confident are going to be really good, not only in terms of generating profit as the case in Canada and sometimes to a lesser extent than Epic, but also ensuring we Nabors have leading edge in technology.

Let me talk about some of the more general stuff, in terms of the balance sheet. We have $1.3 million in cash. We still -- you know, have a net debt to cap ratio over 25. In the next quarter or so, we'll be paying off probably our first coupon -- Put, which will be about a half billion dollars, and we'll probably pay off the the pool, 8 5/8 debt, about $42 million at this point. So those things will be paid off and we'll still have at least three-quarters of a billion in cash, and we're literally being besieged by variable sundry bankers in terms of the ability to do incremental convertable issuance now. Of the, let me talk about the last debt issue. What we did is we did a half billion dollars in straight debt, you may recall. Some in the U.S., which was [INAUDIBLE], some in Canada. I think it was 275, 225. U.S. and Canada. 10 years and seven years. We swapped 200 million of the six debt to variable debt IE, liable related debt and the swap rate is such that we're paying Libor plus basis points on the swap. So basically, we -- we had maybe $1.2 or $1. a million and a quarter interest savings between middle of October when we did the swap to the end of the year, and our interest rate on that $200 million right now is 2%, Libor plus 6.25% .

We entered into another transaction in addition to the swap, where we tried to ensure ourselves that if the Libor rate -- this is in the next 9 1/2 years, goes above 4 1/2. In other words, we're insured for the Libor rate going up to 4 1/2 to 6 1/2, and we did that in terms of giving up a little bit on the low end rate. And that kicked in next August. I won't go through the complications of that, just simply to tell you that we've achieved some savings already, and just from the accounting viewpoint, the swap is counted as the head, so we don't run that through our income statement. But the swap had a value at year end, if we wanted 100 to $10 million dollars. The hedge, the protection of us on interest rates going between 4 1/2 and 6 1/2%, they were in the red, around 3.7. That is -- [ NOT UNDERSTANDABLE ] Plus isn't on the income statement. But in any event, I think that's working out reasonably well.

Let me talk about Cap Ex and depreciation. Appreciation this past year was $195 million and I think it will probably be 10%ish higher than that next year. Of the amount we spent, $102 was defined as sustaining. That's non-discretionary. The enhancing part of it was $137 million. And acquisitions were the rest. Of the enhancing, something under $100 was probably to get new business, mostly internationally. So I would say the true sustaining -- sustaining obviously includes some enhancement, anyway, was probably around $140, which is around 70% of our depreciation, which is more or less what we would like it to be.

On a cash basis, even though we spent $582 million dollars, some of those acquisitions we gave the holders of the acquired company the option to take stock, and we issued in connection with those $582 million of Cap Ex, including $329 of acquisitions. We issued $130 million in stock. So in terms of -- even though we had pretty high Cap Ex in a bad year, IE, 582, the cash drawn was only about $40 million dollars. The rest was the cash flow from operations, plus, the shares.

Let me talk a couple minutes about governance. We frankly have already generally conformed to what [INAUDIBLE] and the SEC and exchanges are mandating. Currently. But we also move with the times. We already had a majority of directors independent, but we'll go from -- we'll shoot for two-thirds or 75% independent directors in the future. And at our next board meeting we'll announce a new director, who I think will be outstanding for us. And independent. Otherwise super qualified. We've always had the independent audit committee, with a qualified financial expert, according to the latest SEC rules. And we have and always have had an independent compensation committee. New committee is we have a nomination in governance committee, which is also comprised of all the independent directors. I think the company in anticipation of what is likely to happen will rely less on options in the future, as compensation, and will start this year. There'll be fewer options. And in general, the options, bonuses and total compensation will be way down for 2002, in accordance with our general principles, when the company makes it, the guys make it. When the company doesn't make it, the guys won't make it so well.

Inversion, I really don't know what's going to happen to inversion, although for that reason we haven't been reflecting inversion savings in our earnings, even though the formal GAP numbers include the inversion savings. I think the risk of the gross equities and retroactivity and pre-taxing shareholders and not letting it become a nonAmerican tactic I think the probability of that are less and I personally have had to pay about $12 million in capital gains tax. So I'm hoping that that doesn't -- that proves worthwhile.

Overall, in summary, I'm bullish. I think they're a -- [ NOT UNDERSTANDABLE ] Internationally and that's the place where we have both visibility and logic. The upturn in Canada is something that we say we're very logical a quarter ago and now it's very visible. And I think I mentioned the big issue there is we have contracts and we have to get crews, and hopefully Nabors has no problem doing that. There were some significant signs in Pool. One of the manifestations, not necessarily with us but when times get tough like this, most of the operators [INAUDIBLE] like that, and one or two of them backed off kind of recently in the middle and we said we need the rigs, and that is kind of a good sign. I think there are good signs, but I tell you, it's more the compelling logic than the tangible signs that make me think me bullish on the domestic picture. Particularly the -- we're going to have a bunch of good years, pretty quick, and to me, it's not only the GAAP story but the increasing obvious value is not American BTUs to us. That covers my comment.

Operator, this is the final comments on the outlook, and we'll be prepared to take questions now.

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 your question has been answered, and you would like to withdraw your registration, please press the 1, followed by the 3. And if you are using a speaker phone, please lift your handset before entering your request. One moment please for the first question. The first question comes from the line of Jim Wicklund with Bank of America Securities. Please proceed with your question.

Good morning, gentlemen. This is Neil Bigman filling for Wicklund. My first question is over your earnings from unconsolidated affiliates, this was down a bit, can you give me color on this and sort of the expected run rate going forward, if have you anything.

Yeah, I don't think it went down. I think there was a reclassification. You want to explain that, Bruce?

The reclassification was made to both periods, so it's apples to apples. I think the question was for year over year?

Correct.

Yeah.

Just to give me apples to apples.

Main cause was in Alaska. Alaska was DKIC. We have two joint ventures that go into that number, our peak oil field in Alaska, which we own 50% of, AIC we own 40% of in Alaska, and our Saudi Arabia joint venture we own 50%. And Alaska, year to year, Alaska was down.

But these are -- But these are now included in revenue.

Yes, it's on the balance sheet but in a different place. On the income statement but in a different place. Yes, but the reclassification had to do with us leasing our 100%-owned rigs to our joint venture in Saudi Arabia, those revenues are now 100% included in revenues, which is proper. Previously, we had 50% of those revenues on the earnings from unconsolidated affiliates line.

Secondly, last question, I was wondering as far as what you've seen in the last recent weeks as far as inquiries for the Lower 48, kind of building on that. Are you seeing -- you mentioned the contracts coming on in the international, I guess there's nothing at least at that dramatic that you foresee in the Lower 48 coming on?

The signs are good, and some of the inquiry levels are good, but it's -- I think it's premature to say we're here, are likely to be here in the next month where we are in Canada. So I think we'll get there. I think the signs are good, and I'll -- and I think sooner or later the compelling economics are going to sort of offset lack of visibility among investors. But also we're -- we're biased.

Sure. Okay. Thank you. Congratulations on the quarter.

The next question comes from the line of Roger Reed with Simons Company. Please proceed.

Can we talk about Canada here. You mentioned that to get the rig count up, you need more crews, yet you don't have crews available there. What does it take to get a crew up there? What is a margin impact of that?

I tell you bluntly, there won't be any impact. With these kind of prices, even with the delta on -- Calgary, the information we have so far is that everybody wants to see but a lot of guys would like to see crews come up, competent crews, actually the skilled jobs in the crews, and they're willing to consider the costs to do that.

Pass along, essentially?

Yeah, or absorbing. And I think from our viewpoint it, would be better -- pretty obviously, we're going to do this for our best customers and for our best rigs. So not only will we likely gather a big rig that will work, but there also likely work through break-up. You know, to the extent we can do it, it will be worth doing, both for the operator and for ourselves.

Okay. Talking about U.S. inquiries, is there any particular part of the Lower 48 that is showing strength, weakness, higher inquiry levels, anything like that?

It's pretty hard to say. I would say not that it's worth mentioning now, I would say California is not as robust as it has been. In recent quarters. But the rest, maybe the Rockies a little bit more. But -- I would say not noticeably. Yeah, across the board, I think. And I think the outlook is pretty good. The things that make for -- usually, the U.S. activity lags Canada by a quarter or two. Usually, the U.S. activity lags the operator's cash flow by a quarter or two. And while the year-to-date through say September cash flow is spent, the cash flow rate in the first three-quarters of the year compared to the running rate now is like day and night. And I guess one [INAUDIBLE] raised their targets for prices and therefore activity, and they raised us -- you know, and I think they're still late and low between you and me. They were up from flat to 20% in cash flow. And from flat to minus to up 10% in Cap Ex in the Lower 48. I think it will be at least twice that.

Gene, this is Scott. I want to go back to Canada for just a brief minute. What are you seeing here in the third and fourth quarters in terms of where this is going to -- how Canada will shape up for the balance of '03, and into '04?

Well, the balance of '03, you know, we are confronted with for the first time a seasonality that we never experienced before, which is post-break-up. But I would say that apart and we don't have too much experience on that, but it won't be as robust as the first quarter. That I can tell you. And I just explained why I hope we can do some stuff into the second quarter. But I would say I don't think I would be very adventuresome to say this year will be our best year by far, and while the fourth quarter I think is good, I would guess fourth quarter next year will be twice the operating.

Wow. Thank you, Gene.

The next question is from the line of Bill Sanchez with Howard Weil. Please proceed.

Bill's become a much better analyst in the last couple of days.

Thank you, Gene. Gene, on the margin side of the U.S. business, you commented the fourth quarter average I think just -- about $2200 dollars a day. I missed your specific comment on your first quarter expectation, was it up or down?

The best guess is level.

Level. Okay. So --?

And probably up in the second quarter. You know, those are within -- if I tell you anything other than they are within a hundred or $200 bucks, we have even a projection for the near term quarter, it's not true. So I don't know. But would you say the best guess is level. I think we're finished running off the high margin contracts, the deep height -- high-priced big rigs. Some of the bigger operators who tend to want more equipment and therefore create a better margin for us, they're coming back into the market. On the other hand, we're being a little bit more aggressive to the smaller operators, which we have do to protect overall market business. So how that works out, we don't know. I can guarantee one thing, we're not leading prices on the downside. And and we generally should go up as -- we have a bigger percentage position with the big operators and big independents.

That's part of my follow-up. So you're quoting prices for base day rate on new work higher than where you would say the market is, in combination of the fact you're adding [INAUDIBLE] equipment improving your overall margin?

Yeah. That may be I would say if you talk with the big integrated company who want more stuff and this and that, our margins -- and generally more rigs, and stuff like that, our margins are generally better. I think the other thing that's modestly manifesting itself in increased margins, there are small number of people saying if you fix the price for six months or a year, do I have to up $500 or a thousand bucks? Lock it in. We haven't locked in anything to my recollection, more than this year, maybe one. But in general, if somebody wants something for more than well to well, they come to us and they in effect suggest they'll pay us more to lock it in. Not a ton more, by the way, but more.

Gene, you commented about BP, and up in Alaska, about their uncertainty in the timing getting things going later this year.

I think that's true. BP worldwide.

Can you extend the commentary, they're selling properties in the Gulf of Mexico? Can you comment on what their plans or are in the land market, concerned one of the more significant players in the U.S. land market? ?

I don't know, frankly. I just hope they know. Basically, I think last time I said they asked us to bid on 25ish rigs for this year, and they asked for bids based on 50% of those and 70% of those. And we're logically one of the guys that meets the safety requirements, which they do stick to and have the rigs in areas with the bells and whistles they need and want. And what has happened basically is they've deferred that decision from the end of January through the end of February, and as you know from reading the newspapers, they're pretty well occupied with selling properties and frankly reducing people. IE, laying off people. Which means the top priority isn't working on this particular kind of category. But we're doing pretty well with them, and I don't know. I mean, if you read the financial times, you get an even stranger picture of -- they're going through a procedure deciding what the answer is to the questions that they're posing and we're posing. And I think it's entirely possible they'll sell even Alaska, if it's not out of the question.

Thank you, Gene.

The next question is from the line of Marshal Adkins with Raymond James. Please proceed.

Hi, guys. Let's turn to the well service business. Usually, that's one that tends to lead the land rig business up. You mentioned for the quarter things were down slightly, but you're seeing signs that things are improving. You can elaborate on that a little bit?

Yeah, although the first quarter usually has also costs for the year that are front loaded for the year, yeah, basically there are a couple markets, west Texas and the Rockies, where a couple three things are happening. There's an accelerated explicit demand for rigs, not we'll need one next quarter but we'd like one now. And there are at least one case, probably one or two cases, where this big argument from the law department about allocation of risk, they said well, we'll work on that, give us the rigs now kind of thing. And that is usually a good sign. Because when things tighten up as you well know, it's not just price. It's the whole terms of the relationship, including allocation of risk and stuff like that.

So it's fair to say in the last month, you're seeing a market pickup in the oil service business something, that fair?

Noticeable. I don't know how you define market. But yeah, it's noticeable. And it hadn't been there before.

Right. Okay. Let me drill down on this Canadian seasonality here. Consensus estimates have you more or less flat Q1 to Q2. I know a lot of the names we covered up in Canada, pass, such a huge reduction. Do you still think you're going to pick up enough from the other areas to offset that -- you mentioned it briefly but I want to drill down more on that too.

You're talking -- talking about what will happen in Canada in terms of recounts.

Not just Canada, but is the falloff that you're going to see in Canada be more than offset by --?

Yeah, I think so.

By pickups everywhere, so that sequentially Q1 to Q2

I think I'm not as certain of that because we haven't had that much experience in Canada, bluntly, but I'm pretty certain we'll have a major increase, Q1 versus Q4. Q2, I don't fully understand the seasonality in Canada. How much goes through workover? I mean, break-up. And what the workover situation is. Because that's also tied to drilling in terms of completions and stuff like that. Then we have the seasonality factor in Alaska, which is compounded by not really understanding what BP will do. On the other hand, the international definitely will pick up. And some of the other businesses are going to pick up. So -- my hope is that it offsets everywhere. But I don't even know what the point is to be offset are frankly.

All right. Okay. Last one, just real quick. You're pulling out the tax effect from Bermuda. How long do you keep doing that, or do you just wait until you get some firmer view of the legislation?

I think the latter. I think that -- there will be either legislation or there won't be. My guess is that there will be legislation. My guess is that it's getting kind of late for them to say, we'll treat you as an American and skip the capital gains tax to shareholders, and therefore I think in terms of equity and what we've seen in the past, the probability of retroactivity that would hurt us badly, is getting smaller and smaller every month. And also, what remains to be seen is let's assume there's a good chance there won't be retroactivity. We and couple three other guys, Noble, Weatherford, will become foreign companies. Then it's a question of what they'll do on restrictions of U.S. deductions by foreign companies and the basic equity issue is that -- what do they do for us compared to what do they do for a Daimler-Chrysler and that sort of thing.

Helpful guys, thanks.

Thank you.

The next question, from the line of James Stone with UBS Warburg.

Good morning. Or good afternoon. Almost. Gene, just curious, in the last six months or so, as the rig count kind of stayed flat in the U.S., you guys because of the [INAUDIBLE] suffered more of a market share loss than some of your peers. Can you can talk about anything that you've done in the last month or so to perhaps address that and reverse that change in market share, or is that just going to be a function of a natural selection of the market comes back?

I love you, but I don't accept tariffs. You mean the other land drill.

Okay, the other land drillers.

Okay, I'm kidding. No, I think we're emphasizing technology on the one end that we're competitive, and we're emphasizing calling on the small guys -- up in the two, three, four rig operators on the other end, and we're doing that -- we have our mind set on it, and in the past when we have our minds set on things like this, we usually are reasonably successful, and I hope we will be. But in general, when the overall rig count in increases, there's an inherent tendency by virtue of our -- historic customer base for -- market position to go up, and I think there's going to be some of that. There's also going to be -- when Shell and Exxon and BP go up, Anadarko and when they go up, we just tend to go up. But we're also trying to be even more competitive with those guys with technological innovations and we're also spending a lot more time on not the lower end but the smaller end of the spectrum, where we don't have as good a position. So we're actively working on that, and it will take time to tell how successful we are. But I expect we will be.

What is your time horizon? You talked to your salespeople, particularly on addressing the smaller end of the customer base?

Pretty aggressively. We address them pretty aggressively.

That's an understatement.

Thank you.

The next question comes from the line of Matt Conlin with Weenan and company.

Thank you. In the core of your DD and A declined for the first time in a long time, outside of last year's accounting adjustment. You know, by the end of the quarter, you had the activation of a jackup, you the had acquisition of Ryan getting into the quarter. Was there some accounting adjustment here? Was there a reversal to the an Arco assets or depreciation? Why that decline quarter to quarter?

That's a very good question I'm therefore going to address it to Bruce Koch.

I think the decline was very slight. But there was no significant adjustment, I guess I don't have a great answer for you. But it was down.

We'll dig into it, Matt, and we'll get to you. But there wasn't anything worth noticing when we went to it. But there may be something.

Okay.

There's no change in accounting policies, if that's what you're getting at. It could be just some assets on the schedule, historically or -- Ram sung.

Good -- [ NOT UNDERSTANDABLE ]

It might have been -- it wasn't a big deal and it wasn't an explicit change of anything.

No, but it searched a series of significant increases in depreciations, sequential.

And we'll have an increase next year too, as I told you. We'll go from around 195 to 220 or something like that. Okay.

Okay. Thank you.

The next question comes from the line of Ted Grace with Goldman Sachs. Please proceed.

Hi. Hoping you can just elaborate on some of the recent international contract awards and what is on the horizon, maybe give us a sense for bid activity by geographic regions as well, both land and offshore.

Yes. I would say Mexico we've explained, we have an additional rig to the rigs we announced previous conference calls. We'll have incremental top drives and instrumentation, hopefully we'll have incremental Ryan Technology and stuff. Directional drilling. India, we have a really juicy project starting soon, where we have in essence our platform rigs displacing jackups. And if that one works, there will probably be another one or more. In Malaysia, we had one good job there and hopefully that will lead to at least one additional one, plus -- which is sort of a workover, plus a drilling one on sparse there. Where else might we have?

I think Indonesia was --

Indonesia, we have a big project, which went fourth quarter.

Third quarter. Third quarter. And we're bidding a couple of land rigs there as well to a major. But the way it would lay out it that in the quarter, -- one -- [ NOT UNDERSTANDABLE ] And then in the first quarter we got -- in the first quarter, there's as Gene mentioned there will be three additional of the Mexico rigs on the payroll, and in the first quarter, sometime in the first quarter, there's an additional rig in Trinidad, BHP on a three-year deal. There's an additional rig going in the Mediterranean, and in the Middle East there's a jackup that was down a little bit in the last quarter that will get back on to payroll. And then in the second quarter, the workover rig that Gene mentioned will go to India, on a term three-year contract, and in the third quarter you have the glacier contract and have you another platform rig on another three-year deal in Mexico. So as you can see, that's --

57? Jackup to Trinidad?

In the first quarter, yeah. So that's basically from January 1 on, we're talking about adding nine incremental rigs in the offshore side. Then on the land side, not as much activity. There's a couple rigs going back up in Equador, a rig going up in Kazakhstan. We had in the fourth quarter a bunch of rigs go down in Colombia for equipatrol. I don't think they'll be out on the first quarter, but hopefully by the second quarter, that could be up to three to four rigs. Argentina, we may add one or two rigs there. So those are the big swings on land.

Okay. In terms of -- okay. I think on the last call, you may have indicated that SG&A would be down in the fourth quarter, looks look it was up some. Just wondering for commentary there and guidance on '03.

I would say the a, to apples was probably down a little bit, but we acquired Ryan and couple of other things that probably -- you have a breakdown of what went up and down?

Ryan and Canada, international is up primarily due to Mexico.

And the rest of it on an apples to apples was down?

It was down a little bit.

That's it. And hopefully, on an apples to apples basis, when things are pretty bad, as they are, it goes down. But when there's a new infrastructure in Mexico, little new one in India, all that sort of thing, adds up to incremental, variable costs with variable rigs.

Okay. So guidance for '3 would be --?

About the same as 4th quarter.

Okay.

With probably a little -- a little less on the base case.

Okay. Great. Thank you very much.

Next question is from the line of Waqar Syed with Petrie Parkman.

This is Waqar. Hello, gentlemen. Couple questions. First of all, are there any long-term international offshore contracts that are coming to an end in '03? Let me offset some of these new contracts?

One second. Okay. I think the Ocean Master rig came up a long contract and is on spot work for three months in the Persian Gulf, at a lower rate. I don't see much coming off short-term that we don't have a high probability of reemploying.

The only significant contract is one in Trinidad. At the end of the British Gas. Is actually or probably one of more sophisticated rigs in the world, which will be finishing up British Gas and there's interest there, and in West Africa for that rig. So in terms of high dollar rig, that's the one whose contract ends later in the year but also the best rig in the offshore fleet, and lot of interest in it.

And the Ocean Master rig is pretty important. It's working now, but at probably $15,000 dollars a day less than it had been, and hopefully by the end of this three-month job it will get back to a normal rate.

Okay. Great. The other thing, off the nine new contracts you mentioned, how many are for the jackup rigs and how many for [INAUDIBLE] rigs and can we get [INAUDIBLE]?

no, of the nine new contracts, how many are offshore jackups?

One.

No. Well, jackups and platform rigs. Is that the question?

Yes.

All of them. All are jackup and platform. And one of them is a jackup.

One is a jackup and the other a platform. Okay. And in case of war in Iraq, do you expect any disruption in your Middle East operation and what happened in the last time when during the Gulf War?

Nothing much happened last time. We didn't lose any days work, and I think the net impact was guys had to get to the Middle East to Saudi with a different routing. So I don't know what will happen, but the whole business that it won't be anything worse than was last time.

Okay. Great. Thank you.

The next question is from Geoff Kieburtz with Salomon Smith Barney. Please proceed.

Thank you. Just two questions, actually. The first on Mexico, number of other contractors commented that the terms of doing business in Mexico are for some of them not very attractive. I just wondered, what your thoughts on that subject were.

This has come up a lot. I think we and Noble are pretty actively involved there, and neither of us -- we're both considered conservative financially with respect to risk taking. And I think the guys -- I mean, the one risk that is uncovered is partially uncoveted is early termination, where you can , the contract doesn't provide for payment for early termination, but there are procedures to go through to get that. But we have got insurance on the rest of it.

Okay. So you feel comfortable anyway. And just related to that, how about collections, that's been another issue for some people in doing that business with PemEx.

That hasn't been a problem so far that I'm aware of.

Okay. The other question was on capital expenditures in '03. You commented on high '02 Cap Ex. Can you give us some idea what your plans are for '03.

I would say absent the first thing is, what are we doing for maintenance Cap Ex? I would say you can probably figure, including some enhancements, some technology improvements, say 80% of depreciation. And the depreciation will be 220 next year, for example. So 80% of that will be -- then the rest will be whatever the opportunities are for incremental work, either incremental work or acquisitions. And I don't know what the number is, but the jobs that we have now that we're going to gear up to supply probably have a fair amount of enhancement Cap Ex already. You have an idea what that number is? -- but it's probably no less than $35 million.

When those things come up we like them, because the returns are one thing, but the returns on the incremental stuff have to be very high, and we generally have them very high in order to make tur the total return is decent.

Right. Just so I didn't quite catch, broke up. So you've got about $35 million kind of already targeted for enhancement or growth Cap Ex?

That's a wild guess, Geoff. In terms of the rigs that are coming on and just to guess as to what the status in in terms of Cap Ex, my guess is it will be at least 35.

Okay. Great. Thank you very much.

Operator, considering our time limit, we have time for one more question, please.

Thank you. The last question will come from Ole Slorer with Morgan Stanley. Please proceed.

Thanks, Gene, for the breakdown. Very welcome. When it comes to the international side, could you remind us after the 59.9 rigs you had in operation in the fourth quarter, how many of them were jackups and how many of them were other offshore rigs?

One second. I don't know, are we going to give them breakdowns in quarterly stuff? Anyway, in the fourth quarter, we had in terms of offshore rigs -- the breakdown I have here is -- well, we had 11.1 offshore rigs, compared to 48.8 land rigs in the fourth quarter. And of the -- I can think of one, two -- probably four and a half jackups.

Okay. And in terms of modeling, that going forward from the Mexican impact, how should we think about facing in those additional rigs?

Pardon me?

How should we think about facing in the additional Mexican contracts that you signed up? When will they start up?

Well, five of them should have started already and four of them finally the fourth one finally started today, and I think the fifth one will started -- hopefully in the next week or two. Two weeks, I'm sorry. Slipped a little bit since this morning.

Okay. [ laughter ] And we haven't.

We have another platform rig, probably fourth quarter.

Third quarter.

Third quarter. Third quarter schedule, fourth quarter delivery.

And the margin contribution from those rigs? Are you willing to talk about that?

Those are real good. Let's see. 36 minus 12 -- well, put it this way. For the five rigs, the operating income we quoted you last time, for the five rigs and four boats, we said 25 millionish, 26 million for the year.

Per annum.

That's operating income. Cash flow on top of that obviously.

So the cash contribution would be what sort of 35 or something like that?

Yeah.

So just under $10 million dollar quarterly improvement.

Yeah. It's getting to be noticeable.

Yep. And the other kind of chunky things that are coming on in the first quarter that we should be aware of?

No, I just think the aggregate improvement in Canada, which we discussed earlier, is going to be -- you know that, number alone might equal the year in Mexico, or something like that.

Okay.

And Alaska will be real big. It's big -- you know, normally there are variations quarter to quarter that don't make super sense relative to rig count. But in the first quarter there, we have seasonal things, ice road building and development drilling. Excuse me, exploratory drilling, a lot done on the ice in the winter. So that's big there. And it's going to be even bigger than that probably. So we'll have a real good first quarter.

Okay. Sounds good.

Yep.

Thank you.

Thank you. Thank you very much, ladies and gentlemen. That will terminate the call. If you were in the cue for questions that didn't get to, feel free to call us. Thank you, operator.

Thank you. Ladies and gentlemen, that does conclude the conference call today. We thank you for your participation and ask that you price disconnect your lines. Have a nice day.