Nabors Industries Ltd (NBR) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to your Nabors Industries second quarter earnings conference call. At this time, all parties have been placed on a listen-only mode. And the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, and Director of Corporate Development, Mr. Dennis A. Smith. Sir, the floor is yours.

Good morning everyone and thank you for joining us for our call today. As usual, we will try to limit the call to about one hour. Gene will conduct the call with an overview of the businesses and our outlook as we see it by business unit and then for about 20 minutes or so, we'll turn it over to questions and answers. Besides Gene and myself today with us is Bruce Koch, our CFO and Bruce Fahey, our general counsel. Along with all the heads of our various business units.

I just want to remind everybody of the forward-looking statements, that a lot of things we're saying is our best guess of what the market looks like and as such defined as forward-looking statements and that's with they constitute. One other issue, the historical 2000 and 2001 -- or 2001 2002 quarter results, the fourth quarter we changed the format and published that for everybody to see. This call effective we are now, in this earnings release, breaking out Alaska separately. We revised that historical sheet and it will be available on our web site after 5:00 p.m. eastern time today when they refresh our web page so if you want to do download that you can do that with excel or PDF this afternoon. And with that I will turn the call over to Gene to conduct.

Thank you and welcome to our second quarter earnings conference call. I will assume that you all have seen our earnings release and again will emphasize our sequential results and give you our at least directional evidence of where we're going business unit by business unit. Before I get into that however, let me give you our overall view of things.

Firstly our 19 cent per share was about 10% above both the first call estimate of 17 cents a share and frankly our own internal estimates. Looking at the details and I will do this in terms of operating cash flow because that is the kind of specific business unit detail you guys have, in the Q2 versus Q1, we went from $110 million operating cash flow to $94.6 operating cash flow. Which means there was a decrease of $15.4 million.

However, as expected, we went down $22.8 million in Canada. That's major seasonal factor. Down $4.7 million in Alaska. Again, the seasonality. And manufacturing and logistics was down $6 million of which $4.5 million was Alaska, people built services and AIC. So all together, we were down $37.5 million.

That means every other unit was up. And they were up an average of $22 million dollars. So I guess it is fair to emphasize that it is my relatively firm, in fact very firm expectation, that every single unit except Alaska will be higher in the third quarter and frankly for the rest of the year, and in general, except for seasonality in Canada and Alaska, for the foreseeable future.

I realize that this is relatively bullish, compared to the rest of the world and compared to the uncertainty and noise that is substantial in the market right now, but I believe that the lack of clear visibility doesn't negate the fundamental facts, and logic, and all I can say in defense or in justification of my feeling is; I won't go through all the pros and cons of the North America gas picture; but I will say that all the uncertainties and lack of clarity that we are experiencing now, we hear in stays in the fourth quarter in the lower 48 and even more so in Canada and say the last four months of 2002. Remember in Canada, we had acquisitions, people were high grading deals, royalty trusts were taking funds out of drilling that would never come back. A big guys and a lot of the smaller guys were spending a ton of money on heavy oil and tar sand and we would never drill again, virtually never drill again in Canada.

Then you have a couple of quarters of decent prices which implies, well, frankly, better than decent, but good prices that implies good margin, repairing the balance sheets, and all of a sudden, in the first quarter, we, the industry in Canada, we Nabors in Canada, were drilling with every rig we could man and we could have done four or five more rigs had we had the manning which we would have had had we not started 60 days earlier going from 20 rigs to 65 rigs. Similarly in the lower 48, think of where we were in the fourth quarter, and we, Nabors, went from around 100 -- I don't know the specific number but I think it was around 110 -- rigs at the end of December to 162 rigs today.

And I think fundamentally the situation has not materially changed. I think you know the gas price, which is that $470, I think it is a real good gas price, I think $450 is a good gas price and I'm not predicting the gas price, I think the crude oil price is good, I think frankly a lower price, would still be good and I'm not predicting a lower price. So basically, I see a continuation of the environment that led to a pretty dramatic increase in our business in the lower 48 and Canada, and I see it continuing.

Let me talk hopefully briefly, if I can be brief, unit by unit. Alaska, we had a dropped as projected Q2 versus Q1 and traditionally I've given you the stuff including AIC and peak oil field, and the breakdown is somewhat different. But you can get there yourselves because the logistics and manufacturing component is down roughly $4.5 million because of Alaska, AIC and peak. So we had a pretty substantial drop, maybe a total of $9 million-ish. In the aggregate of both drilling and -- roughly half in drilling.

And frankly, I see Alaska continuing weak for the next couple of quarters. I see it picking up again substantially in the first quarter. But I'm not yet sure that the first quarter will beat -- in fact it probably won't beat the first quarter we had in 2003. And I think there are a couple of positive signs in Alaska. And you know, one major negative. I think the positive signs are that the economics generally are good.

The economics of this viscous shallow oils are particularly good and it is almost beyond my understanding why there isn't a whole bunch more of that being done and Jim Denny who is on this line tells me that there is more being done, they are working -- I think the issue basically was that there is no question that this stuff is really workable, at well below the current oil prices and there is an issue of what technology to use to complete these things, and as you folks know, my feeling is even the worst technology would have higher returns right now, than not drilling but there is some drilling. I think the other fundamental issue is it is a mature field with costs rising and opportunities waning compared to say Russia.

So it is a typical mature area issue which, you know, I'm not suggesting will happen, but the independents up there, the nonmajors up there, I think are more eager to drill and will have more incentive to drill than probably will BP and we will see what happens down the road. But in the meantime for Nabors, we're flowing, generating cash, we're making profits, and our depreciation is maybe three or four times our cap ex.

And we move to in the USA, we had a very substantial increase in operating income which you can -- operating cash flow, which you guys can follow. And I see a continued growth in operating cash flow, as far as I look, and you know, we frankly look at least through -- in a general way, through the second quarter of 2004. The rig count as I said, we're around 167, whatever it was, at the end of 2002. Today we're at 162. The first quarter average was 109. The second quarter average was 137. And we are right now at 162. And frankly we're almost at internal projection for the third quarter. And I see this stuff growing through the end of the year. I don't expect the rig count will grow as rapidly as we did in the second quarter. But I see it growing through the end of the year.

With respect to margin, you recall we were effectively below $1800 per day per rig in the first quarter. Now, we're at slightly below $2200 a day. And I see that's been growing gradually and I see that continuing to grow. Like some of the other folks, we've had a lot of costs that we've absorbed. We've had wage costs. We had re-startup costs, if you will as we brought rigs that were ready to work back to work.

There were expenses that we in fact expensed right away and we were having -- we will continue have costs of moving stacked rigs from inactive markets to active markets and gradually expense that stuff. I think we've had -- well firstly let me say this. If you look at what's happened overall since the beginning of the year, we've increased our market position so as has traditionally been the case, when the rig count increases, and when some of our traditional customers become more active, we tend to improve our market position. Which we have done. We've done this in the face of the fact that we're pricing right with the market, and if not continually slightly above the market.

And I think some of the things I would like to point out is that we're doing particularly well with a couple of the big majors, including Shell, and some of the biggest independents are now with their biggest vendors again. Safety continues to be good. We have a program that we're emphasizing in the lower 48 initially, where by we're working with know vo, automatic drillers and smart drillers which is algorithms for determining either weight on bit or Delta Pete. And we're developing through our Canadian affiliate an anti-collision device, we're putting on rough neck for a lot of our rigs and in general we're upgrading the top end of our rigs, and we're marketing more aggressively on the bottom end of our rigs, and we're doing this with the safety record that still continues good. We still have an excellent rate. About a third of the industry.

And our cap ex in spite of all the things I've just mentioned, including I think, I mentioned a couple of -- a couple of new pad rigs that are sizable investments, we still have cap ex that will be below our depreciation. Canada, Canada I think was a really timely acquisition. I think I'm delighted that we did it. It's been the major cause of the drop seasonally and you know, next year, it will probably be a seasonal, have a seasonal impact as well. But we'll be doing a whole bunch better in the whole company as well as in Canada next year so it won't be as big a factor.

In Canada, this is a pretty dramatic move, our operating cash flow went from $33.3 in the first quarter to $5.5 in the second quarter. But I see that frankly growing, pretty sharply, for the rest of the year. And I will give you a number now, I see the first quarter next year being 15 or 20% higher than the record first quarter this year in terms of operating cash flow. The rig count went from 59 rigs average the first quarter to 23. I think that will increase. Right now, we actually will have 38 rigs working. Or I think -- I think working -- I was going to say working around the payroll. And that already is equal to what we're internally targeting for our average in the third quarter. And my guess is that we have -- will have at least 10% more rigs working in Q1 '04 than we had in Q1 '03.

Our gross margin went from $5.1 U.S., this is U.S., thousands of dollars a day in Q1, to $3.7 in the last quarter and I think that will continue to go up and I would -- you know, my guess is that in the first quarter of '04, we're up 10% on that as well. We've done an awful lot in Canada in cap ex. That's one place where we're not doing as much as I really would like. We -- the rig I talked to you about last time rig 69 which is a 2,000 plus AC rig which is really working real well, and that is on a four-year Sun Core contract. I think we did so well, probably one of the factors is we did so well with that rig and we showed Sun Core a moving system that we had in Alaska, so we've got a new -- a new rig, which is actually going to be used in see the heavy oil or the tarzen, I'm not sure which, and that will be on a long-term deal.

And we had a problem that I described to you guys about taking the -- kind of the worst rig we have and spending a bunch of money and making it the best rig we have in its class and we've done that with our rig 60. And it's on a two-year deal with Anadarko, in spite of all the noise relayed to Anadarko lately and we're doing a whole bunch of things in Canada including developing an anti-collision system and I'm really happy with that. I think just in -- through June, we had not through our income statement but we had almost $80 million U.S. gained in terms of the currency. I think that has backed up a little bit. But our timing has been very fortuitous in Canada.

The well servicing business is pretty good. We went up in operating income from operating cash flow, I'm sorry, from $15 to $18, or $19 million, essentially, Q2, I see that at least staying the same and in spite of the sandbags by Nicatone I really expect it to continue to go up. The rig hours went from 275,000 to 282,000. Truck hours 159,000 to 168,000. Rig rates actually went up. And in this business, cap ex essentially equals depreciation.

But having said that, from -- and since -- since I've given you the operating cash flow, and I've just told you what the depreciation is, I might as well tell you the net income is $20 -- say $23 million for the first six months and that's a pretty good -- pretty good little business and safety record is pretty good, and in general, it is pretty good. We're also getting the benefit of integrating our rigs, our work-over rigs with our drilling rigs and we're doing it multinationally and a cross unit synergy, which we've been talking about for -- it actually works in some cases and this is one of them.

Let me move to offshore. I think offshore basically has been pretty poor. We've -- we had an improvement Q2 over Q1. And I'm talking about operating cash flow and you can see the numbers, we went from $1.1 to $5. I see continued improvement through the rest of the year and serious improvement later on. What makes up the improvement is the -- is the thousand SPAR drilling rigs will essentially be at 100% capacity in the next pass and we will be building a new -- well a 1500 horsepower -- we will be essentially at full capacity and we are actually at the point in the gulf where we can contemplate raising prices because of the full capacity utilization.

On the bigger drilling rig, the 1500 to 3,000 plus power rigs, we're also doing well, and we have been able to justify three new builds which will take effect later this year. And by the first half of next year. And that per Magee, Murphy, who is the other one? And Anadarko. And so that market is improving. We don't see any short term improvement that's worth mentioning in the -- in the jackups so they -- you know, hope breeds eternal. But that market reads pretty good.

The cap ex is pretty big because we're not only building the three new rigs but getting rid of the last legacy of imaginative financing by cool, where I would we had to buy some rigs which they leased. That probably an effective interest rate of 8, 9, or 10%. But anyway pretty happy, we're buying them now the first opportunity we had. That market is improving, it is nothing to write home about. But it is improving and I see testimony downside from here and if the shallow gulf improves which it may, things will be appreciably better. And international, we did have an improvement. We had an improvement from, as you can see from $28 million to $33 million. And I see that continuing.

But I think there are two things, let me just be upfront, we were approximately $4 million below where we should have been or where we projected where we would be in the fourth quarter. And $2 million of that is functional. Largely related to Mexico and $2 million is the timing, the timing will correct itself, and we will correct -- I mean that's is still a nice attractive market in terms of decent, but we can't tolerate being below things that we're -- are within our control, not to be below it.

So the outlook is still good. We have a bunch of things that are in the mill that will turn to fruition, I mean specifically we have rigs in India which are just making out and we'll be starting to make out pretty substantially better, the rigs -- the 15 rigs in Columbia and elsewhere we have essentially four net rigs going to work. And we have a big rig in Indonesia which will hit the payroll probably later, and a small rig later in the third quarter and a bigger rig in the fourth quarter. I think you all know that we're in discussions with Luke Oil in Russia, and we have other discussions there.

In essence, overall, the activity is very, very high. The prospects are very, very good. We're continuing to generate increased cash flow and frankly increased operating income but the execution has not been to our usual standards, and it will be. Starting next quarter, frankly.

Let me move to some of the small logistics. I won't take much time but I will go through all of them, Camry, Epic and Ryan. Basically there is no change in the aggregate quarter to quarter, except in Camry and that was all timing so the minus $6 million we had in logistics, $4.5 was in Alaska and $1.5 was in Camry and I think we will recover that pretty quickly. All those businesses are doing pretty well. Two of the three are profitable. Ryan, which was our newest acquisition, will be in the black by the end of the year. The other two entities are profitable now. And are contributing to Nabors overall quality delivery over and above their own profit.

The last unit in Seemar, Seemar is modestly up quarter to quarter. It will be modestly -- well, flat or modestly down for the remainder of the year. This is an operation and you got the cash flow, this is an operation where the cash flow is very relevant because it is almost no depreciation. We have depreciation that aggregates about $6 million a year. And cap ex is almost nothing. Say $100,000 dollars. Except we probably will do a couple of upgrades on our DP, we will go to a formal DP one on two vessels, and the aggregate including that will be a million dollars. So we're generating nice cash there.

Talking briefly about the balance sheet, you guys probably noticed that we did a $700 million zero coupon, that's zero coupon, zero accreted interest and it is in a vertical minimum at something north of 70. We used around $495,000 of that to pay off debt of 2 1/2%. We will also pay off a $295 million, 6.8% debt in April. So net of everything, we will probably -- the worst case scenario is we will save $30, $31 million dollars in interest starting -- starting some right away and the rest of the $31 by April of next year. And beyond that, I fully expect we will have a chance to use that money profitably.

Our cap ex and depreciation, we will have modestly more capital expenditures than depreciation this year. And I explained most of that will be in international and some of that will be in Nabors offshore. We're projecting total depreciation of $230 million this year and something a little north of $300 million in cap ex. As usual the situation, if we have opportunistic chances to have more rigs working, with investment, we will take advantage of that. And if we have acquisition opportunities, we will take care -- that will chew some money up.

But in the first half for example, we generated enough cash flow -- income after tax, plus depreciation, minus the increase in working capital that goes with the increase in business, we more than covered our cap ex.

In summary, I'm pretty bullish. We have no objection with the first call estimate for Nabors. Which are $1.24 for this year and $2.18 or $2.20 for next year. I personally remain convinced about the financial strategy. I think -- I think I've mentioned before that I think Exxon is in essence -- it is not only my alma mater but it is my research department on liquified natural gas, they have announced a humongous project in Qatar, that will come in no later -- no earlier than 2009. And a whole bunch of stuff has to be worked out yet but when that comes in, that will be two B's a day. Two B's a day and we're in a situation where the decline curves are probably 14 B's a day every single year. So there is -- I think there is a plenty of room to grow. And I think the facts that we have, namely better than $4.50 gas price and better than $25 dollar oil price, the supply/demand situation, the importance of the CO 2, I see as -- and the lack of competitive supplies, be it LNG or North Slope or Mexico. That concludes my comments and we will now take questions.

Thank you. The floor is now open for questions. If you do have a question, or a comment at this time, please press one followed by four on your touch-tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Again ladies and gentlemen if you do have a question or a comment, please press one followed by four on your touch-tone phone. Our first question is coming from James Wicklund of Banc of America Securities.

Good morning, guys.

Hi, Jim.

Gene, I have to believe that your domestic activity is higher than you forecasted in your business plan a year ago or six months ago.

Absolutely.

And do you think that through the course of the next, I don't know, year or two or three or whatever it is, do you think we go back to as many land rigs drilling active turning to the right as we had back in the summer of '01?

We might. I think the -- you know, the big question is let's say we have a $400, $450 gas price and that doesn't decimate demand and the question is, -- and we have more reasonable drilling costs, and I guarantee you the rig prices are not going to be -- you know, if they're two-thirds of what the margin was at last peak it will be good, plenty good for us. The question is how many wells will be drilled? I don't think anybody has answered to that question. The think the intuitive answers that I hear are wrong.

I don't think anybody has proved that are enough prospects at those prices, and I think what has happened in Canada has been a pretty good lead indicator what is going to happen here. So I don't know -- I think the rig count has a shot at beating last time, but we're going to do great if the rig count improves, but not to the extent that it did last time. And if margins improve from here but they don't get much more than two-thirds of what they were at the last peak.

Well, generally, between, you know, Canada, the rest of the world, offshore, and the U.S., how long ago -- how long has it been since the business just felt, you know, this good, this strong to you?

It has been a while. I think we had a false sense of what was happening at the peak of 2001, 2002, and they're a different situation. But there is a situation where there was panic buying in effect if you will, for rigs. We had three or four contractors being solicited by the same operator for three or four extra rigs. And you know, I knew -- we knew the prices were too high but you know, it is almost impossible. Guyoff issued 15 your competitor is taking 15, you're literally going to say I don't want 15, I want something else.

Doesn't work that way.

But now we have, as you pointed out, like 450 rigs more than we did last time. I think there is plenty of competition still in the markets. But you know, I think there has been a move to frankly I think modestly deeper rigs and I'm looking to see more of that. I think there is a move to more sophisticated rigs and we're spending a bunch of money to make that happen and so far, it has been working.

So at some contributions from some divisions, some gross, some customer, you know, throughout, it is obviously expected by first call, that '03 numbers will be up from '02. And that '04 numbers will be up from '03. But there is no reason at this point not to expect with the continuation of all the macros we see that '05 would be up from '04 at some rate for Nabors. Would that be fair?

Yeah, I mean -- Jim that's my personal view and I don't think the guys who are doomsday projectors, I don't think they have as -- any better information. I don't think it is.

Okay, so the business is good, maybe not as good and growing as fast as some investors would like but it's looking good and looking to grow over the next couple of years?

Absolutely, I agree. As I suggested earlier we're going 20 have seasonal factors in Canada or again next year, they won't be as big in Canada, in other words it will be from a higher base in Canada, and the rest of the business will be -- be an overall impact. Also -- the only two situations that aren't super attractive right now are -- I think I talked a little bit about that, and there are things that could happen there that could make it better. And shallow drilling in the shallow water gulf is still an enigma to me. If that's the right word. I just don't understand it: Unfortunately, we're not tied to that too much. For example, all our Super-Sundowner are either international or they're in deep water.

Last question if I could, you guys all knew about Anadarko going to release some number of rigs long before, you know, we did. And you'll know in advance if there is going to be another Anadarko. At this point, you know, without asking names, do you see any other big customers significantly dropping rigs, ala Anadarko, is there another shoe, you know in advance of us, is there another shoe from another company that have you some insight on that could drop?

Nope. I will tell you frankly I'm not 1000% certain that Anadarko is going to drop everything they've said. We have 12 rigs working, for Anadarko now. I think we are going to go down to eight rigs. I think -- excuse me, by eight rigs, to four rigs, those rigs are locked in. And they're good rigs. Frankly from my view point the best rigs. And I think of the remainder, we're almost certainly replace the vast bulk of them. I won't say all of them but I will say now that six or. [ Indiscernible ] -- if they come down, I think we have two that are down right now. You know, life goes on.

I talked to one of the biggest independent drillers, and couldn't figure out, he asked me if I could help him, and why this happened, and I can't. You know, I asked -- I've been around where, you know, some guys say I want to do this, that, and the other thing, and you go down the line, people get more and more prepared, they don't want to be -- so I'm not even sure if this will happen. But you know, it is obvious you're going to replace those rigs where you otherwise could.

Okay. Gentlemen, thank you very much.

Thank you, our next question is coming from James H. Stone of UBS.

Could you talk to me about the margin trend that you saw during the quarter in the lower 48? I mean I know that in the last couple of quarters we've had some funny things going on with margin, based on mix, and you know, kind of month to month trends. Could you just give us a sense of where you finished the quarter versus perhaps where you started? And whether or not there were any of that funky mix. And also with some of these -- -- sounds like you got a couple deeper rigs going back to work. How that might affect margins going to the back half of the year?

I know I listened to the Patterson call and I knew what it was the end of the quarter compared to what the average was, I can't tell that you number. I can tell that you we've, you know, we have a bunch of two -- two rigs we'll have working in the second half of the year that weren't working in the first half of the year. These are fancy skid moving rigs in the Rockies that will be higher investment and higher margin. And in general, we find that our percentage of top guys for example, is increasing so all I can tell you, Jamie is that I think it is increasing.

And we just -- for just for the fun of it we took the 60 best rigs and compared them with H and P's- there wasn't much difference there and we saw what Patterson UTI were doing. There are a whole bunch of differences among them. For example in the steady state it doesn't make any difference but if you're increasing rigs pretty rapidly what you're depreciation -- what you're expenses versus capitalization policy is important and I'm not saying they are -- we know what ours is and we are conservative. I'm happy with progress. Would I like it faster, yes but is it moving in rough proportion to utilization? Absolutely in my mind.

Are you implying then with the pace of perhaps increase in rig count slowing down in the second half of the year, that it is something like 60 rigs in the first half, that margins will actually improve because you won't be expensing that start-up cost, you don't think you will be incurring another round of wage increases? I mean do you get that, do you pick some of that back up?

I don't expect another round of wage increases. Although in some markets, we're having to put guys on a 8 and 4 instead of 7 and 7 instead of 14 and 14. Instead of 7 and 7. I guess. And we will as we bring rigs out we will have expenses but as a percentage of the whole fleet it will be smaller as you suggested. I think as we have more rigs the one this thing I can tell you Jamie is we're moving rigs from the less active markets to the more active markets so it might be west Texas to the Rockies, for example, stuff like that. And we -- and that stuff, we expense. We don't capitalize it.

Uh-huh.

So there might be a little more than that. Net, the expenses should be lower.

Are you seeing any kind of change in California?

Not -- I mean it is decent in California. But the thing that goes from decent to very good is that the deep cads-- and I haven't seen much there lately.

Okay. And then my last question would be you just -- you went fairly quickly through some of the international stuff. What -- you know, do you -- the short fall that you had on revenue in the international market in the second quarter, you know, what's your degree of confidence you will make that back up and kind of be on time as we go through the second half the year?

Are you 100%, 105 or what? 100%. Just sticking to 100% confidence.

That's great. Thanks.

Thank you, our next question is coming from Kevin Simpson of Miller Tabic.

Hi, Kevin.

Good afternoon or morning, depending on where you are. I just want to -- Jim James Wicklund kind of implied that you guys had significant knowledge beforehand of this apparent APC move. And I'm just wondering the fact if that was the case. And I guess you know, just taking a -- to finish up on it, do you have any sense yet of timing of when rigs would actually be let go? And then I guess on the APC, is it possible that they're going to be a situation where they're specific rigs that they want that are going to end up going to somebody else, you know, because of this kind of period of uncertainty?

They were quoted as saying that. I won't say that. I would say -- it depends on what you define as significant lead time. It was never more than 24 hours frankly. I heard this -- well, not counting the weekend. I heard this just before the weekend. And I got an e-mail and phone calls from some major operators frankly.

And I talked to one or two of them, and you know, and our guys, they prepared, which I won't go into but they prepared what the story is on the rigs, and as I said let me suffice it to say that we're highly confident the vast majority of these rigs will be picked up with no material downtime and we're sticking with our forecast of increased rigs, you know, through the end of the year. Quarter by quarter and through the end of the year. I haven't talked to Bob Allison, he has been gone. And you guys know what the rumors are as much as I do, and I don't know any more than you do, but basically the lead time was we had it Friday. And if nothing -- you know, there was a rumor like this with who? Devon. About a week ago. And you know, they had to deny. It I don't know where these rumors come from. But it comes I think from the uncertainty and the cloudiness and the haze about, you know, pricing, and skills and all that stuff, but I don't think Greenspan is an idiot and I don't think we're idiots, either. I think the supply/demand situation is an issue that is favorable for us over the relatively long term.

And in terms of forecasting international profitability, it sounded like, the timing is $2 million, the incremental costs, over budget, was $2 million, I assume the timing takes care of itself this quarter. But realistically, how long before, you know, you get your costs in line? And as you go into -- there has been kind of a pattern as you go into new areas of one taking longer, which is understandable, and two, having the costs be higher than forecast. So you know, it takes like, you know, -- you get there but it takes two quarters longer than, you know, than forecast to get there.

You're being especially nice this morning. What's wrong? I think that is right. I think the other thing you could say is that we've always gotten there, even though it has taken two quarters extra, but you know, the implication in your question I think is 100% fair. Namely it isn't like the first time we've gone into new markets, even Algeria wasn't the first time and Mexico is like the third time we've had issues, and you know, I'm confident they're going to be solved by the people there or other people.

And when you're thinking about Russia, you've certainly been mentioned you know, many times now, and it sounds like it's your intent to be, you know, to get more involved substantially, you know, hopefully within the next couple of quarters, if possible, maybe a little bit longer than that. Do you base that into your thinking on how much you're willing to pay for Russian assets or is that not significant --

In the budget comments or economic projections, I think you know, we have a sustainable edge in Russia that we should be able to exploit. I mean there -- I won't go through a big long speech. But they're fundamentally two categories of companies there, the bureaucratic companies and the entrepreneur companies, and the entrepreneurial companies want us because they know what they want to get in terms of western financial acceptance and the bureaucrats are under pressure in the fact that we are S&P 500 and A credit ratings and a billion and a half on the balance sheet and they're getting pressure from everybody. So we have a shot.

And as you probably know Schlumberger gave up and who else, who has the Arctic experience, the cash flow, you know, all that stuff so we're obviously trying to exploit it as economically and rapidly as we can and pretty obviously the way to exploit it is to do the stuff that we know can generate profit for us and savings for them right away. And we're trying to do that. And then we're trying to work from there to buying their assets on a reasonable basis with not too much risk at a decent return. So how that all happens, I can't tell you. All I can tell you is it worth mentioning and I mention it every time we have guys, Ziggy just came back from there we had guys over there for probably ten days and we're talking to more than one person or entity.

And not -- I'll ask one quick follow-up and then get off. Will have you your own equipment, will you have incremental equipment in Russia, before the end of the year? Even if you don't, you know, make a buy of another, you know, one of these companies?

Yes. I've never been perfectly right but I bet we do.

Okay. Thank you.

Also, Kevin, let me add a minor thing to that. To the extent we take a rig from Alaska or Russia, excuse me, or Canada, that, you know, we're going to obviously make money on the rig, but also, we're going to tighten up those markets. I would -- you know, for years I would like nothing better than to take a couple three rigs out of Alaska so that, you know, the monopoly buyers -- anyway the very few buyers can't count every single rig and you know, they will have some incremental competition and I'm pretty sure that is going to happen in both markets, frankly.

Okay. Thank you, Gene.

Thank you, our next question is coming from Roger D. Read of Simmons & Co.

Good morning, gentlemen.

Hi.

A couple things. To start off with, the platform rigs in the Gulf of Mexico, the three that you're building for the independents out there, can you kind of refresh us exactly what those are and how those contracts work? I mean Pride the other day had real trouble with some platform rigs and I just want to kind of see how your setup was a little different between building the rigs, managing them and so forth.

We don't do turnkey drilling, footage drilling or turnkey drilling rigs. The only thing we really do is rig moves on a turnkey basis. And we're very careful about that. We, you know, frankly, I -- Exxon is my alma mater, but I would have -- I admit that I would have difficulty doing a build, turnkey build, and procure, build and operate design for probably anybody, but specifically Exxon. So you know, we don't take those risks. We build a rig, yes.

And we built I don't know, three dozen rigs since I've been here, five dozen rigs, I have no idea, but you know, some of them are over, some of them are under, but we watch them pretty good and these guys perform pretty well, so we're building the rigs the way we built scores of rigs, and it is not -- when you build for like Exxon, or any of those guys, you know, you have to have a contract that would take you know, our whole management team a whole period of time to do and with one of our managers is a professional lawyer, Tony, then you have to have a contract with the shipyard, you know, it is just all so complicated. And what do you do if a customer says I want to change this? You say no, get off the God damn shipyard? You know, no it is not -- I'm just saying it is very, very difficult. And my guess is that Pride would be very happy if this locks up 100% of their problem.

Right. I was just wondering if you --

We don't have problems. We don't have those kind of problems. We know what we can't do.

Then in terms of when you build the rigs, how are the contracts set up when you operate the rigs? Is it just a standard day rate then?

It is almost -- if you -- yes a day rate, we usually or frequently have incentives. And we have a term and we have a short fall rate and we have a mobe that covers a bunch of it. We do this almost all the time. We almost now a days never build anything without a contract.

I mean the best deals for example would be the kind of new build contracts in Alaska, we built two new rigs, maybe 3 1/2 years ago, whatever it was, where we competed with the world, we got a five-year contract, we got a full payout, 100% payout with no residual value, including more than, you know, our decent interest rate. That's the best. And sometimes we take a chance. We have a one-year deal. And see if follow -- for example, the Mercury deal, we're building a rig for Mercury, and you know, it is my -- certainly my hope and partially my expectation that we do a good job on that rig in the gulf and we modify it, and have a whole bunch more work in Malaysia for them. Et cetera.

Okay. Second question, Canada, you talked very optimistically about it. Can you kind of give us an idea of what you think will be sort of the pace of activity through the second half of the year? 35 -- or excuse me, 38 rigs running right now, does that ramp up through the rest of the third quarter? And into the fourth? Or does it stay fairly stable until we get --

It ramps pretty good. It ramps -- I think we have like 58 rigs or something like that, 57, 58 rigs in the first quarter of this year. Probably could have had 60-something if we could have gotten the crews, and our Canadian affiliate is projecting 66 rigs in the first part of next year and they aren't noted for setting themselves targets that they can't meet.

And final question, looking at the international side, you made the comment kind of always takes two quarters longer, what is your view in terms of rigs getting picked back up in Latin America, the Mexico timing issues coming through, and how do you see the second half of the year in the international piece?

I think -- I think we see it pretty good. But I think it is Mexico, it is a whole bunch of mid east, Far East -- south America, we don't have -- I mean apart from Columbia, there is not -- maybe a little bit in Ecuador, that is not the bright future upside that we see. I mean eventually, Venezuela will be good, eventually Bolivia is going to be good but I'm too old to worry about eventually.

Never too old to worry. Thank you, Gene.

Right.

Thank you, our next question is coming from Ole Slorer of Morgan Stanley.

Ole, how are you?

I'm very well, Gene.

You were you better when our stock price was better, right?

A little better but as I said, I'm taking a little bit of comfort from what you are saying here. I wonder if you could give me just a little bit more clarity on the international progression, gone, a little bit about the startup date, and how it filters into the third quarter.

Ziggy, you want to try -- can you get specifically on the startup dates on the things -- In the third and fourth quarter.

You mentioned --

For example, when does Indonesia start up, how much of the profit.

And India.

India already started.

India already started and the benefit will be that we have the full quarter of that rig in India, the rigs in Columbia are on the move or have started to move. We will bet the benefit of the full quarter to have these rigs running. And really in the Mexico we're in the process of optimizing our cost structure, and so we are very confident that we are going to make our numbers.

What about Indonesia? When does that come in?

Indonesia is scheduled to start September 1 and the rig is being packed at the moment, and there is no reason to believe -- typically, I heard several times, that we are always two months late, or two quarters late.

Yeah. quarters late.

Yeah.

And really, -- That isn't a rule in our --

That isn't a rule. Like India was on time. I'm pretty sure Indonesia will be on time. If you go to the Mediterranean, it is on time. The problem is really comes when you have a multi-rigs startup in a very short time and we might have been a little too optimistic on some of these but I think generally we're on time and on budget as well.

So basically getting the full effect of the stuff that started at the end of the -- going into the second quarter, how much of that alone left the third quarter profits by sequentially? In other words by getting full effect of the stuff that started in the second quarter. I mean you went from 28 to 33 and how -- what are we looking for incremental, sort of the full effect that you talked about there?

Well, I would -- I can tell you in dollars, basically, I would say the third quarter should have a larger increment in dollars over the second quarter than the second quarter actually did over the first. And I think -- I think the increment probably should be $2.5 to $3 million dollars more. And that is largely the catch-up I'm expecting to deliver in Mexico. Then I think in the fourth quarter, we have another fairly sizable increment. I can't tell you what it is; but it won't be any less than, you know, this $5, $5.5 million in operating cash -- cash flow from operations.

So it is pretty much look down, not really depending on --

Yeah, I think the only variable is frankly performance on -- and as Ziggy correctly pointed out, all excited with multi-rig startups and frankly we've done enough of them, so you know, it is better to do five rigs than one rig, you know, much more efficient. But to tell you the truth, it is modestly harder to do, but we should know ahead of time that it is going to be harder and be able to cope with it, so apart from that everything else is more or less on schedule, on time, and -- except you know, $2, $3 million dollars, which is not trivial. That much in Mexico.

And if you could give a little bit more color on the Russian. You gave a lot of information already. In terms of what you're looking at. But there is a lot of people associated with the oil drills of Sidry and have you come to any terms where by this company will be right-sized before you are taking it over? Or will you be responsible for doing that yourself? Will it be -- you think it is a safe to earn out, how much capital do you think you will put upfront?

Actually the biggest single problem is the Morgan Stanley bankers who are -- no, I'm kidding. [ Laughter ] I'm only half kidding you. I think you know us pretty well. We're not going to fix the whole conversion of Russia from Communism to capitalism. You know, and we're dealing with other folks there who, you know, don't need that kind of an education.

But I think what Luke oil, you know, the fact that the -- Alagar companies like the BP, TNK companies and other companies, Hugo and companies like that, they're gearing up to be attractive to the western capital markets and they know what they have to do, and the fact that they're run by billionaires means that they know how to make money. And they will know what to do. But we will know what to do. We're not going to -- we're not going to fix the whole Communism problem.

And when we do a deal, it is going to be bluntly, you know, a function of we'll pay as we go, kind of thing. We're not going to -- you know, blow $100 million and assume we are going to lay off, you know 8,000 people over 20 years or anything crazy like that. You know, and we're -- you know, we're working with Luke Oil, we're working with your people who maybe I should give this lecture to them. You can do it for me.

It doesn't help to give it to me anymore.

They don't talk to you anymore? Anyways, you know, it is going to have to be -- we're going to have to pay as we earn. We're not going to take on social reform on our account. And we'll buy -- hopefully even in that case, in every case, what I would really like to do is show that we can make them money. Either by fixing up one of their rigs or bringing in one of our rigs and demonstrate what we have to offer instead of doing it all blindly. And I think we will have a shot to do that away from Luke oil and we're trying to do it with Luke oil. Other way. I don't care.

Either -- and also psychologically it is a little bit harder, you can't -- go to these guys and say, you know, we got to change you 100% from say -- you know, they are making a ton of money as it is and they're pretty successful, and you know, they've been making money when the prices are $30 a barrel, but -- and they want to be able to make money when they're $16, but still, they're making money, and you know, you're talking to guys who even -- even the guys partway down are pretty affluent guys.

You mentioned you would like to do a deal which would make you money from day one and save them money from day one. Can you give us -- I know it is difficult but can you give us any kind of indication of what this deal could --

Well, --

In 2004 on an EPS basis.

I can't tell that you.

Is it a rounding error? Is it a meaningful number?

I think potentially it is meaningful. I think the first one, somebody asked a question would we have a rig by the end of the year. And I said I think we would. And it is more likely yes than no that we will and if we do we will probably make a pretty good number. You know, it is not going to be -- what could it be? It could be $4 million a year cash flow. You know, $4 million, $5 million. It isn't going to be a humongous thing.

There you're talking about your big rig price, Canadian slash Alaskan rigs into the Siberian area. I'm talking more in terms of the corporate acquisition.

I don't know what they would be frankly but I would guess we aren't going to do anything that isn't at least 15, 18% on our capital employed and I shouldn't say that, because it is not anybody -- it is not our customers' business, but you know, we haven't got to the point where we can talk about that yet.

And have you indicated what the capital employed would be?

I can't -- what do you think it would be --. 100 million?

A bit more than.

I think Morgan Stanley is a bit more and we're a bit less but not 100 million. But the numbers. And I think the other places we're looking at -- I mean the other places, the number is big but it is -- I think they're more readily adapted to a pay as you go scheme.

Okay.

You know, if it is pay as you go, for example, if is reasonable to say at X $100 million dollars and it is a function of, you know, Mac, 30% of the pay rate or something like that, we will take more of a risk.

And this can be founded within the sort of Sierra coupon of what you intend to redeem.

Pardon me.

This could be in other words from the -- within the excess proceeds from the -- I mean you highlighted it, a zero coupon, you highlighted are you going to redeem like a zero coupon convertible Democrat.

Yeah, the fundamental issue is finding a productive use for it.

Well, I know that you can do that. Thank you very much.

Operator, we're actually over our one hour time limit but let's take one more question and then we will end the call for today.

Our final question is comes from Mark Ernest of Merrill Lynch.

I will pass I think we have gone long enough. Gene I hope your outlook is correct.

I do, too. Okay, operator I think since we're over time we will finish up the call at this point. We want to thank everybody for participating and if you have questions, that you would still like to ask us, please feel to call us. Thank you very much.

Ladies and gentleman, thank you for your participation. This does conclude today's Nabors Industries conference call. You may disconnect your lines at this time and have a wonderful day.