Nabors Industries Ltd (NBR) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Nabors Industries third quarter earnings conference call. At this time, all participants have been placed on listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to introduce your host, Mr. Dennis Smith, Director of Corporation Development. Sir, the floor is yours.

Good afternoon, everybody and thank you for joining us today. As customary, Gene will be conducting the call, Gene Isenberg, our Chairman and CEO, will talk for about 20 or 25 minutes on the results of the quarter and our current outlook moving forward. Then we will open up to question-and-answer session and hold the call to approximately one hour.

On the other issue is with us we have today all the multiple business unit heads of the businesses, Tony Petrello, Deputy Chairman, President and COO and Bruce P. Koch our CFO, Bruce Payton our General Counsel. And he wishes to send his regard by reminding you all that forward-looking statements do apply and we'll trying to give you our best outlook in the market. But things may not quite materialize as we think plus or minus, hopefully the plus side. With that I will hand it over to Gene.

Thanks. Welcome to our third quarter earnings call. I assume you have all seen our earnings report and as usual I will emphasize sequential results. Although for the first time in a while, year-over-year comparisons are becoming relevant.

Before I get into a business unit by business unit discussion of results and outlook, I will spend a couple minutes on our view of the overall picture. The most significant metric from our viewpoint is operating income. If we look at Q3 operating income of 52.9 compared to last year's of 32.1 is a real healthy increase. Even on a sequential basis, we went from $38 million operating income in Q2 to $52.9 in Q3. These are very significant increases and pretty much in line with our "bullish expectations".

Let me switch now as I get to individual operating units to operating cash flow, which is the metric we use in discussing this. Every group contributed to the increase from operating income, except Alaska, which we had projected would be down. In fact, Alaska was down less than we had projected, and Seemar, which is struggling with the weakness in the Gulf.

But, Canada was up $12.6 million, U.S. and $5.4 million, international $2.1 million and in general all the units were in good shape. In fact, everybody was more or less in line with our projections, except international, which was $3 million cash flow below what we had projected. I will talk about that in a bit. I also expect in the future at least for the next quarter and as far as we can see beyond that every single unit to be flat or up in the fourth quarter, except for a pretty modest decline in well servicing due to the year-end holiday, which affect operating hours.

Just overall summary, I won't go into my usual talk on North American Gas, but I will say I think the industry is in very good shape. I think the environment we're in with I think 450 guys is better than 650 guys and I think $25 oil is better than $35 dollar oil. And I am still bullish about the time lapse in which this good commodity supply demand balance on the gas side in North America is going to persist.

I think the other thing that is a kind of important from our viewpoint is that it looks to me like odds of the economy crate ring which was a conditional comment on commodity projection, so looks like it is going in the right direction in a pretty substantial way. I think the environment is we are operating in is good. And also think the company is in unusually good shape. I will just summarize a few overall comments perfect I get into the business unit by business unit. Lower 48, I think we are doing much, much better than we had been doing.

Rig count is up year-to-date 57% to 58%, compared with the industry, less than half of that 27% to 28%. Our customer base is expanding and is good. And I will get into more detail, but there are a lot of positive things happening beside increased margin, which pertains to future probability. Canada is going to set records as we had projected. We are improving our position and growing organically and we're having sizable increments and uplifts in technology. In Alaska, it's a pretty tough market, but we are doing exceedingly well there. I think we are generally considered the best not generally, I think we are universally considered best by far by the clients up there.

I'll have a few added comments on that when I get to Alaska. Internationally although we have had hi cups, some within our control and some beyond our control. I think it is also important to note it is recognized the leader as the leader in most of the places where it pays to be the leader, in Saudi Arabia, in Columbia, Algeria, Yemen, and hopefully Russia and we will talk about that a little bit in a minute.

Offshore, I think we came off an absolute dismal bottom in Q1. We've improved since then. I think the outlook is pretty good. I think albeit from a pretty lousy bottom. I think the offshore deeper water stuff is pretty good. We have three new contracts, which manifest the position we have in terms of operators with future work. We are also modifying a rig for deep drilling in the shallow waters.

Let me move to Alaska. Alaska again, this is operating income. Operating cash flow, excuse me, income plus depreciation, we went down from $13.9 million in Q2 to $10 million in Q3, this is pretty sizable drop, but frankly less than we had expected. The fourth quarter will also be down moderately, although drilling will be up and the non-drilling part is pretty hard to project, although right now it looks like that probably will be down so that would be overall modestly down. Rig count has gone from 9.1 to 6.3, as expected in Q3. In fact, we expected it to be worse Q2 to Q3. Q4 it will go back up. Q1 will go back up. Q1, we start to get good seasonal drilling, but frankly will not be anything like what Q1 '03 was.

But, we are doing great there. I was up there maybe a couple weeks ago and spoke with all the operators. BP is the biggest operator, by far, and our relations with BP are outstanding and well earned. Specifically I was told by BP that the last rig we had bid them we were awarded it based on performance at some $10,000 per day higher than the alternative competitive rig.

This is the stuff we love to see and hear. So, we are doing well in a pretty tough environment. I think the one bright light which I've mentioned before is Biscus (ph) Oil up there. I think pretty certain that I feel pretty certain that some of this will go on in late fourth quarter or early first quarter, which should be a help.

Nabors Drilling U.S.A., we've had quarter-to-quarter increase from operating cash flow from 23.4 to 28.7. While I am among the subject of that, simply say that I believe that will continue at about that pace of increase in the fourth quarter. The rig count has gone from 137 to 157, Q2, Q3, and I think we'll have about the same increase in Q4 over Q3.

And compared to some of our competitors, this is U.S. Lower 48 land only and doesn't include Canada or Alaska. Cash flow from operations per rig -- excuse me, cash flow per rig per day went pretty much what we had told you last time, from under 2000 little under 2200 to little over 2200 per day, probably round figures 2150 to 2250 and we see further increases above that amount in the next quarter.

I mentioned before and I will mention again that our rig count has been up like twice the industry average so far this year from late December to now. We're up 57%, 58% from I think 100 to 170 and the industry is up almost half that amount. I think what are also important are the technological upgrades that we have affected and the quality and operational improvements we've made.

One of the things that happened just yesterday, I was speaking to El Paso which I will talk more in a minute, and we completed a well in South Texas for them which was the shortest, most economic well ever drilled in South Texas, over 19,000 feet. That is the good news. The bad news, it was a dry hole.

The point is, we are getting to the point where we get calls in terms of how well we are doing from important customers, compared to what the situation might have been a year ago. Incidentally, on that particular well we were using the automatic driller and the smart drill, the two devices I told you last time we were working on. We still are and I don't know how much of this, this was like 12 days ahead of the curve. I don't know how much was attributable to those things. All I know, the operator loves it and he loves the rig operations.

We've made a bunch of investments in a whole bunch of things. We have pretty sizable investments with Shell in the Rockies and that's working pretty good. I think we have, we're about to sign an arrangement, which puts us in good position with Shell, both in the Lower 48 and in Canada. Let me talk a little bit about B&B, El Paso financing.

We are not going into the MP business. El Paso and component parts have been for a long time, one of our premiere customers, two of them. We consider them excellent operators. We consider they had good prospects, ie, they were starved for capital, not because of the EMT operation, we felt there were good returns left. This therefore provided good risk reward.

We had our internal guys look at this and had one of our directors, Jim, Pain, who is running an ENP Company, he looked at it. We had outside investors and wanted to be sure we made the investment it would stand on its own feet and not be contingent on getting rigs. Frankly, El Paso wanted the same. They wanted to get us investment and have the rigs stand on their own feet. I think net-net, this is going to work out pretty well and I think a lot of it is happening already. Let me move to Canada.

Canada, we had dramatic increase in cash flow from operations, which we had projected, which is seasonal. We went from $5.5 million operating cash flow to $18.1. We see a large increase in the fourth quarter and frankly new records probably in Q1 and Q1 '04 might be as much as 25 plus percent above Q1 '03. Rig years, Q2-23.4, Q3-39, Q4-47.5 and we're virtually at that number right now. Gross margin per day Q2-37, these are US dollars, and all numbers are US dollars for Canada.

Q3 4200, I think Q4 will actually be over 5500, but we'll see. The well servicing is going well there, too. I think the other important thing there is the quality of our work and we're firstly going to grow organically there. And we're doing that with a number of new rigs mostly for our major customers. Most important single customer there, well, they are all super important, but Shell and Burlington have the highest dollar volume.

We have a new rig for Burlington, Apache, I'm sorry, Apache and Shell are the biggest. We are building a new rig for Apache, or hope to be. We have other rigs for Burlington and Adarko. Suncor, couple new rigs, one of which is to work on the heavy crude to develop for use in the heavy group. And the important, in addition to Suncor and Adarko, Hunter is an important client up there.

A lot of our important clients down here are important up there and in some cases, for example, Suncor drills only there and not here. And Burlington right at the moment is drilling a little more than here. And Apache is drilling lot more up here than there. We have kind of not been south of the border (ph) synergies and as long as Canada leads the way with good performance and it has been real good performance and good results, you know.

We will see if my theory of Canada leading the North American market by couple quarters or so holds. If it does, it will service us well. I think the other thing I should mention, we are getting an actual increase in rig depth, well depth in Canada. This now is statistical, not anecdotal. We will see how that works for us.

Go to well servicing now. Well servicing our operating cash flow, excuse me, was essentially flat $18.8 million versus $18.6 million. I hope we're that accurate in our numbers. What basically happened is our rig count, rig hours went down a little bit and the rig rates went up a little bit and therefore we are level.

I think, in the next quarter we are likely to be down because of what we traditionally have as Thanksgiving, Christmas-type, New Year's holidays and stuff goes the operations are usually down in that period. Next year looks to be pretty bullish. Including the fact that we'll have rig working in California by the first, around the end of the first quarter of next year.

Offshore, offshore, as I said, had been doing a lot was Q1. Q2 and Q3, we're 5.6 operating cash flow in Q3 versus 5.1 in Q2. I think the important thing here is that things not only couldn't get worse, but they in fact are getting better. We're projecting that for example Q2 and Q3 of next year and I'll go into the reasons in a second, are likely to be double what they were in Q2, Q3 this year.

We're getting healthy returns, healthy uplift and part of that is -- much is the offshore and we have three new builds for quality customers and it's not only the importance of the economics in the new build, but the importance of the fact we were able to win these contracts from quality customers who are pretty fussy generally. McGee, we have a rig going to be ready 1/1. Murphy, a rig ready hopefully that will work for Murphy in Indonesia, early on that we are trying to coordinate with them.

We have essentially a new rig for Conoco-Phillips. In the shallow water, we are taking one of our -- in fact, our only barge rig, pretty effective 2000 Horsepower rig and we are upgrading it to 3000 Horsepower rig which will work for El Paso in the Gulf. This rig will be pretty capable in terms of deep drilling in the shallow gulf and have the big edge of being able to get into 7 or 7.5-foot water depths.

Even if they don't drill in that depth, they have to get over for us to get into it. It will have million and a half pound mass, 750-pound top drive, three 1600 horsepower mud pump, 7500-PSI, the whole kit and caboodle. And I'm looking forward to doing as good of a job offshore for El Paso and others as we've done onshore for good customers. International. You there, Ziggy?

Operator, would you un-mute Ziggy for me, please? Operating cash flow Q3 was $22.1 million versus Q2 of $20 million and reason for the increase was Mexico improved, but not enough. Mexico didn't improve enough. India came on and a lot of rigs in Columbia came on. So, basically I think the outlook is pretty good in spite of the fact there are some things that occurred that are beyond our immediate control that are going to have to be overcome.

We've been operating rig one for Hunt in Yemen since we probably a dozen years and it's been lucrative and Hunt we are in the process of negotiating it FBSA. This rig came down and due to come back on. Also in Yemen we had some rigs working that aren't going to be working but will be coming back. The biggest single hit, this is close to $2 million part of Regado one which, we had actually three different places where it was going to go and all three temporarily fell through.

I think it will go to work yet, but those things happen in life. But, I think I'm comforted by the fact first place international is a real good operation. It's probably the best one in the world. I don't know any better. When we're talking about increments of -- you know.

We're talking about a business that is going to generate something like $130 million operating cash flow this year, it is pretty sizable, or over 100 anyway. The upside, I think is pretty good. We're the best in Saudi Arabia and have the chance to increase our position there. We're the best in Yemen. The Russians are courting us as if we were the only game in town. We are going to improve in Mexico and we do have upside in South America.

Let me move to the boat (ph) business. That was a pretty sharp drop. That's the bad news. I think the operating cash flow went from $4.9 million to $4.7 million to $2 million. That is a pretty sharp drop. I think we will stay essentially where we are, fairly substantial drop and it's been a little about in the third quarter we had some down time and the main thing on an ongoing basis, the rates have come down pretty substantially. There won't be any big help there until the Gulf starts to pick up.

The good news is we have four 180-foot boats in Mexico working at rates that are damn near what we get for a new 200-foot dynamically positioned boat now. Some of our other businesses, Camrey is doing well considering the slump in demand for equipment. We have a significant number of outside sales. We are in the block and we developed a new product, which is selling pretty well, 175-ton, feeding our own operation in Canada and some third-party sales. We have significant number of outside third-party sales. Epic is doing OK and will get better. Ryan is going to be a very good situation, although right now it's still developing.

Let me move to balance sheet. We have over a billion and a half dollars in cash as of September 30th. Our debt to cap was 0.24 on a net basis that is net of the excess cash. I think it's important to also look at CAPEX and depreciation, although we have a pretty aggressive CAPEX program, in other words, we are projecting spending like $311 -- $312 million dollars in cap ex against depreciation of 230.

More than all of that will be funded from operating cash flow, not only that, but as of volumes increase working capital requirements increase. If we have cash flow from operations subtract the working capital, then look at what is left to service expanded CAPEX, we have plenty and will have excess cash.

I think to talk a little bit about the tax rate. You've seen the press we've gotten, our favorite New York Times author Kay Johnson, our personal favorite, trying to make a career out of Nabors and god bless him. Our tax rate is likely to be as our profit increases next year, more like 10 or 15% compared to what it is today.

Let me also quickly say that I'm comfortable with our consensus forecast for this year and I have no reason to be pessimistic for 2004, although it is obvious to everybody it's not crystal clear what's going to happen here. It is obvious for the first time, international is not as crystal clear as we used to think it was. But in any event, the outlook looks really good.

As I said in the beginning of the presentation, I think the demand and price situation is such that we have good prospects for as long as a decade of good drilling before marginal supplies, particularly liquid petroleum gas come into will cap prices, but it won't be for a while. I think right now the pipeline from Alaska is looking to come a decade from now.

Bear in mind, that's only 4.5 Bs per day. I think we are in great shape the industry is in decent shape, despite all the noise. We are in the best shape we have been in for a long time. I think while I can't tell you what is going to happen this quarter or next quarter, if you look from a broader viewpoint, I think the outlook is extremely attractive. That covers my comments.

Operator, that's the end of Gene's comments, we'd like to go ahead and take questions and answers now.

Thank you, gentlemen. The floor is open for questions. (Operator Instructions). Our first question is coming from Kevin Simpson with Merrill Lynch.

Good afternoon. Couple of questions, Gene. I guess one on the international side. Do you think that you've gotten to the point near term where you're going to run into, capped out in terms of how well you can do and would that be looking into 2004, should we be thinking at least for the time being something only at or modestly above where we are at annualized for the third quarter?

I can't tell you for sure. I hope not. We are certainly pursuing two areas. I mentioned 801 are down right now. I'll make a bet we will find attractive work for it. That alone is like $1.7 or $1.8 million per quarter. Some of the things that were down in Yemen are going to be definitely back. I think some of the areas where we have a commanding position, like Saudi Arabia, potentially Russia, I think will come to fruition. When it will come, I don't know. But, I think it will come. I would say I asked Ziggy to exactly to get interrupted where the next $5 million was coming. I didn't have enough time to listen to all prospects. What was the other question?

Russia specifically, I understand international, you didn't really get into too much depth on that. There had been speculation on the TNK -

Actually, Ziggy is on this phone call from Russia right now. We are having pretty good or promising conversations with TNK. BP are getting involved in this. As you know, we have a pretty outstanding relationship at least in BP. We have kind of three things cooking there. One is management contract. They are in love with -- that has showing really encouraging results and in fact TNK, or the group in totality has - can be --when they drill them, they can split it with TNT.

Gene, you kind of breaking up, I don't know from coming through, but I think it may be through the speaker phone, but I am hearing half your words.

OK. You are hearing the best half, though.

Of course.

We have a management contract, which is doing well, and they love it. It was intended as a door opener and in fact is a door opener. We are going to be drilling for them hopefully some of our own new rigs in gas prone areas and that should come to pass.

We should get a commitment on that relatively quickly and the rig would be in operation probably four, five, six months, our rig-o-rig. The third thing we are working on them is buying a bunch of their rigs and upgrading the rigs and working back to them. We have a three-pronged approach. The first approach has been successfully implemented. That isn't payoff for us. The other two are cooking right now. We are also still working with Luke Oil.

So, there is still a possibility there even though you kind of sounded more cautious on them in the last conference call?

I feel I'm cautious, but they want to do something. We're willing to do something if we can get together on how we'll do it, we will be there. That isn't any closer than it was last call, though, Kevin.

OK, great Gene that's it for me. Thank you.

Thank you. The next question is from James Rollyson with Raymond James.

Good morning, guys. Gene, you talked a little bit about deeper drilling in Canada. One of your competitors last week talked about the Lower 48 and the fact that, so far we really haven't seen much of an improvement in deep drilling or at least using some of the bigger rigs. What are you guys seeing today?

I think we're in the same essential position. We've -- I don't know what the statistics are in terms of depth in the Lower 48, do you have any idea, Larry? Yes. It stills essentially the same as it has been before. We have been increasing position, our rates are going up. We haven't really got anything analogous to like the deep Anadarko or the East Flat Hills stuff or some of the stuff we think should be coming, but isn't here yet.

OK. Your position with El Paso, I think, a lot of numbers have been thrown around outside of your press release of how many rigs are actually going to employ and whose rigs are going to be set up. From the numbers offered here you are talking like 8 to 10 rigs, that kind of thing and presumably you guys have the best shot of employing rigs there. Can you give us a sense of timing on when that's going to start up, and kind of get a full run rate?

Yes firstly, let me emphasize that the investment is, stands on its own merits the rigs we have to earn the right to supply the rigs. But like you say we have an edge in getting there. And I would say we now have probably a dozen rigs or 13. 13 rigs working, they haven't been reflected in the P&L yet. But, 13 rigs working and we might work one or two more plus the barge rig that I mentioned, or somebody will go up.

Right, so it's already starting to show up in your fourth quarter?

It will start to show up in the fourth quarter. There is this, a kind of a screwball playing that I mention to you, we own 20% of this play, we have to eliminate 20% of the gross margin on the rig, because that is like the sale from one part of neighbors' doing other, and has to be eliminated. We get it back, but not till next year. So the real benefit in P&L is probably going to come next year.

Sure. And then lastly just, well servicing you mentioned it was down slightly, obviously fourth quarter coming down with the holidays. But what the outlook you mentioned next year is looking better. You know, what do you think is driving the market? One of your competitors this morning was, talking about things and where they are, and they didn't sound dramatically optimistic there released in the short term. Maybe that is the holidays. But what's your kind of, broad-brush outlook on well servicing Lower 48?

I just basically think that the persistence, for the kind of prices we are talking about, and will get it closer to the correlation that we traditionally government haven't had yet of the relationship between commodity prices and work over activity. We also mentioned that have a platform rig that will go to work at end of the first quarter, which will, one platform rig is a whole big number of work over rigs in terms of the bottom line.

OK. Thanks, Gene.

Thank you. Our next question is coming from James Stone with UBS Investment bank.

Thank you very much. Gene you talk about in your comments as well as in the press release, about what sounds like some disappointment in profitability, coming out of Mexico. Can you give us an idea what the situation is there and what needs to be done to fix that? Then, I have a follow-up after that.

Yes I think frankly there was some stuff we could have executed better in Mexico. But, we are improving, I would say that I'm looking for, I don't know, maybe a million to million and-a-half bucks or so, maybe even $2 million a quarter improvement in Mexico. But, it still won't be, some of the stuff we missed, is missed is gone.

I think the other possibilities are Mexican land rigs. But those are going to be very competitive, it's not going to be like what we make per rig in Alaska or internationally or things like that. The Brazilian guys are competing. That is another prospect. We are doing OK. We have top guys down there we are making decent money incrementally. We have instrumentation they like and will make incremental money in that. We will improve, Jamey, but won't hit where we thought in the first place.

The issues there really reflect the offshore operation down there?

Yes, that's all we have right there on jack-ups. I don't know who else is affected, but we're pretty blunt with you guys. We were late and got penalized. Some was unavoidable and planned and some wasn't.

OK. Just looking at Saudi Arabia, there is some commentary that Saudi Arabia is flattening out here or maybe you might pull back a little bit. Do you have a sense as to what their drilling program is shaping up to look like over the next six to 12 months?

My guess is it goes the opposite direction of that. It is my feeling we go from a pretty sizable market position to a more sizable market position. I think you go there occasionally, don't you? You can talk to the Saudi Arabia guys. We are in good shape there. And I think the environment -- they are doing more drilling, in my mind, no question. Crystal clearly they are doing gas drilling. I don't know who would be operating, my guess is Saudi Arabia becoming operator, too.

OK. That's great, Gene. Thank you.

Thank you. Our next question comes from Marshall Adkins with Raymond James.

Hi, guys. I'm a little perplexed here. This time last year we had EMP budget survey tell us spending weren't going to go up in the U.S. and you are up 57 year-to-date, how does that happen?

We're just good, Marshall.

Yes. The only rigs per our numbers, the only rigs left out there in the Lower 48 are yours and Patterson-UTI. Patterson said today they are looking to be up 15 to 20 rigs this quarter. You echoed similar sentiment. Both are seeing pricing improvements. What point in time do you stop putting out more rigs and start pushing pricing harder?

I think we try to do both, virtually simultaneously. The facts of life are that we the industry have a couple hundred 50 more rigs this cycle than we have last cycle. Therefore, the slope of the increase relative to number of rigs used will not be as good as it was last time. We have probably 125 rigs that could work with minimal investment right now and you know, we're not going to cut prices to get them to work, but we're not going up 2000 bucks a day and say if we don't get it we will not put them to work.

So, assuming that you guys, along with Patterson-UTI, are roughly in control of where prices trend over the next several quarters, you know, should we be looking at couple hundred bucks per day per quarter or can you push it 500 or more?

I think we're reactors, we are price takers, roughly in this situation, not price makers. We are not going to go down. I'd like to think if we offer something extra like these automatic drillers, like the other stuff we're putting on, a number of other things we (inaudible), re-powering rigs, we're putting high-end rough necks on land rigs. We are doing a whole bunch of things.

At the end of the day if we can perform a little better, we will get paid a little better that way. We don't exactly mesh head-on with Patterson in terms of the kind of rigs and kind of customers. It isn't like the two of us are like a duopoly in any sense. Duopoly, yes. We will go up as quickly as the market lets us go up without losing business or inducing new builds.

Pretty good non-answer there, Gene. All right. Keep after them. Good quarter.

What did Patterson tell you when you asked them the same question and I will adjust my answer.

They said it was up to Gene. Thanks, guys.

Thank you. Our next question comes from James Wicklund of Banc of America Securities.

Good morning, guys.

Sorry we didn't come down a couple of senses you had written.

Believe me, That's a pleasant surprise. Can you talk about the tax situation going forward?

Yep.

You had negative 10% tax rate for the third quarter. What should we use for the fourth quarter and what should we be using for a tax rate for '04?

I'd say assuming we increase profitability like we are assuming we do and absent anything that I would say is not really expected from Washington, we'll be in probably 10 or 15% tax rate next year.

OK. That's going to be a big change in earnings relatively not a big change affected by your tax rate?

Yes, but as you heard me say in the beginning, my emphasis and I think the metric we judge ourselves on and you probably should, too, is operating income.

We do. We do, there is just a lot of people still pay attention to earnings.

I think you probably could ask this question better of the Chairman of the House Weighs and Means Committee.

He will be the tax expert.

On this subject, he knows more than we do.

Gene, everybody is getting more non-American centric and focusing on international because it has some visibility. What does maybe Nabors do in terms of balancing current U.S. exposure and international exposure? Do you plan on shift through acquisitions, shift emphasis into international over the next five years or do you stay with the same?

First thing I would like to do is really getting balanced to put hundred of these, 125 rigs we have ready to work and not working in the U.S. to work. I would like to get unbalanced that way and then worry about the rest. The rigs internationally, we essentially move from the United States or acquired internationally.

And as you guys probably know there is one or two possibly sizable sales land rig fleets for sale or potentially for sale internationally and we'll probably do some of that, too. The most important single thing we can do is use the spare capacity we've already paid for in our divisor and put them to work. We have unfortunately, a lot of spare capacity domestically and internationally. We have more domestically and it is a good thing we did a pretty good job and went up twice the industry average in rig utilization because we needed to.

This is why we still have it. In Russia there are 1100 rigs running this year.

Yes.

How big of an acquisition do you have to make in Russia, how big of a market share do you have to make to have a Nabors size impact you want to have?

I don't know. I'd say you have an idea what we're making in Alaska per rig and you know, take that in half. Take that and third and multiply by 10 or 15 rigs and you have a good P&L center.

OK. Good quarter.

Thank you. Our next question comes from Mike Urban with Deutsche Bank.

Question on the US market. You had a nice pick-up in terms of margin per rig. I think the improvement in revenue per rig implied by the number is actually less than we valid thought. Is there a mixed shift in terms of the rigs be putting back to work or were they disproportionate in different regions or something else?

I tell you what I think and I don't like to go through this. I don't like this when I hear them. Basically, when you are increasing rig fleet. You have start-up costs, expenses that once you get to an equal level and stay there, you don't have them. One of our competitors was talking about why he went down a whole bunch, very well concerned start-up cost, etc. I think, I don't, $100, $200 bucks.

My hope is we go up in rig count so it is a while before we get hundred or $200 a day back. I think a lot of people don't understand the fact that I mention already, namely we have a couple hundred plus more rigs around today than we had before. Significant number is in the sweet spot.

I mean, between 1200 and 12,000 and 15 and 16,000 feet, probably 60 new rigs plus what we established and added and that is taking its toll on the rate of increase, the speed which we increase the industry will increase day rates and the percentage utilization may be the same as it was before, but same percentage utilization means you need couple hundred more rigs before you get the same movement as you did last time. Since last time, the rigs were 3 or 4 contractors asking, being asked by 3 or 4 operators, there was a buying frenzy, which we won't have that time.

Start-up cost should explain. More rigs spreading cost over more rigs. I assume that will go away as start-up cost.

Yes.

On the accounting issue you mentioned with the rigs for El Paso. Does that affect the sequential improvement at all there?

No, nothing at El Paso is in there yet and won't be anything in the fourth quarter.

OK.

Might be little in the fourth quarter, but not material. Won't be anything on the EMP side, nothing much on the drilling part side in this quarter, third quarter.

OK. That should do it for me. Thanks.

Thank you. Our next question comes from Waqar Syed with Petre Parkman.

My questions have been answered. Thank you very much.

Thank you. Our next question is coming from Bo Mckenzie with Stonegay (ph).

Hi guys. If you look at technology out in the rig, Gene, you talked about automatic drillers. I've heard people talk about rough necks out there, top drive. The service as a whole has had difficult pace paying for the technology adding. Can you see returns where you are adding that equipment to the rigs that are visible improvements in rates right now in lower 48?

I would say one big improvement is working a rig compared to not working a rig.

Yes.

And that's a fact of competitive life, in most businesses including ours. At the end of the day, you get paid one way or another. When you drill, I don't know, I knock on wood we don't do something bad, you drill a record well and the head of the company, CEO, tells you it is an all-time record and he thinks it is because of this and that, at the end of the day that is a plus one way or another. Same thing is true for the new rigs we built for Shell. It's not just in land. Same thing in Canada.

We have a new design rig working for Suncor. And other guys will be doing that kind of heavy oil drilling will look at that rig. The fact that we designed a rig like that in Alaska helped us get the Suncor job, etc. So, you spend this money and don't have a damn choice. Either you go forward and stay in the lead, if you can technologically, or you perish, in my view. In any event, some other time I will tell the story of how we heard about, how I met Brock Urshen. Now isn't the time.

Yes, along that front, one other thing we notice, use of bits has been picking up particularly in South Texas over the 2000 and 2001 boom. Do you see noticeable difference or something that might indicate 1100 rigs today is equivalent to some other number on a previous basis?

I think that has been true forever. It seems like forever, I've been in the business 17 years and it's been true all the time, particularly in Alaska, where the progress is just part of game. You know, I think in Alaska and everywhere, the more economical you can drill; the more drilling is going to happen. It is not the other way around.

All right. Thanks.

Thank you.

Thank you. Our next question comes from Scott Gill with Simmons and Company.

Yes, good day, Gene. Just a very quick question, Gene. I want to pick your brain little bit about Canada. You talked about fourth quarter, first quarter, when we get to the spring break-up in the second quarter what are your customers in the market telling you, they are going to do with respect to activity and how does the balance of 2004 look?

Balance of 2004 looks to me like it is going to be a record. However, our guys -- I don't really know and the Canadian guys had to take off, they are doing a major research here. But, the forecast they gave me, I hope are unduly pessimistic. They're talk being seasonality, pretty much what we have experienced last year.

So, a pretty dramatic drop-off in the second, modest recovery in the third. Fairly substantial recovery in the fourth and a full recovery in the first quarter. But, you know, I don't know what the story will be because I believe that in the scenario that we're talking about, I don't see or at least hope we don't have the same kind of drop that we had in the second quarter of this year.

OK. Lastly, Gene, offshore are there any more deep water projects that you're currently bidding or working on?

No, we have our plate full with 4 fairly substantial construction projects going on and we have one or two deep water modifications for these contracts coming up on renewal contracts, etc. I don't know that we can handle too many more right now.

OK. Thank you.

Thank you.

Thank you. Our next question comes from Bill Desland with Davidson Investment Advisor.

Thank you, Gene. In your opening remarks I thought you made reference to wells in Canada and deepening or at least the ones you are drilling. Would you go into some more detail in terms of what you are seeing there industry-wide or whether Nabors specific?

No, this is industry comment and I can't elaborate too much. One of the issues by design is our average depth in Canada is more than twice the industry's average depth, that's because we don't do the single, super singles, all that stuff. The industry statistics and again, I didn't spend a whole lot of time studying it, but the industry projections statistics show smaller number of rigs than they had earlier projections, but a larger number of drilling days, which means the average depth will go down.

The average depth is pretty shallow in Canada. So, I anecdotally, I can tell you we're looking-- still looking for more deep work and getting a little bit of it, but not a lot. The industry statistics seem to indicate it is moving somewhat in that direction already.

Fine. The reason that I'm asking is you point out Canada is so shallow. Is there some indication maybe those shallow horizons are getting drilled out, and which to some degree would obsolete a number of the rigs out there, but not the neighbors' rigs and just moved them right into your sweet spot?

We are willing for that to happen. I have no real basis for that. As you know from day one we felt these 12, 15, 18-hour, 24-hour 36-hour wells went our fort, and we have may be one rig in that, even our enhancement program and new build program is geared to another maybe double, small doubles, medium doubles, big doubles, but I am not really an expert on the small stuff.

Although we avoided that in terms of direct investment, and in terms of acquisition. If it goes the way everything else goes, I think that real shallow stuff is running on a treadmill with ever-increasing slope in my view. But people can make money at that, too.

Thank you.

Operator, we are in one-hour limit, why would we just take one more question please.

Thank you, gentlemen. The last question is coming from George Gaspar with Robert W Baird.

Yes, good morning. First question is on the Rocky Mountain. So little more color, Gene, could you scope in on what the Rocky Mountains will amount to percentage wise in terms of their total deployment going forward here in the fourth quarter, and maybe the early view for '04 and What might you be looking at on a margin basis on a gross margin basis, with additional rigs going in there versus your average that you're going to see for the fourth?

I can get you those specific numbers off line. But I can tell you this, that we've been having pretty heated discussions here every time I see something that talks about the Rockies were 100% utilized, and have got -- I don't feel it super logic, it would be 100% utilized there when we have 100 plus rigs in the streets that have you, so we are going to be moving rigs up there pretty good.

We have the pretty lead position there. And because of the supply demand and other things, the rates up there are better. And I think they'll stay better. So, we have a lead position up there, we are going to enhance our availability up there, and we have 100 rigs from which to pick to do that. You have to winterize them and you have to pick the right rigs that can be winterized and all that stuff.

All right

We will be doing it, and I think the consensus is that the, over the short-term visibility scene that is really one of the more promising areas we have. We, the industry frankly have a competitive edge there.

OK. And secondly I brought a question on Canada, you mentioned about potentially building some rigs for customers, including Apache. One it brings, it begs a question, you know, is Nabors going to have an opportunity to move any rig equipment into the McKenzie delta for winter drilling?

Number one, number two is, if you got a lot of rigs in inventory and you talk about building rigs, what is it, that causes a customer to require new a build when, potentially you could take something that's still in inventory and upscale it and move it north. What's the particular situation that causes a new build?

A humongous difference between a rig that can operate down there and a rig that is operates up there. I think there is possibility you have Rockies rig to go north with the border in Canada but as we just said the Rocky rigs are pretty tight supply. We're not really in most net adding, in some cases we are, a lot of what we are doing, taking worst rigs, the ones that work when every other rig in the industry are working and we're upgrading them.

We are upgrading economically. We are able to do that and put them to work in a contract over a two-year contract for Anadarko leaving one of these upgrades. Plain English, you get it paid off in two years. And you got a rig that's gonna get a first set at Alaska.

So, I'd say we have those kind of rigs and also have the new builds essentially new builds that are rigs for Suncor. Which, are for heavy oil dig 2 or 3000 AC rig working for. Those were just kind of we didn't have anything to upgrade them. So, a lot of this stuff is upgrading in Canada. A lot of stuff we will look at upgrading from inventory down here. That will be a pretty comprehensive upgrade.

OK. What about McKenzie, do you see opportunity for Nabors to do drilling up there in the winter?

I do, accept it is complicated. We are now looking at on an arrangement with one of the native groups there. You know, we've had success working with the native groups in Alaska. It is not the easiest thing in the world. One of the first problems you have, you have a rig that has one-third of the economics. You know, if you have to carry somebody significantly and more than one partner, it gets to be why mess with it?

But, we are messing with it and have given our Canadian guys the ability to start discussing an arrangement with the natives. They are coming to us because for example, Apache who is one of our best customers up there, they are moving a rig into the McKenzie delta and would like to work with us. They are. When they go to natives and want to use the native rigs, the natives say, why should I fight this, let me see if we can cut a deal with Nabors. If we can, we will.

Ladies and gentlemen, we want to thank you all for participating. We will end the call. If you have questions, please feel free to call us.

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your line.