Nabors Industries Ltd (NBR) 2003 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the to the Nabors Industries Ltd. fourth quarter 2003 earnings conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn floor over to your host, Director of Corporate Development, Mr. Dennis Smith. Sir, you may begin.

Thank you operator. Thank you, everybody, for joining us this morning. We will be discussing our fourth quarter and full-year 2002 results, as well as the outlook for 2004. We will maintain the same format we always do. Gene will give about a 20 to 30-minute overview of historical results and our outlook for the future, and then we'll open up to questions and answers and try to limit the call to exactly one hour.

Usually we can't get to all the questions, so if you don't get your questions answered just feel free to give us a call if you want to. In addition to Gene and myself today is Tony Petrello, our Deputy Chairman, President and COO, Bruce Koch, our CFO and Vice President of Finance. Most of the presidents of various business units, as well as Bruce Payton our General Counsel, who likes to send his regard, we'll be reminding you that we are going to be talking about forward-looking statements today, and while it represents our best view of the market as it is right now, things can certainly vary, but hopefully be optimism we'll express will be realized. So with that, I'll turn it over to Gene to get started.

Thanks. Welcome to our fourth quarter and calendar 2003 earnings conference call. Just briefly -- summarize, I think the year and the quarter was somewhere between very good and excellent. And I still believe as we have believed for a long time that this is a step in a multiyear upturn in our business. The income derived from operating activities, which you all know we used call-operating income, went from 170 million to 212, 13 million, 2002 to 2003 at 25% increase. Earnings per share went from 81 cents per share to $1.25 a share, and we had similarly good sequential story of fourth quarter of 2003, operating income was 65.8 compared 52.9 and the preceding year on earnings per share went from 33 cents to 42 cents. Before I get into our usual business unit by business uni comments, let me make some general comments.

The North American natural gas picture continues to look like we are in the right place at right time with right assets. The natural gas plan demand outlook looks very favorable for us, at least through the end of the decade, and you all know that I feel that price of 5.50 or 5.70 today is better than the price for us in the industry have been 7.20, which we had a while ago, and I think $5 would be just as good or even better. Similarly, I think a $25 to $28 crude price would be maybe even better than 32, 33 prices we have. Although I don't see anything rushing to push down the crude price.

This basic infrastructure has already transformed or translated itself in our Canadian markets to very high levels of utilization, very high margins and very high operating incomes. And as I've said for a while, I think there is or there are the makings of a similar story the lower 48. Broadly in the Lower 48 this past year, the industry was up around 30%; we're up around 65%. We had 35 plus of the increasing rigs for a variety of reasons.

The kind of drilling is getting more into our bailiwick, the kind of customers are more into our bailiwick, and last and I hope not the most important is we have the most stacked rigs. Anyway, we see the rig count increasing in 2004. I know no more than anybody else, but I think we're basically optimistic and everything I hear from our customers indicates that the optimism will likely be fulfilled. In plain English, I see at least 75 incremental rigs for the industry compared to we are at now by the end of the year, and hopefully it will come sooner. I further believe that we'll have - officially have perhaps 35% of the increase from here and I don't think we'll have 35% to 40% of the increase going forward. Similarly, we're getting to the point, and I think we're at the point, but certainly we're certainly at the point in getting to a better the point, where the supply and demand balance in the industry including ours will give the industry and ourselves more pricing power.

We're not looking to go berserk on pricing, but the average margin in the lower 48 for us now we'll get little later but it's around 2200. I think I told you many times before 6200, and we'll be happy if we-in the cycle we get halfway there, and be happy if we -- I'm pretty sure we're going to something pushing 3,000, and the sooner we get there, the better.

We are a little bit more conservative than -- in our projections. We'll take the results that are better than our projections, don't have a humoungous price increase short term. I think the other thing I want to talk about is just in general, where the growth came this --last year of 2003, versus 2002, and where I think it will come next year. This past year, IE 2003 compared to 2002, we had growth in every in subtotal of contract drilling, -- frankly except in the U.S.A. And that added had it at the end of the year but at the beginning of the year, we had comparisons against high and declining growth earlier numbers in any event, that was the story. We also had a pretty sharp decline in our manufacturing and logistics, which includes Seemar, Ken rig key growth services into line technologies.

OK. That's a fact. What we see for next year, we see everything increasing, except Alaska. I think we've been saying for a number of quarters, we're doing great but the state isn't doing so well, and it will be down for year. Apart from that, every other unit will be up, and interestingly, in terms of the increased operating income we foresee for next year, pretty robust lower 48 is going to contribute. But in our case, it won't be as much as quite half of what we anticipate our overall operating income growth. If it does better than that, that, will be fine. But that will be because it grows be faster, it won't be because the other groups are not growing as fast. I'd like to just make a little emphasis on our off shore business which I'll talk a little bit more about. We went from this year - last year we went from horror to something decent so it was a decent increment.

But this next year we see we a pretty good increment. A lot of it is pretty visible in terms of concrete visible in terms of concrete contracts, we have on three brand new ridge and one major refurbish, majorly refurbished rig. Similarly, we're going to have increases in Canada, but in Canada, a new record and all that stuff, but it will be much less important in terms of the increment 2004, compared to 2003 and every single operation on well servicing will continue to grow pretty readily, international will grow readily.

If international have some up side, which we people will finally catch a break on the up side with next year. Let me go through it company or operating unit by operating unit. (inaudible) talked about, you can see this as well as I from the stuff here, but the operating cash flow, incidentally, I think relatively soon, we're going to switch from the operating cash flow to operating income. I think it makes life income and we went into this El Paso thing, we got a complication on how the difference between operating cash flow and operating income, which it's a gratuitous unnecessary complication. So, pretty soon, we'll probably switch to operating income.

But at any rate, operating cash flow essentially the same in Alaska this year, this quarter versus last quarter. We'll have a substantial increase in the first quarter because that's seasonally the high but substantial increase will be well below the profitable product of the year earlier and rig count, doesn't tell the whole story. The rig count went from 63 to 73, in first quarter be 83, but there was a whole bunch of stuff including the construction stuff and ancillary stuff, which isn't there now. Basically, I'd hoped, told you last time that the Biscus oil project should provide some relief to this downturn, and it will, but it's been delayed, a couple of quarters. Anyway, I think, what needs to happen really, in Alaska, in my view is there has to be more farm outs and things like what BP did in the North Sea, I'd like to see them start to do to some degree in Alaska. They, near the major (inaudible). I read this morning that pioneer Armstrong just formed in some properties up there. That sort of thing is going to increase a bit. In the mean time, Alaska, probably will get good sometime in the future, but this is 2004 is not going to be. But in spite of that, we're going to do fine.

Now, let me turn to ND USA. The cash flow from operations in the third quarter and the fourth quarter were almost the same, within a couple of $100,000. We look for pretty sharp increases progressively through the year, little smaller increases in the first executive quarter, but by the third and fourth quarter, we're looking for much bigger increases. The rig count in third quarter was average 157 rigs, was 168 in the fourth quarter and we're thinking 175, 176 for the quarter.

We were actually up 176 right now and we think that by the end of the year, we should be fourth quarter at 2005 and I think that's relatively modest of our projection in terms ad perception of the infrastructure. Cash flow per rig day. This is a little complicated, but I'll little lay it straight on you. Last quarter, we had $2,200 a day. This quarter, the number is $2,100, but on a normalized basis, adjusted for couple of three things, it would be at least 150, perhaps $200 higher and in order, not that in order its important but probably importance but probably in order importance, we located a bunch of rigs without contracts to serve the markets, pretty obvious where. And where, and we took the P&L hit in this quarter. That was probably a million and a half dollars.

Then we found out and I'll tell you tell you a little bit about a little bit about this later, that our safety record our safety was better, so record was we had smaller accruals for had safety and health and that sort of thing, we recognized this in the third quarter, so third quarter. In the other words, it wasn't smooth. We took less of it in the fourth quarter - than would be normal. Ramson, I think we're eliminating, some of the net debt (inaudible) deal for example beyond 20% of deal we are eliminating 20% of the profit on our rig. We'll get them back at the end of the project, but temporarily, it's gone and out so we restricted some of our trucking.

Next a long story short, I think the realistic number would I think be like20, 23. And we're looking for -- you know, I think we could do better. Some of the stuff better, I've been reading by some of the cell side guys and some do better than our competitors saying this, but I'm looking for first $500 a day increment, incidentally $500 a day times a couple hundred rigs is not chicken feed for the year. When that a will come, I don't know, but it should come before the quarter, and that will perhaps earlier. We're aggressively looking at increasing prices, again, not crazy, but modest increasing of prices, reflecting the supply and demand balance and required return on investment.

I think all our deals are going well. Our technology, basically our overall investment, particularly in 48,is geared more quality than quantity. We'll be spending money on improvements, hydraulic power, automatic drillers, top drives, stuff that goes with top drives for remote diagnostics, that sort of thing. Money, time, money and effort to improve moving rights, rather than adding rigs, per, side. And, you know, I think it's pretty obvious that this is a cyclical business, and we want to have larger percentage of our rigs working in the down cycle, and you know, maybe even - maybe 10, 15 years from now, if there won't be as there many rigs working works as there are now and they won't be ours.

We will talk a little bit about Ramson. Ramson is our description of our ENP program. We have had a small program for a while. And the small program for our standards for last year was about like $5 or $6 million in operating income. Then we did this well publicized deal with El Paso. And El Paso, plain English, we've invested 50 million up to date, and we're projecting, and I think it's relatively safe that we'll make that money mostly back in operating income of 13 million this year.

I think this is a good deal. I probably should remind some of folks that El Paso, and its component parts; we traditionally were the major rig supplier. And when we started with El with Paso on this kind of deal, we were not the number one technological vendor. We weren't the vendor of choice initially, which was not a happy story. But I think over the course of over the course of the last 12 the months, ending maybe three, four months ago, we got to that point. We moved rigs as quickly, ROP were up. We've given them everything they wanted for us, so I won't mention names, but some of the higher-priced rigs don't command any premium at all right now for us, and we're getting a little bit more for the higher quality rigs we are having. And this is anecdotally or symptomatically of the direction we're going to move. It's going more we're going to quality, move. It is going to not more quality not high.

Canada, I don't want -- one of the things I'd like to point out that, it's really whole North Americana, you know, and we feel it's an identical story. And one or more of competitors blends in the Canadian day with the lower 48-day rates. And you know, but they do or don't god bless them. But just for information, if we put our Canadian rigs in with our U.S. rigs this last quarter, our average margin instead being of 2200, would be something like $3,300 a day.

Anyway, what's, that basically says, Canada is kind doing pretty good. From an operating cash flow viewpoint we went from 18.1 to 33 million in third and fourth quarter. In order to the seasonality big time Canada.

Our first quarter, frankly we're looking as I think we told you before at least you up 30% from the first of '03. The rig Q3, are 39.1, Q4, 47.1. We're targeting next year something up the next quarter. First quarter next year something up to 60, and to when we spoke Alaska two days ago, they had 69 working, having had just 70 briefly. The cash flow per rig day in the fourth was $6,200, U.S. dollars per day, up from $4,200 in the preceding quarter and $4,400 U.S. the U.S. in the preceding Q4 2002. So basically the outlook is good. Is qualitatively, it's good. you know, really well we're with major customers. Had an interesting development, minor but maybe interesting.

Burlington announced last week that because of the -- I and I take them, they're a big good customer, whatever they say, I believe 100%. But basically said that because of rise in the Canadian dollar, which is like 20% over the preceding couple years ago number, they diverted some cash, -- they haven't changed the total North American budget, but they've switched some develop exploratory some budget money from Canada to lower 48? I think that's kind of interesting in a couple for one I think it isn't like starving for prospects lower 48, and this, This has been kind of -- I think that's interesting. It's one market and if the shackles told me a long time ago, if long time prices go up for services, they're not going to drill us much in Canada. And in we didn't raise our price but the Canadian but the dollar raised it for us but they're we're doing well with moving well there all of our customers up Apache, we have essentially all the work we're building a new kind a shallow rig for them. Suncor done for them.

We are doing really well there both in terms of numbers produced and evidence of general acceptance and improvement down the road. Nabors off shore, I think as said earlier, the important thing we've already moved from near death barely alive in the last couple quarters, but more quarters. But more importantly, say the offshore, the numbers went from cash flow from the third quarter, of 5.6 million to 9.6 million, and let me put it this way. I think by the fourth quarter this year, we should double or close to 9.6 million per quarter.

And you know a lot of that is visible. It's firm contracts, for our firm investments that are getting built on time, on budget, etc. And I think the other part of this is, quality customers. So that when somebody goes for an important job, whether it's Kerr-McGee or Murphy or Conoco Philips El Paso, we're jazzing up a barge rig, our offshore folks get called. I think there's one of thing I'd like to mention. You know, I could take a lot of time on each one of these things, and I won't.

Nabors offshore had some pretty bad safety experience and records, and I think they're to be commended. Money is not the issue as you know with safety, but a simple measure is what percent of payroll operating dollars goes to cover our workers comp. And they went from something around 30% a couple, of three years ago to 10% and to going down. So number one, we're doing a much better job of protecting our employees. And difference in 20% of payroll is not chicken feed in terms of P&L as well. So I think they're doing really well. Did I miss -- let me go back to Well Servicing. Well servicing has been a good steady business with a high return on a high investment. We don't have the historical correlations that we deserve -- no, that we used to have between high commodity prices, particularly oil price and activity, but you know, the operation is doing well. We're up this year. Let me switch well for a second to operating income to $47 million operating income. Then every to reason to believe be up to 15 to 20% this year. And there too, we're not making the headlines as the much as one or more of our competitor but we're emphasizing quality and technology compared to volume as well. And we have a new rig and information technology, and related stuff.

Let me move to international., we had a drop this quarter, which we warned you would likely be the case. We're going to be increasing in the future, I think pretty effectively. I won't go into all the details of promises but basically, we should be up 15% or, more 2004 versus 2003. And then we have upside beyond that with the things that are almost in hand, and I had a list three days ago of India, Algeria, Yemen, Ecuador and I think two of those are now in hand. And then beyond that, we have active programs to get involved in Egypt and I think we're talking about incremental Malaysia, too and elsewhere, there might where we operate from.

Briefly about cash flow we spent a lot of money this year. Our Capex was well above. Depreciation. We depreciation was 226; we spent almost $300 million Capex, not counting the 52 to $53 million that we have invested in the El Paso program. And in we spite of all that, we actually generated cash of about $150 million. What we did is we borrowed $700 million on that zero-zero, which is essentially free. I hope, I you know, it won't be free when the stock hits 71, but that won't be a big problem for us. We paid off 500-plus of debt with that, so we net borrowed $140 million, and we increased the cash at the end of the date.

We also paid for Capex, we paid increased working capital for increased business and we still with ended up with more cash, ended up with more and I think it's going go that way, even more significant way way down the road. I think talking a little bit about tax rate; pretty sure bit this will come up in the conversation. But next year, we're reckoning something between 10 and 15%, this year it's essentially zero. Talk about briefly, I skipped Canrig EPOCH and Ryan.

In general the aggregate was a little bit of a loss in 2003. And it will be a bit a gain or about the same amount gain next year, with some pretty good upside in terms of some of the other things they're doing that don't generate a ton of profit for, like the automatic automatic driller, soft torque, we also make make anti-collision devices, not in one of these entities but one our Canadian manufacturing entities, and overall they're and doing well. Let me quickly summarize.

Taken the bulk of those 25 minutes I wanted to take. We are optimistic, even bullish over the last year and happened that nothing's happened a little change our view my view on this stuff. I think we're getting into supply demand balance that's demand balance going to be that's going to be good for pricing. I don't see extraneous supply materially altering this picture. This picture. There will be supply, but I don't see a big alteration of this picture this picture for the next five or ten years. And I think we're going to make appreciable day in it. That will help. Just make a couple of the comments.

For Safety it's important that we are making enough progress so that I can first time talk about dollar savings rather than saving people, which is 20 times more important. But we are saving money there, and also the insurance market is softening a little bit. We haven't seen that therefore we might see some of that starting April 1st next year. So all - the infrastructure is there. We're positioned I think superbly with our cost of capital, the assets where we have them, the people where we have them, the markets that we're in, and I'm looking for a robust 2004 and I don't think that will be the end of it. Operator, we're it. Ready for questions and answers please.

Thank you, sir. (OPERATOR INSTRUCTIONS) Thank you. Our first question is coming from Roger Read of Natexis Bleichroeder.

Good morning.

Hi.

Just wanted to take a little to take a stronger little look at the US offshore in terms what is the is the timing of the contracts that come in there?

-- this 1-1-2004 for the 04 for the Ker McGee, this is when they go on the payroll like this. The Murphy contract, the 4-1 this year

OK.

Conoco Philips, 6/20 this year, and those are the new builds. And the barge, I think the we're now talking about February 15th maybe March -- March 1 for El Paso, that's the we now call it victory under that 3000 on current forge.

OK. So that business actually should ran pretty well on the first part of the year, not at so much a second half part?

Well you'll start getting it in the second quarter and then in the third yeah it will be all in there by the third quarter. And much it will be front-loaded. Right.

OK. And looking at the US cash margins, I mean, you gave us some good some good comments on what on what happened in the third quarter and the fourth quarter. As you look into the first two quarters of '04, anything else that's going to be a little unusual or do you think for the most part it should be a normal progression, as the rig count assume the right count continues to creep higher and the mix goes your way, kind of how quickly do you think you can get to a 3,000 level?

Not as quick as I'd like. But I think, you know, we're going to moving rigs because the markets aren't all getting to capacity concurrently. We're not the not the only ones in the world doing it either, but we have a pretty leading position in the Rockies, and I can guarantee you when we did everything we can to keep it. Whether or not we have a million and half.

That's where we get to our P&L or a $3 million hit; I mean I could care less. We're going to be where we're going to make money long-term. I think the other thing is as the usual minor junk in the first quarter, social security discount workers all that junk. But that's all trivial. I think basically if the market moves the way we hope it is, and if supply and demand gets to where we think it is, and it's getting there already by regions and by rig quality and size. But as that broadens out, I think we'll get. I can't tell you when. I can tell you that we're going to pretty well if it takes till the end of the year if you get high 20's. And I'm perfectly prepared for us to do better.

OK And final question on the international piece of the business. It's been a number of things that have gone on there, don't really want re-hash that, but looking into the first half of that. What - what do you see in terms of contracts that should re-start? And the comment was in the press release, and thanks you get going again. Could you kind give us the highlights of exactly what are the marquee contracts?

I don't I was at - let me just tell you, I think rig - our mace rig in Trinidad is probably the best platform rig area. I don't know we usually better with only three quintals not (inaudible) mud pumps, dual fuel, engines, let me try on a bit. And that had two jobs that we fully expected it to go to, and they both disappeared. But figure you have pretty high hopes for that pretty soon. I think there is reason to be somewhat optimistic.

Let me hear that is like a margin of what, 20,000 a day or something? And there are a couple of other rigs. We've worked for Ray Hunt in Yemen with that rig 1 forever, and they had a problem in renewing their concession, which they finally did, but the rig got they finally did but the rig got laid down during the negotiations. That probably won't come until the end of the year. And Algeria we're going to have couple of more rigs working. In general, there are two things going. One is, everything we're talking now, with now with the potential upside of maybe 15% over the 15% that we're projecting for international, rigs already there, it's a matter putting them to work.. I think in addition to that, we have prospects, as I mentioned, which will take CAPEX entering Egypt and new rigs in Malaysia, say, and things like that which will be later in the year, but they could be sizable. And they're kind of on the front they're kind of too.

OK. Thank you.

Welcome.

Thank you. Our next question is coming Marshall Adkins of Raymond of James.

Hi Gene. Let me dig a little further into these margins were you went through numbers pretty into the quickly. But, last quarter you were 2200 a day, you reported 2100. But you would have been probably couple of hundred higher near 2300. Is it weren't for these expenses.

Yes.

And did you also see looking for $500 a day incremental by the end of the year?

No I - only the - straight our internal forecast have that by the end of the year.

Yeah.

You know, in terms of what's going on in the market place, what our competitors are saying, what some of you guys are saying, that could easily happen before that, we're prepared for that for that to happen. We have a pretty good P&L forecast and takes till the end of the year. But you know, we've had conversations yesterday and this morning about doing it a hell of a lot quicker than that. And if I believe your stuff Marshall, should happen already.

Yeah, but - we all we think it should OK. So probably - probably, you know, that $500 day by the year is just being conservative.

And also, we're not saying that we're purely price-takers anymore. What we're saying is we're aggressively -- we have the most spare capacity and we want to put it to work.

And currently that's a meaningful change from kind of where you've been in the last nine months.

Exactly. I think we're at the point where we are pushing 200 rigs and 200 rigs stands 500 bucks a day. We would like $30-odd million and, you know, if we grow, 10 rigs slower than otherwise would be the case. It pays, it didn't pay when were at 100 rigs. I think it pays, keep both eyes on the ball now (inaudible).

Great. Couple other quick ones here. SG&A run rate was a lot higher than what have been running. Where do you see that going forward?

Well, a chunk of it is, the Canadian dollar. That's the easiest to explain. I see it a little higher, but not as high an incremental as it was this quarter.

So just bump up where you were this quarter modestly going forward?

Yeah. Maybe even not -- maybe this quarter going forward will do. If we have the forecast, Bruce?

While he's looking, DD&A also, is that the EMP stuff?

Yep, I would say the big stuff would be increased up.

I mean Capex we know went from -- depreciation from 225 to 250, and the rest of it is -- I mean, for example, on one of El Paso deals, if invest 100 million, which we'll be slightly less than that, will get back 117 say, and amortization at the end of inventories going to be 100 million. And one of the reasons we are going to switch on operating cash flow to operating income. As the accounts say that 100 million has to be one stuff. Operating cash flow, Tony and I don't want to take a bonus based on that.

I can understand. All right. So DD&A is we only got 66 million, that's going to continue ramp up modestly as well.

But it's going to end within 15 months on the depletion part of it.

Right. So run in $270 million plus and minus bad for run rate next year?

Depreciation I think it is more like 250 or 255? 255 to say.

OK.

250 from 225 this year. The increment is just depletion. You it's the cost of goods against the crude, but they count it differently.

Right, Right. OK. Great. That's all I had, Great, that's all guys. Thanks.

Thanks

Thank you. Our next question is coming from Kurt Hallead of RBC.

Good from morning.

Good morning, sir.

Just wanted to flesh out a little bit here on this oil and gas. You were in about $9.5 million gas in the quarter. If I missed that, I apologize, but could you flush that out for, what you expect full-year run rate in 2004, marry that up with the cash flow one more time and I apologize if you've already gone through this.

OK. I think from an operating income, what we've said was our basic program, (inaudible), is like 5 or 6 million a year and if that should continue about that level and we get that returns, we don't do it at a lousy, we don't do lousy NP projects to get rig works, but we like to do standalone ENP projects and get rig work and we've been doing that. And you know, obviously, when we put the money in, we're not going to get up a lower than market rig rate. And the El Paso thing, there's going to be two pieces of that. One is, this they call (inaudible) project, product, Vicap, excuse me.

And that's the one that Lehman invested in, we invested in and we took 20, Lehman took 50 and El Paso has got 30 in. And that stuff has a mixture of development drilling, exploratory stuff and stuck in between such that they could classify it as a farm in, i.e. not depth because they couldn't do depth with their restrictive covenants and so, basically, we're going to spend the 100 and we're going to get back, or some fraction there of and we're going to get back 1175 for that, and it's going to be accounted for, at the end of the day, 17 is operating income.

In the meantime, there will be different be things. And we're also in a modest exploration program with them with the basic theory of that was but we would be willing to risk some of 17 million on exploratory stuff so that, we could end up with some oil and gas in this case. Gas in the ground, not just the return on the 100 million and also, you know, having done a good deal, we also have the side benefit of having a good position on the drilling side. And we can give you the detailed numbers by quarter if you want and what the estimates are and some of it is in estimates because we're looking at what do you do. You again use, that the future market for six months, then you use something like 4.50 gas or whatever you do, you know, that's what we're doing it on or something like that.

Well, I'll get that from you, I'll get that from you off line.

I think the bottom line is the big program is essentially in O'Breiner and we'll get the money back reasonably quickly and the returns will be almost guaranteed double digits. Nothing is guaranteed, but almost guaranteed double digits. And some of that return were, if we investing in exploratory programs, which probably will show that return them more. But, there is a downside risk in these exploratory programs that is not in there's not in this diagram.

Now if I finish stage everything that's been discussed so far this morning, what you're basically telling everybody pretty comfortable with the First Call consensus number out there for two bucks, and if we get any up side whatsoever on U.S. pricing, we could do little bit better than that, even with a 10 to 15% tax rate. Is that right?

Pretty close. Yeah, I mean, we don't know what it is. I would say the range I've seen is like to a buck $80 and $95, I don't know what the FirstCall is., buck 80 to $2, and I would say that but we to two have no basic thinking that we shouldn't be without comfortable with that, without super heroic increases in margins.

Right. And even with the 10 to 15% tax rate.

Yep.

OK. Thank you very much.

Thank you. Our next question is from Scott Gill of Simmons and Gil Company.

Good morning, Gene.

I wanted to probe and your comments here a little bit on your outlook for the U.S. activity Company. You said earlier that a lot of that optimism stems from conversations you've had with your customers. Can you just elaborate on that a little bit more? What specifically telling you that would indicate uplift of 75 rigs a year?

That's year?

That's pretty hard, because the conversations have been over a period of months. I would say that that Burlington for example, specifically, I spoke to Burlington two months ago, and there around that they were was a rumor around going to cut back their drilling in the United States and Canada, because they were to get exceeding -- and they wanted anyway, to make a long story short, I spoke CEO, and he said that you got to be out of it.

They told him what they count next year's budget and they grow dramatically in Canada and some in U.S and big increase in Canada. And what they recently said is that they still have a sizable increase to the Lower 48. We've talked to, you know, the new talked to the top management, E&P person, El Paso. They're going continue their programs.

They're going to - they feel to -- they that the deep stuff or at least the chairman least the felt to modified by the new E&P person that the deep Shell stuff was their competitive advantage. And the radio financing, the other stuff was pretty good because it sort of truncated flush early production, you know, so they lowered the treadmill that they had treadmill that they had to run on in domestic.

Anyway, so I think that will continue. I have no reason to believe that Anadarko won't do what they should Everybody is going berserk in Canada, and some of those guys are going to be drilling here when they've cut their Canadian stuff. I don't have anything specific. I like your analysis of how much spending was relevant to the drilling, and you said it was like to 23% that was relevant to our industry and the lower 48 this past year, right?

Right.

Which is much higher than anybody else, and more in line with what we think is going and you were--I'm quoting you as one of the sources for my opinion.

OK. I guess one of the other things I was curious along those lines with respect to the E&P customer, last cycle, you entered into some contracts for, you know, working with specific customers to lock up certain rigs and I don't want to use the word "Guarantees," but kind of ensuring that you had rigs available to them. Any conversations like that going on in today's market?

Not yet as much as I would like. Maybe I can skip as much as I would like." I don't think there is a ton of that yet. I think you know thousand horsepower rigs; good thousand horsepower rigs are getting relatively scarce. There are anecdotally increases in 3,000 horse power rigs, and we've got to jerk them around from California to wherever they're required, so, I mean, it isn't like there's a year ago, where every kind of rig was available a year and every kind of market. But I don't think any operators really worried terribly about rigs. Although you know, there's a couple of guys who said keep this price or modestly higher price and keep it through June 30th, and you'll have the business. A few of those. But nothing like what happened in 2001. And I don't expect anything like that to happen.

OK, Gene, quick questions on Canada, if I may. What are your expectations for cash margins in the first quarter for your drilling rigs?

I'd say even where they're at now or maybe 100 or so higher.

OK. And the work over rig business, well service rig business in Canada. How does that normally compare to the fourth quarter or during the first quarter?

First quarter normally a little better.

It is driven by rates or activity?

Mostly activity. The rates are pretty high in the fourth quarter and the first quarter are modestly high. These rates are also seasonally impacted. They have boilers and stuff like that we don't have down up there that affect the margin seasonally. But the first quarter will be better, somewhat better. Fourth quarter is great. Let me see if I've got it in front of me. No, I don't have it but the activity will go up, I think, pretty well, maybe 15, 20% in activity in Q1 and the rate probably 5 or 7%. Do have it in front you, Bruce?

couple percent.

A couple of percent. It's already pretty high.

Thank you so much.

Right.

Thank you. Our next question is coming is from Kevin Simpson of Miller Tabek.

Hello, Eugene.

Kevin.

Can you talk a little bit and I don't know if it's possible to do this in a concise way, about, the assumptions going onto the 10 to 15% tax rate for '04 in terms of (inaudible) and then what changes, where we are, what kind of risk there is that you're going to lose some of the status that you have?

Yeah. You know, yes there is legislation pending in The House of Finance Committee. Yes it's the Thomas committee, whichever committee that is, which is the controlling committee there.

Ways and means.

Ways and means. And, you know, under that, there is some with the amount of stuff we have internationally, and the setups we have internationally and you know, the little bit of double dip in Canada and all that stuff, we think 10 to 15 is reasonable considering everything that's proposed so far. And I won't go through it but the accountants go through it, Bruce goes through it and all that junk I think we hear a lot of this is deferred taxes that get eliminated or deferred even further because, you know, actually in cash taxes, we have so much depreciation in Capex that, it's not a humongous (ph).

Real factor in cash. That is little bit more cash paid because of the mechanism of interest, etc., but I think, it's, I don't think there's humongous risk on that. But, you know, it's a loss and I think the risk is less with the, roughly with the republican administration, because they're more reluctant to retroactively change the law. That's it and I don't think there will be anything more rigid than the new regulations, which restrict the kind of interest deductions you can have in the US. I mean, they're making it more difficult than they had been.

But I don't think (inaudible). I've heard nothing about proposals to make it more difficult than the Thomas proposal and they've eliminated or reduced substantially the ability to carry back, carry forward, all that John first. I don't think that will change if any worse we now have.

And if you look at '05 will just when it grabs bit does it migrate up a little bit assuming as many of us do that no - we should see substantially higher US. Income in '05 than '04?

A little tiny bit, because whatever tax savings you work don't work on the incremental stuff generally, Kevin, so maybe, maybe 10 to 15 goes to 15 to 20 or 15 to 18 like that.

OK. And on the international -

A lot of the international, I mean the bigger of the international thing, the lower those tax rates generally, as you know.

Yeah was it with or without?

Conversion.

Gary I was I was actually swinging over to over international, you've had you now more, you know, short falls from, you know expectations and getting it even though you know over time, the number has gotten number's better.

OK. In any of these start dates, do of have risk of missing and having anything happened like happened in Mexico with, you know, late payments?

Well, the start dates I gave you were U.S. off offshore.

Right OK So, no late payments there. So if the amount I want executive won't be right on?

Sorry about that.

Anything internationally where we had that situation

No, I think the things we mentioned to you, the up side things that I mentioned are all sort of recent quite likes rig one will come at the end of year, the rig what 3 -

Is Rig 5 in Yemen.

Yeah.

And what about - what's the measure in 301, it looks like head chip?

I knew it was not, 803. Is full and worked and 801 the -- 803.

We got certain in Egypt that would be in - that would be in June.

Yes. Hopefully. That's been more accurate.

I mean what we have is everything there. The plus 15% is stuff is with -- the rigs are there, so it isn't a question of spending a ton of money and moving them there. And in the second 15% and 20% would involve stuff that we don't have. But you know could have the second 15 that, you know, could to have a date that could 20% could have it backed it could be late or early.

OK. And I guess back U.S just quickly, in order to kept them well you know kind of hashed out see. Do you think it's going to be regional, you know, base but you bit you see rig rates improve? I assume the Rockies as better because, you know, if you're Rockies moving rigs there, you've got to be get you are moving there for a higher returns?

Exactly return.

Exactly right. In other words, the unlike other things, the intuition that you have on this supply and demand, it's a free market is right. I mean those rates are better, and that's why we're moving rigs there. Bluntly, I want to move rigs there before contract because we can swallow the million and a half hit or whatever it is.

And just from that specifically, you ate you're going know million and a half. Are you going to eat another million and a half this quarter? -- as well as you're building range, next quarter up there?

I hope. So I mean, we don't have it right now, but if these I told these guys I don't want to saying we're at 100% ever want capacity to a region when at 65% for the whole damn company. So I hope so. I don't think its always once up there we're at work and I'd like to spend another $5 million moving up there.

So if we're modeling -- and let's -- shoes modeling of those who are the modeling the company, that -

That's probably what is reasonable to continue to bake that bake that into the forecast even though it's not a big number?

That's in -

You know whether number was too conservative on price increases or not, , but I would say that it's sort of in the cake we're baking internally, which is generally speaking, a little less bullish than all the cell side guys and apparently all our side competitors. We're not going to do all anything deliberately to inhibit the to bull, I can tell you that. But with respect to your specific question, if the incremental rigs and the Rockies get used we'll move the others up their with contracts. And if that P&L hit, you know, I mean, what's the God damn difference in running a company whether you have capitalized a million and amortize have it over X years, or you don't capitalize it will get the same economics. We're not going not to do it differently because of the P&L.

All right, that's it for me, thank you.

Thank you. Our next question is coming from Ken Sills of Credit Suisse First Boston.

Good morning Gene. It's still tracks morning. Wanted and to switch tracks and talk more about where you see the company going strategically. You know, I think we'll all be pretty ecstatic if we've got a five year gas cycle going in front of us, and it seems like oil fundamentals are pretty good.

Yep.

You know, you guys have done a lot consolidation in U.S. land, you've c got some positions in supply boats and services and work overs. Where do you see the best opportunities going forward in terms of you know trying to consolidate or deploy your capital for what you see the world going to over the next five years?

Ya think that's a good question. I think domestically, I don't see it see consolidation. I see deploying capital to enhance the quality of our rigs, make them more effective and market position and margins because of the, We have got pretty sizable Capex offshore domestically which deliver good sign. and where we can organically grow like that in response specific contracts, where we win a competition and you know, we're awarded the contract, that's great.

But I don't see, us buying any rig companies in the lower lower 48. In Canada, similarly I see organic growth. we hit 14% of the market, We have a slightly of the higher percentage of bigger rigs and almost nothing in singles, and we had good success with new AC rigs, only done three or four but along again. We did on the basis it could compete better in market now that's what the every one of them got locked up of into a contract.

So we're going to do six of those this year.

We're going to be obviously the world knows we're going bidding on the Global Santa Fe International they're good rigs, and they're in markets and it's maybe consolidation, but we have zero operations in Kuwait, and that's a big operation very little but, aspirations in Egypt, that we do.

That sort of I would say where we could add quantity if quality, which that possibility had.

We haven't much trouble had much trouble spending $300 million this past year, and you know, if we have good returns, I don't mind spending it next spending it next year. Certainly we have plenty money to do. Even though this coming year, we'll end up paying off $300 million of 6.8% debt, and in 2006, we pay some more debt. But we got plenty money.

And I think, therefore, the question will be questioned in.

Its quality, not a good quantity. The areas question. Quality not quantity, Canada and international.

And any thoughts on split between, you know, sticking with the core land business or moving more into service? Or I Obviously you've offshore in the U.S. would be you spending that internationally?

Just well I think we've spent money on technology of various sorts. And I think some of we've done internally or of it in combination with outsourcing and in sourcing, like the automatic driller, drilling algorithm and working with Noble on. We're working our own, I guess we're doing our own soft torque, we're doing own anti-collision things, we're buying stuff various preferred vendors like Heyen, Rough necks (ph). And we make our own top make drives. That sort of thing, and incremental sophistication that value like remote diagnostics anything starting with top drives and synchronization mud pumps, that kind of investment we'll make from now dooms day. And then some of them get the create (inaudible) extra rigs, that's where we get for the specific tool or we get the rig with better rate and more employment.

OK, thank you.

Thank you. Our question is coming next question is coming from Terry Darling of Goldman Sachs.

You missed out Terry.

Hi Gene how are you?

Good.

Just wanted to get your thoughts on Venezuela, some rumblings so we may see a pickup there, particularly in the second half of the year. Are you seeing any signs there? Then back on the acquisition question can you help update for your thoughts on Russia?

What was - I am sorry, the question was?

First question on Venezuela, second question on Russia. First question, with Venezuela on activity pickup, and then Russia on acquisitions.

Venezuela, we were the first guys to in getting zero in. We still have couple of rigs -- We have rigs in the area that we'd like to move there we have active investigation of what's going on there, but you know, the fundamental story is the same as the it's been for two story is the same or three years. They have sharp decline --, they have a lot of hydrocarbons, just logical they're going to explore them at some point of time exploit them. And we're ready, willing and able we have kind of Venezuela connections that might be useful that we haven't before; we have lots of sophistication we didn't have before.

There's not an issue, I can tell you that. And Russia, you know, Russia we're pursuing, you know pretty aggressively, and I think, you know, it doesn't pay for me into the details, but if something is done in Russia with drilling rigs, we bloody lost to be doing it. We got the expertise, we have got the connections, we have got the equipment and all that stuff, but you know, if we have something to announce there to this calendar year I'd happy and it's not in any of our projections.

OK, thanks. That's all I had.

Right. Operator, I think we're right at our time limit so maybe we'll just entertain one more question, please.

Thank sir. The final question will be final question coming from James Stone of UBS Investment Bank.

That is right in under the wire. Gene -

We didn't realize it was you, a huge area otherwise -

Otherwise you would have cut it off?

I'm just kidding cause your name is here.

Yeah, yeah. You mentioned that the shift that Burlington talked about, perhaps moving some dollars in Canada down to some of the U.S., for the Canadian dollar --

I just read that. I didn't talk to them.

Anadarko made the same comment this morning, and I just wonder if, you know, granted they're both good customers and if they pick up your rigs in the U.S., on a rig basis, volumetrically, there is a margin difference between the U.S and the Canada is so great. Are you concerned at all about perhaps so your outlook great, are you concerned that perhaps for Canada and your outlook and is - may be not shaping up maybe as strongly as you expected it to as a result of that?

In our unique case Jamie we don't have many rigs in Canada. They're all bloody used. And we have plenty of all rigs here. So that we are not cannibalizing our own business at all. Maybe there will a time when we do but, they were going to have 40 or 50 rigs working, Burlington and we have barely that many in the whole God damn fleet. Now we have 80, you know, we're going to go from not being able to supply a rig to some of these guys to having plenty of rigs to supply them.

Secondly, when were you doing your international roundup, you had mentioned to me a couple of weeks ago that you had some rigs in Algeria that were coming up for re-bid. Can you just update us on the status of the Algerian rigs?

Go ahead Ziggy.

Yeah. We had a couple of bids in the office now that we are working on and I believe with the activity of previous customers, the key and O's, and other players in the future, -- by mid all the rigs will be year.

Everything should be -- it should be the renewal process should go process smoothly? Is that

Yeah, I'm pretty sure that there's actually more demand than rigs on the ground, so I'm pretty confident all our rigs will be working.

Also in that case, we, maybe others too are outperforming the local companies like are outperforming the local companies like crazy so the clients go out of the way the design the bid so we can get it kind of thing.

My last question is, did you have any dry hole costs in the fourth quarter?

Yes.

Can you quantify that?

1.4 million.

And do you expect anything -- I mean, how many exploration wells do you expect to drill in the first quarter?

Probably two, but more modest ones, and one of them -- one of them we're setting pipe already on, so that that likely won't be hit. The second one, we had a - listen to listen me talk about E&P stuff. So we had a zone at 6,000 feet above our target, and what they say, the words they use is that zone will bail out the well. So even if the -- we don't do any good in the target, we'll at least pay for the we'll with what we have.

And the other thing we learned is that, which I should have known, we're on the successful efforts, basis, which, you know, like our good friends Exxon are, but, you know, most of the independents of aren't doing that, because they don't want to get into a situation where a dry hole and you know if you get to hit five out of 10, you're doing superbly well, exploratory wells. If you have two dry holes and one quality, in one quarter, so neighbors won't do much in the way of exploration get in the future.

OK. I appreciate it. Thanks guys.

Ladies and gentlemen, thank you for joining our call. With that, we'll sign off today, and if anybody has any further questions, feel free to call us. Thank you.