Nabors Industries Ltd (NBR) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Nabors Industries' second quarter 2004 conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host Dennis Smith, Director of Corporate Development. Sir, you may begin.

Good morning everyone and thank you for joining us today. As usual I will do the quick introduction and overview and Gene will conduct the call. We'll try and hold remarks to 20 minutes or so and then open it to Q&A and try and limit the call to exactly an hour, as we usually do.

Besides Gene, with us this morning, is Tony Petrello, our Deputy Chairman, President and Chief Operating Officer; Bruce Koch, our Chief Financial Officer, Bruce Taiten (ph) our General Counsel and all the various Presidents of our various business units as well.

As usual we would like to remind everybody of course of the SEC Safe Harbor statement, these forward-looking statements that we would be making. While we are optimistic, things sometime change as is reflected in our pre-announcement we have. But anyway, with that I will turn the call over to Gene.

Thanks. Welcome again to our second quarter earnings call. Overall the second quarter was a good quarter, which continues to reinforce our very constructive multi-year outlook for all of our businesses. Our Q2, however, was not as good as we had hoped, pretty obviously.

We had some issues, which were crewing issues of execution. We had other issues, which were more of a character of one-time issues and/or beyond our control and hopefully non-recurring. And we also had some significant other issues, particularly in the USA and oil and gas where our accounting conventions or the accounting conventions indicated that we take short-term P&L hits or attractive future returns.

We'll discuss these in more detail but before I get into some other general comments, let me point out that we had indicated that our -- we had -- unfortunately had to announce an earnings warning shortfall. We indicated that our operating income would be a little north of $12 million short of our expectation. That turned out to be still bad but it's $10.5 million. IV it wasn't quite as bad as we had thought but we will get into those in short order.

Looking at the actual second quarter results, we have an increase year-over-year of about 18%. Our operating income or our income derived from operating activities was up 23% and the net operating income was up 60%. Most of our major units were up year-over-year except Alaska, which is down as expected and we'll talk about that when we talk about Alaska.

Oil and gas was also down because of a dry cold hit which we had in this quarter and International was also modestly down year-over-year. I think the other thing that was down was our boat business and we will talk about that when we get to the other portions of operating income.

On a Q2 to Q1 basis, operating income was down pretty sharply, largely because of seasonal factors in Canada and Alaska. Let me make a few general points before I get into the unit-by-unit discussion. The year-ending June 30th this year, the Baker Hughes Industries had -- industry's rig count in the lower 48 -- not the lower 48 in the U.S. -- and an increase of 116 rigs, we had 50 of those rigs and the USA lower 48 excluding Alaska for the numerator but including Alaska in the denominator.

For the second quarter, Baker Hughes numbers were up 23%, we had 13. So we had a pretty sizable position. This overall is creating a position where there is increasing pricing power that the supply demand is dictating and I think we have increased our position, I think, largely, for two reasons, one, a big factor obviously is our spare capacity and I think another not to be minimized is the fact that we spent a lot of money upgrading our rigs.

We had faster moving rigs, we have sharp drives, automatic drillings, iron rough necks, importantly increased hydraulic power and so not only will prices increase but I think the price increases will be mitigated by virtue of the productivity increases.

My example is not to be significant sample of the guys, the CEOs of operating companies, the operating companies that I talked to but increasingly almost every chap I talk to talks about increasing Capex in the second quarter and beyond, which is a very positive thing.

I think most of them also went pressed admit that they are getting a hell of a lot more either feed or DOE per rig gate than they got in 2001. I think it is also significant to note that our statistics are showing statistically for the first time that we are -- in the United States the drilling is a little bit increasing in the over-10,000 ft category particularly over the over 15,000.

This is only a couple of percent increase of the total wells but it is significant and that is moving into our direct basket and that is the kind of stuff we have been looking for. We have almost no position, maybe a 5% position in under-7,000 ft.

Let me quickly move to the business units. Alaska, Alaska as you can see our operating income went from $9.8 million in the first quarter to $3.9 million in the second quarter. I think we had warned you that Alaska was going to be down in the short and in fact intermediate term outlook was not very attractive.

I think the third and fourth quarters also will be down compared to the previous years. I think the fourth quarter -- first quarter, however will be pretty decent and, in fact, comparable to this year although it is well below what it was last year. I think, the important thing worth mentioning is that we are the best driller on the North scope and there are a couple of bunch of exploratory activities by a whole host of newcomers.

Sooner or later, Alaska will come back to life we hope. In the meantime we are generating positive cash flow and doing a pretty good job here including on safety.

And the USA is, you know, pretty important if not the most important short-term business unit. Operating income went up pretty sharply Q2 versus Q1 where we went up from 10.3 to roughly to 14.7 operating income. Rig years went from 175 to 193 or 194. Let me get into some of the more crucial aspects of it.

The margins went from 2100 in the first quarter to only 2250 in the second quarter but that included at least $200 of rig moves to mostly to the Rockies, which we have spent and start up costs, i.e., rig repair and maintenance costs on those startup rigs and to put that -- we are not making it, those are just the facts as they are. I think importantly when we emphasize that we are getting pricing power, we are improving pricing as we speak, so in the next quarter, we are committed to increasing the margin by $250 a day on savings and maintenance and repair, start-up maintenance and repair and rig moves even though we still will have rig moves to the Rockies and start-up costs.

We are also going to have something hopefully approximating 2 to $300 a day, over and above that and pricing. So we are looking for something between 27 and $2,800 a day in margin for the second quarter.

What we are doing I think is getting continued benefits with our overall approach, company-wide approach but more specifically in the lower 48 emphasizing quality versus quantity. We are top guard position, we are actually producing top guard and now they are all ACs instrumentally for all over lower 48, including iron rough necks, increasing hydraulic power, fast moving rigs by both organizing ourselves better, spending capital better and also supporting a truck (inaudible) to move our rigs, which is not the most attractive business in the world expect that it does help us move our rigs first -- and I won't mention the competitor -- but one of the operators called us last week to move our competitors rig which competitor was presumably, anyway we were happy to do that.

Let me talk a little bit about Ramson. With Ramson we've had a dry hole this quarter we also had a dry hole and in the fourth quarter next of last year. These are on the exploratory programs and we are on the big boy accounting and maybe we shouldn't be there but we are in a successful effort.

Let me talk about that. Basically, we've had five exploratory wells, three of them are successful and I think the return is on those five wells, including there will be another three if those other three are dry holes, which I hope they are not. We will get a more than adequate return on those tracked down although we are reluctant to tell you what the return is but I would say this. The development drilling might be another $60 million over the next several years and the money back could be a multiple of that. In turn these are development drilling this is when the reserves are so, I think that's pretty good its unfortunate that we got involved in a successful methods rather than full cost accounting but that's why.

Similarly on the stuff we are doing with El Paso. El Paso started out with probably 10 rigs, we are probably down to four rigs, five or six rigs now we remember will probably go back up and we will probably have first dibs on the next position.

Totally apart from the rigs position, however the economics though of those wells they are broken down into two sections -- Red River is one chunk of them U.S.A. is another chunk of them. They were first initially to aggregate 100 million they now aggregate only 75 million for us the first half of the Red River stuff will have spent our money got our return back by the end of the first quarter next year. And that return is probably going to be with a little hair cut from today's prices something in the mid 20%.

On the U.S.A. debts have been cut down to 25 million and that probably will take another two years to get our money in return back and so that would be two years longer than the Red River.

Let me put all that in perspective. We are only talking about $8.6 million profit operating income on the Red River project and essentially half of that on the U.S.A. So it is an enormous -- and the way we have to count for this sometimes it's a little confusing we will put in gross investment all that stuff.

But basically I think these things are working out work the way we hoped that hoping that we have an opportunity to do more of these and with El Paso and hopefully others and I think while I am on the subject of Ramson we will have a project in Colombia and we've been on the business for a little bit so, what we are doing is we're taking a position in Colombia where essentially we will get all the rig work and we are almost promoting out 100% of our interest in it.

So that we have spent almost -- I think we spent like 2% so for cost and exploratory stuff for 10% of the interest -- and I think perhaps that we will do the same thing, we will put rigs to work and we will stand again, on its own feet.

Canada, Canada has been a real good story. Operating incomes this quarter was down pretty dramatically a lot of this was seasonal and this may have been weather. I think whatever it is or was, was and when we look to the future the outlook is pretty optimistic.

I think we go up very significantly this year as the second half as good as the first half was in the end it will be better in the second half and, we will have a few more rigs, we will have pretty good prices and we will have a record margin.

I think in Canada we are continuing to expand the development of what we called case rigs those are programmable AC Electric Systems under rigs we have a bunch of those now the most notable one and the one working for Sancor, we have a couple others we have three more of these by the end of the year we are looking at this technology and in lower 48 and international and we are working for a combination probe $2 billion and jointed pipe unit for Apache if it works out the way we expect it will do several of those down here. So this is something that is really good.

One other thing that is happening in Canada we are developing which we uniquely we can do a bi-national approach to both rigs and crews. We are building our rigs so that they can -- incrementally at least -- so that they can work both in the Canadian Rockies and in the lower 48. And we are working with Apache on their drilling, and particularly Shell Life on that sort of thing.

We are also moving crews back and forth when we have more from Canadian and we have Canada we have spring break, we take crews down here at net increasingly as we will continue to do that. So Canada, I think, is one of the bright spots. The U.S. well server thing, I think, the outlook there is steady and the price that we got and return on assets and if its good there.

We are probably going to have a record operating income year and the return as I said the return on assets is very good rig hours are going up, rig rates are going up, I would also point out that labor cost are going up too, but the supply/demand situation is favorable for us there. I think there will be more activity inline with I think people are pretty much convinced the commodity prices aren't going to drop to nothing anytime soon and we will continue to do very well there.

I think there again, we are looking at introducing new technologies we have developed one rig with a major supplier pretty sizable rig we are looking at some more generally operable smaller rig, which would be probably KC and generally the high-end so that we will probably get not only better productivity from these rigs, as is the case and our new rig program in Canada and our revamped rigs in the lower 48 but also I think will do pretty good work for us.

We will move onto offshore. Offshore I think we obviously didn't do very well. In other words, we did essentially the same in the second quarter versus first quarter. That number we had mentioned it before is, you know, $2.6-$2.7 million below what we had expected earlier that was part of the pre-announcement.

And I think 100% of the explanation there is the work over jack up businesses a whole bunch worse than we thought it would be at this his point of time and I think that weakness quite possibly will continue through the second half I think however it's pretty clear that operating income will go up pretty dramatically in the third and fourth quarter.

And these are largely associated with the Mase (ph) rigs the (inaudible) crew drilling (inaudible) that we had and -- and at least the three platform rigs are under contract and there is not much of a question against those results. So, I think in a longer flow I think there is no place really but up in terms of the work over jack ups and that I think will happen.

Internationally, let me put international in a little bit of perspective. When we aggregate our earnings in a calendar year and we divide by capital employed we still have a decent return, the return on assets employed I think it's probably pushing 10% even when we have these techniques which we're now experiencing and describing.

I think it's also important to note that we have the glass is more than half full when you look at international. We are the leading driller in Saudi Arabia, we are the leading driller in Yemen, we are leading driller in Algeria. In the Gulf, we have a lead position. We have a lead position in Columbia, such that we can get into the kind of frankly lucrative E&P opportunities which I described before, which will also have rigs work with it. And we're probably the lead driller of that control. So I think what we, but we have had issues there.

We've got problems in Mexico; we've had problems in a number of places. This last quarter, we had downtime in a rig, OceanMaster 8, which costs us around figures of a million dollars; we had a whole bunch of rig relocation's which hit the P&L pretty dramatically and I think the next quarter is going to be much better and really a substantial reason for it being much better and the certainty of it is that a lot of these hickey's are not going to recur.

They are not all going to disappear, there is going to be one or two more particularly in Mexico, but I would say that we are looking at maybe $6 million of operating income, improvement -- 5.5 to $6 million in the third quarter -- half of which is just the omission of most of the hopefully one time things that we had before, but we still have some things to resolve.

I think there is another point I would like to make. We, I think, are going to spend a little bit more time and attention helping manage the international operation and I know they would love our help. See what I am thinking?

Anyway, but I think that is what is going to be and I think the other thing we are going to do is when we examine the (inaudible) we have, we do really well in our core operations and I think what we will do is continue to emphasize the core operations and, you know, in Saudi Arabia we make probably close to $45 million and that is pretty good at you know, where Saudi is at, I mean, everything is good, the returns are good, the budgets are good, everything.

The same thing is true now and not initially in Algeria, Mexico and Yemen, a lot of places so, we are going to have to decide you know expanding more where we are doing well and we have paid our dues and be a lot more skeptical or deliberative or whatever else the right word is in terms of new ventures elsewhere.

I think in connection with that, I think it is a good time to announce that we've spent about $58 million on three accommodation units, which are working in Saudi and they will favorably impact the P&L down the road.

Let me talk now to the other miscellaneous -- other which includes Hamery, Gethic -- also the biggest single thing and that is in this breakdown in the report but not in the numbers I have given you, was the trucking business which is still a lot entities in here.

In essence the (inaudible) business is going well, the instrumentation business is doing well although not as much in the black yet as we would like and the biggest single drop in quarter-to-quarter, year-over-year numbers was the big drop in Semar (ph) our boat company and basically the boat company is essentially break-even now.

We have taken out of the boat company, the Mexican operations before boats in Mexico which are attractive but in general the boat company is not generating operating income and that way, a little bit, but we are generating cash flow and I think it is not a big deal with us, the capital would tell us, exploiting this is about 140 million and I think if we have to get out of the business we could not have to take a lot to get our 140 million back.

Let me summarize and stick to my 20, I am over 22 minutes already. I still like our position a lot in macro if it stays good. Worldwide economic is good, commodity prices not only are good but we might be able to risk it, so that we get too good. And I believe that there is life and much to life in the lower 48 in Canada and I think for quite a while.

Canada, we have room to grow for organically or otherwise frankly from a 13, 14% market position and we are going to increasingly take advantage of the price quarter opportunities who has a good reliable growth and we will grow with really for the first time really and work over this market the improved technology in the business.

We aren't sure but frankly we only have room to go up, and I think the good sign is the important clients come into us and we are meeting those 150, 200, 201. I think they are all on the payroll. Two hundred gets (inaudible) look at that about in the end, just about? So, two of them will be on the platform (inaudible).

International fell, as I said a minute ago, still has the lead position in critically important areas like Cameroon, Saudi Arabia and North Africa and elsewhere and I think in spite of the fact that we have been beating up on them a little bit and if so the return on assets is nothing bad and I think perhaps it will get better.

Anyway, overall I am pretty, well I wish I think (inaudible) even including (inaudible) this for this quarters support the constructive attitude we have long-term and I think it was like the last time I think in 12 months we will be almost every valuation metric that we've had in the past with a few exceptions with the start price which I don't know anything about.

Operator that concludes Gene's formal remarks and we are ready for the question answer session.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question is coming from Marshall Adkins with Raymond James. Please post your question.

Well you don't anything about stock price, right Gene, right. Your comments on day rates, let's clarify those a little bit. They weren't real clear, you -- it appears like you had margin improvements of around $350 a day of which 200 was taken away by rig moves in the quarter, is that accurate?

It's start-up costs. Exactly right.

Okay. And going forward into the next quarter and again I just wanted to make sure that I heard this right, it appears like you are going to -- you are looking at margin improvements in the $500 per day range.

Yes and half of which would be the cost improvements and which would be 250 and then 250 to 300 on actual price.

So boiling that down, it appears like you know rates are now moving upward to the -- instead of it -- roughly $300 a quarter, they are more like 500 a quarter on a rate increase. Is that fair?

I would say you know it varies so much in so much -- so many markets and I would say I would stick with the averages but you know if the averages by your analysis yield those results, they are probably right. I just haven't looked at it that way.

Are we seeing -- I guess the bottom line is -- are we seeing a modest increase in the rate of which rates are going up?

Yes I would say -- let me put it this way I would say the pedal is instead of slightly on the gas pedal it's pretty heavily on the gas pedal. And the guys here will tell you the pressure they generated their own pressure up till kind of recently and kind of recently I helped -- we helped them a little bit.

Right.

And frankly it is being showered (ph) and again my sample of talking to operators, CEOs is not you know enormous but the few guys I have talked to, number one the commodity prices offset the challenges. Secondly I think the productivity of the rigs is not an attributable factor. Either, I mean, one or the other guy thought we -- you know the guys rate the prices are good and then I said but we are productivity then they tell me, yeah, we're 40% of where we were a year ago in this field and where do you send that particularly in the manufacturing fields.

But just pretty generally it's true. I mean if you look at what is going on in the (inaudible) you know I think two things are happening. One is they are getting cost per DOE than they had ever and secondly one of the ways they are getting here is doing more directional drilling which requires a bigger rig, which feeds into our bread basket, so and I think that's generally true.

I think there's more directional drilling everywhere including Koban Methane and anyway I think that is not a trivial factor. Prices are going up and I think the cost of the increased day rates have mitigated.

Okay. One other real quick one. You know, we are in the low 1,200 rig count right according to Baker. Assuming that commodity prices hold where they are here even though higher, where do you think that can go over the next say 12 months? Obviously most of it is going to be land drilling, so you know how many more land rigs you think we can put out in the next 12 months?

We can put out probably at least 85, probably more.

Let me rephrase that. How many more do you think will be put out in the next 12 months?

What do I -- what do I think?

Yes.

I don't know. I think last time we addressed it we said we think we probably pretty comfortably blow through the previous high however you measure it on land rig drilling or total U.S. rigs, which I think the overall high was 1293 (inaudible) and --

Yes you are above that.

Yes. And on the land side we would get above that and then I think I have seen no evidence that there is a shortage of prospects -- you know it isn't what it was 10 years ago and 10 years ago it wasn't what it was 20 years ago. But I think the commodity price, the improved technology and I think there is a good shot that there will be a lot of -- lot of wells drilled and clearly we need them. I think there is not going to be an alternative to North American land rig drilling for, you know, the better part of the next decade.

And yes, they'll be L&G, I am not going to get into that, there will be some L&G in five years, seven years, but whatever else is true on that score there'll be demand for gas that we can drill for, for a long time to come.

We are looking forward to it Gene. Thanks.

Thank you.

Thank you our next question is coming from Aaron Gallerium (ph) with Credit Suisse First Boston.

Good morning, Gene. I was wondering if you could elaborate on your international strategy over the next 12 to 18 months and in particular how do you plan on capitalizing on your opportunities in both the Middle East and North Africa?

Well basically you know I would say in North Africa, Algeria is a place we are in. We have four rigs working now. I think there is a significant probability we will have I think seven or eight by first quarter of next year. I think in Saudi, we are -- we were little concerned about how we invested -- we were covered with all kinds of war risk insurance in Saudi, which we're going to increase a little bit on a fixed price, non-cancelable at least offshore.

So we had invested $58 million in combinations units. We put another rig in there since we talked last time and we expect that six or seven rigs and we will be after them if we get paid -- what we need to get paid for and we are talking with some of our better customers who are re-entering Libya. We are talking to some of our better customers who are in Egypt and I think those are -- I think those theoretically will go ahead if we can get the size we need and get the core competency from virtually contiguous operation.

To meet that incremental demand Gene, do you have enough in the international portfolio or do you need to refurbish some rigs from the U.S.?

I think the latter -- but you know we are one company and if the rig working in wherever, California, and we get a better opportunity in long term, price all that junk and let it finish its job and go to Saudi's edge it will happen.

Okay. The last question. Can you elaborate a little bit more on what you are doing in Columbia?

In terms of the E&P structure?

Yes.

Just -- it isn't worth mentioning except as an add-on to what we learned from what we did in the state with El Paso and others and we saw an opportunity. We have a good relationship, probably the best contract relationship with Ecuador.

They know we have a drilling competency, you know Ramps-on has been around for a while, that is our entity and they'll probably looking to get new competitors in there who are operator friendly and we got invited in and you know we got a pretty juicy concession and it was juicy enough so that we could end up with, you know, a well promoted year which we also learned while in this business.

So it isn't going to be the end of the world, we will probably get I think five or six rigs here out of it and probably a good return on the investment with almost no down steps.

Okay. Thanks.

Thank you or next question is coming from Mark Urness with Merrill Lynch.

Yes. Good morning. Gene I wanted to ask about the pace of reactivation of land rigs, where you are today, how much is it costing to reactivate rigs, what you are doing in terms of training crews on existing rigs and just how that whole process is going?

Yes. Well we have two of the guys here from -- in the USA, the top two guys. Basically we finished; in the first place the demand has been largely in 1,000 horsepower and smaller. A lot of the incremental demand has been in the Rockies where we have gone from -- in the end of the first quarter we had 26 rigs, we probably have 57 to 60 and probably end up with something in the low sixties pretty soon. So we finished with kind of the really low cost things.

What we have been doing lately we approved, after some considerable discussion, four rigs that are going to be $2.5 million a pop -- two for the Rockies and two committed elsewhere and these are SGR (ph) rigs and, you know, pretty good rigs, fast moving and all that stuff. And now we are looking at -- what we are having to do is to look at taking rigs out of that stack, in other words we have 200 odd rigs working, 203, 205.

We have 80 rigs that had worked in the last three or four years which won't cost us a fortune. You get up although we are putting new stuff on the cost. Then we have 80 odd rigs that haven't worked for a long-long time, which we can put even more capital in to get working - so we'll review our cards pretty soon but it has been going pretty well.

The capital expenditures of the company including in the U.S.A. are reasonably high relative to probably twice the depreciation and a lot of it is the upgrades -- we talked about increased hydraulic power, automatic drillers, more top drives etc. But a lot of it is taking the rigs out and putting them to work. I don't know we have to -- trying to deal with BP on that other rig.

It's underway.

I mean and these -- we have two kinds of rigs we have where we revamped them. One is a quicker moving rig with all the bells and whistles that can fully compete with our, not to be named, competitors rigs which cost three, four or five times as much. But also we have our rigs that are skidable (ph) like the two rigs we have Shell in the Rockies and this is like the Rig 33 in Alaska, like Rig 59 in Canada. So we might have some of those, one of those at least in one center really in the long term. So it is coming along in terms of deliberate speed.

We don't invest in stuff that is really speculative because there is no need for it now and you know as they said a couple of times and I have said it enough today, we are looking to have quality rigs than quantity. We don't expect the rig count to work forever and their EBITD are cycles are worse longer-term than we expect the rigs that we are putting out to work for a long time.

And let me ask on the laborers side, in 2001 a big issue was the inefficiency of the crews, basically inexperienced crews and a lot of downtime and the like, what are you doing differently today to train people or to reduce those inefficiencies?

This is Larry Hite (ph). We have setup a number of training centers within a couple of our operating areas and you know we are bringing crews through there, familiarizing them with the operations and we actually have a you know -- we have a training rig that we work them on.

We also brought crews as Gene mentioned out of our Canadian operations that were experienced and were down for the break up period there. So yes, I mean we still have some inefficiencies but you know this ramp up has been a lot steadier and it allowed us to improve and now train crews better than we did last time, so that is kind of where we are at today.

All right, thanks Larry I will pass it back.

Thank you. Our next question is coming from Kevin Simpson with Miller Tabak.

Good morning.

Good morning.

Gene I have got a couple of questions. I guess my first one is that would be more non-operating. I guess Barbados has signed a tax treaty with the U.S. that you alter that relationship and sounds like it will make -- at least you know dramatically reduce the value of your tax shelter or whatever you want to call it there. So I assume you are on top of that, but I just wondered what your plans are to handle that?

I think -- I think -- I think the only answer I can give you is number one, we are on top of it and when we come up with a solution we will implement. I think --

Are there solutions?

My hope is that there are solutions. In any event we have taken care of a big chunk of the deferred taxes already in terms of the -- yes but I think they are absolute -- if I had them I wouldn't have broadcast them, but I think there will be.

Okay. Second one on the international front, I mean you have talked about a couple of new markets for Nabors and you know whenever you go into new markets, you seem to you know kind of lose money first up, whatever, amidst your numbers for those markets for some you know period of time, a couple of quarters to as much as four quarters. Can you do anything different or is that just the cost of playing in those new markets?

I think basically I tried to get the impression that we are going to really focus pretty intensely on the markets that we are already established and that are core and there are a number of those with fair number of opportunities.

The ones, the new ones that I mentioned Egypt and Libya ought not to be materially different from the kind of desolate work we do elsewhere. I mean not to say the reservoirs are the same or the rigs are the same but the kind of rigs, the organizational structure, the kind of x-factors, you know, we would be using Egyptians in a lot of these things etc. all that -- if they are not real similar we won't pursue them, Kevin.

So the whole theme we were trying to say is we will try to not fight pretty hard, we will try to make money the easy way and get good returns with what's proven to us to be the easy way and that is, you know, where we have already done well and we paid our lessons.

We paid our lessons, we paid a few (inaudible) dues where we probably, we spent a lot of money in Saudi Arabia -- we had a lot of delays in Algeria but now those operations are good, Yemen too, didn't start of smoothly in Yemen and we paid our dues and the theme today hopefully was that we are not going to pay our dues twice and we are going to try to evaluate what the dues are pretty carefully before we go into some place like Egypt or Libya.

And I guess just from -- would you -- are you going to raise the bar so that if you have to you just will pass on those opportunities?

Absolutely and I think that has happened already frankly.

Okay. Thanks Gene that's it from me.

Thank you.

Thank you our next question is coming from Allen Brooks with CIBC World Markets.

Good morning Gene. Most of my questions have been asked and answered quite well. But --

Despite that one easy one, Al.

Well you did throw a little hook out there which begs to be asked and that is the accommodation deal. There's got to be a story behind this.

No. I don't know but there is not really a story but I think we have been bickering on this thing for how long, six months, nine months and we have finally got it into the price range. I mean the economics pure and simple are that after depreciation we should be making $800,000 a month on these units, capital costs 58, no Capex, contracts has got a better part of the year left and we have a high probability of renewal where it's at and interests elsewhere in the Persian Gulf if it doesn't renew where it's at.

You know the biggest consideration we had or one of the considerations were, you know, how many assets we have in Saudi Arabia and what kind of insurance we have and we have a three year non-cancelable deal on our non-manned assets elsewhere. There is an issue of whether the country-cap, is going to be raised or probably raised assets, won't be enormously expensive and I won't say this but the fact that we don't have to do too much in Capex and management. So, it will make it little easier.

Okay.

I said it anyway.

All right. Thank you Gene.

Right.

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

Thanks. Gene, I want to -- first of all is on your thoughts on the balance sheet, obviously it continue to be very strong here, outlook for cash generation also strong. You are seeing some of the other oil service companies step up upon buybacks and dividends. Can you review with us your outlook or optimism for acquisitions and if those should not pan out, you know, are you considering something along those lines to return cash to shareholders more proactively?

Yes, I think you said it exactly the way I would say it. The first choice is to get -- the reason we are in business to (inaudible) investors is theoretically we get contiguous to core investment opportunity that are above average. So, we continue to have that into top priority and this year as I suggested earlier, we are going to be spending a fair amount of money over and above depreciation.

You know we -- the acquisitions of size that we'll look at as well and if we get to the point where the cash flow in and hopefully that's the problem that we have been talking about, we haven't encountered real sum and I'm looking forward to it that if we get to the point where we have cash flow in access of our ability to economically invested. So, we are trying to, you know, buybacks and dividend.

On the Capex front, I wonder if you could just update us on where that number is now and how much capital you have got going into the E&P business with some of the expansion in the international markets?

Yes I think that the way we have to report the Capex in the E&P business, it's kind of silly because the buyer caps stock, we have to report this capital but it's coming back eventually a year to two years.

So, if you ignore that we have Capex, I would say, probably little over $200 million more than depreciation, depreciation company wide is going to be about $250 million, part of that is going to be this accommodations specials of 30% of it. We will expect in this year a fair amount of money in those rigs for offshore domestic investing.

We would have spend a fair amount of money upgrading rigs on and in USA, also enhancements of rigs for USA. So, I think what's in the hopper right now, we will probably spend not counting E&P, which is the different, you know, get it back in the year compare to four years or five years. I think we will spend $450 million.

In your capital expose to the E&P business, however you want to define that?

I would say it's pretty bloody small. I would say, you know, in the USA on the Alcopa (inaudible), by the end of this quarter we will have all our money back in total on the buyer cap, you know the financing type thing and we will be waiting for returns on 25 million of it. And on the other part of it, we capital invested, we have had the $3.5 million, of dry holes, we may have another such dry hole. In the next couple of years we might spend $50 million here on development drilling but that's shooting fish in a barrel. I think in Columbia it's going to be the minimum, may be 3, 4, 5 million, that's almost nothing.

Okay, I wanted to also ask you about the US Gulf services business, which is continuing to outperform our expectations, talking about improving pricing in the drilling side, is there opportunity to move pricing on the wells services side at this point?

Yes, we -- right. We are doing that, in fact, we had a conversation yesterday, we are all running it was so aggressive if you want to make sure that if you got a shot, may be for one, no, I think we were pushing it real hard.

We are having more labor cost increases, it seems in the wells services I think its that maybe that's because of California and elsewhere. But we are talking about $12 and hour wage cost increases in California. So, we are looking to get that plus, you know, the overhead costs, other than wage costs that we incur plus we want to provide enhanced services with equipment technology and increased services for any one want to get a little back for us. So, we are talking about a fairly aggressive pricing format.

Where do you put this spot rates on hourly basis, you know, if we struck out the trucking and all the ancillary stuff, where do you put this spot rate currently?

We, 225.

Okay. Lastly on the tax situation, how do we think about the downside risks scenario in the event that you got (inaudible) costs to make the adjustments or the potential that other loopholes that you might be inclined to shift to get closed. Can you sort of frame, you know, that scenario for us?

Yes. I get the question; I don't really have the answer. But I would say that a lot of our taxes now are deferred taxes and we are taking care of some of those already with the Bermuda Incorporation. A lot of our operations are already international which have a relatively low tax rate. (inaudible) If this whole thing disappear, what would our tax rate be, 5, 6, 7 you have any idea? Low 20's?

Low 20's.

He doesn't have an idea either but he's saying low 20's.

And is there you know some kind of a catch up from back taxes or were you in a situation where you had essentially losses on the U.S. side where that would not be necessary?

Yes, I think it's the other way around.

We actually have (inaudible) currently we have more than $700 million in our well in the U.S. So we (inaudible) this will have - U.S. (inaudible) -- that's going to be available to offset any US taxable income.

So, really in the short term, we are talking about the difference between, you know, zero affective taxes on that increment for the accounts of deferred tax -- non-cash accounting as opposed to U.S. dollars. It supposed to be all in (inaudible) all the situation. Is that -- if you look at down side from a cash point of view, you know, we are actually in a pretty good situation because we have such a large well NOL on a going forward basis.

Yes, doesn't look punitive even under the bad case scenario. Okay. Thank you very much.

Thank you. Our next question is coming from Dan Pickering with Pickering Energy.

Good morning.

Hi Dan.

Gene I was hoping you could step back for a second and walk us through the U.S. available rig situation. You said you have got 203 to 205 rigs working now.

(inaudible).

Okay.

I am sorry 208, I understated it.

Okay, all right. So 208 working today and that leaves, I think you said roughly 80.

75-80.

Okay. And are those rigs that require no Capex to go back to work or some Capex?

Some Capex.

Okay. And at this point.

Pretty small though, and they tend to be bigger rigs.

Okay. So if we split the big rigs versus 1000 horsepower rigs, what will that breakdown of the 80 be, roughly?

I think we were mostly bigger than 1000 aren't we? 60 would be bigger than the 1000.

Okay. And given the demand for the 1000 horsepower range, I guess that leave 20 units roughly of that, fit that sort of rocky profile, if you will. Help us understand what are you doing with those 20? Are they being reactivated now?

We are working on four or five as we speak.

Okay. And so those are the four or five you talked about it roughly, 2-2.5 million.

Yes. The four were $2.5 million, there are another couple were we are going to look at today around $2 million.

Okay.

And we'll be examining the totality of this, we are looking at the possibility of some of these going to Ziggy too. Maybe 10 of them.

And Ziggy is the international business? Okay. And I would assume that the international Capex requirements would be a bit higher than 2 to 2.5.

It depends where. If it is in Mexico, which is one of the possibilities, it wouldn't be the materially high.

So it sounds like, I mean if I am making the assumption that if we got put in Capex in the remaining rigs to put them back to work there I mean you are sort of running at close to 100% utilization -- effective utilization right now. Is that fair, I mean, each incremental rig is going to take some money and time to get ready to work?

That's what I'm telling these guys that they should raise prices if there are no more rigs today.

Where would you like your, where of the 20 lower horsepower, how many of those do you think six months from now are going to be sitting out on the field ready to run?

At least half I think.

So may be 10.

We have to look at all of them unless there's something -- you know, a lot of these have been used as sources for spare parts and all that stuff. We have to see what the story is. If there is not anything more than a seven mass there, we'll probably have it in use the way we see the output.

Okay, and the 2 to 2.5 million Capex, am I getting a like new rig or I am gettinga -- is this tricked out or not?

Well we went through this and this guys were telling me and they convinced me that these rigs are fully competitive in terms of move time, ROP and drilling days with, you know, on a 11-12 million H&P rate. I think it doesn't have the (inaudible).

Okay, so 2-2.5 million which are coming out.

2.5 without a doubt.

Okay.

But that would be -- moving two and a half days that would drill competitively with anything.

Right.

Et cetera.

And what would be the total then, sort of, book value of that asset, 2.5 million in Capex and it is on the books now for --

Gene Isenberg. 1.5 million.

1 million or less. Sorry less.

Okay. So, 3 to 4 million call it book value investment.

New investment, yes. Well 3 to 4 plus including the 2.5.

Right, okay. And I want make try to understand, it sounds like your expectations 450 to $550 a day on your kind of growth margin basis up to the 2,700 - 2,800 per day at the gross margin level in the U.S?

Dan, these guys are shuttering, but that's the arithmetic.

Okay and the reported number that we saw were right round $740, operating income per day. Do I think about that 4 to $500 just flowing right through operating income as well.

Little bit of depreciation.

Okay. So, there is a little bit of higher Capex, but not much. Okay, last question, Saudi accommodation rigs, revenue expectations that you said $800,000 a day after --

$800,000 a month.

Sorry, a month.

Operating income.

Operating income.

After a pretty modest depreciation, $200,000 a month depreciation.

Okay, so, we are talking about a million a month or so.

Gross profit.

Gross profit, okay. All right, thank you very much.

Thank you, Dan. Our next question is coming from Rod McKenzie (ph) with Sterne, Agee & Leach.

No, I think that's Sterne, Agee actually. Congratulations on your effective results out there. Gene with Canada having gone through weather, the traditional slow down, everything else that has caused rig count to pop up and down so much more in the last couple of weeks. Is there any kind of inferences that you can give beyond the one that you said that second half is going to look better than the first half in terms of the amount of work that might be getting back logged up there for projects that might have normally started in June and July, that's you know, have had their share issues up there?

And what does that imply about potential perceiving from further rate improvements since we moved through, you know, back into the busier part of the year?

You know, frankly as we go along, we are getting rate improvements over the last year. I think the guys are a little reluctant, you know, in the first quarter we had something like $6,800 U.S. (inaudible) and I think our guys are little reluctant to project big increases over that.

But as we go getting pretty good margins and last part first quarter we had some abnormal that enables us to, you know, have higher than normal margin because we had a whole bunch of rigs contracted in the summer time with early discount and volume discount and we have operator dropped these rigs we have rigs with crews that went from low summer rates to one of high winter rates. So, it was unusually, we have the, you know, the rates were damn good, the rates are no problem up there.

Okay. Secondarily Iraqis, where do you guys stand in terms of total rig supply up there -- is it 63, 64, 65? And for the overall indy U.S.A. fleet up there right now.

Yes.

How many rigs moved during the course of the quarter?

We moved, what did we move? 10 or 12?

In the last quarter?

Yes.

9 or 10.

9 or 10 and we still have like 4, 5 to go. So, we still have some hits projected for the third and fourth quarter but then if that number can be increased, we will increase it.

Now, the 4 or 5 to go is still enlarging until Iraq or is some other repositioning?

Mainly Iraqi.

So, you guys will be pushing close to 70 rigs up there? Are you seeing any kind of back log of work that might indicate that as some of the rigs kind of mandatorily come down off the work on the mesas that they are going to get picked up on the prairies or whatever you would call it as that kind of seasonal slow down hits the mesas drilling?

As it did last year for example. I don't know yet. You guys haven't observed yet. They have hopes and they were referring to last year as manifestation of the hope realized but nobody knows we are sure yet.

One last thing, I seem to recall at the first of the year, you were talking about seeing maybe 500 kind of margin improvement and into U.S.A. over the course of the year. I think at the end of the first quarter you said about 1,000 over the course of the year and I think if I heard you right you are looking for about 500 from quarter-to-quarter although part of that is due to reduction in the kind of mobilization expenses.

I mean, you know, you keep revising up quite significantly. Are we looking realistically at something that -- the chance of seeing, I don't know 5-$700 possibly a margin improvement -- at least on an exit rate for the quarter is in the cards or is too much that tied up, on not really term, but do these need to roll over to realize that?

This quarter we will have an unusual one because the guys are building in and monitoring to date you know of 250 improvement in cost. And so far we are getting that our a little bit better. And you know I don't think we are going to get 250, a day in cost every single quarter.

But I think and you know we probably said we don't think these rates are going to go berserk. But you know if we exit the year -- early on we said we would exit the year at 3,000. Now we are saying we got a shot at averaging fourth quarter 3,000 that is kind of, we are not there yet, this quarter will tell a lot.

All right guys.

Thanks.

Operator. Since our one hour of time frame, we just have time for one more question please and then we'll end the call.

Thank you. Our final question is coming from Mike Urban with Deutsche Bank.

Thanks. Good morning. Gene I'd be interested in how, if at all, your thoughts have changed on the Russian market, given all that is gone on over there to see the dynamics of the acquisition market where made more favorable or could get more favorable there?

Well, I think the acquisition market for rigs is not going to be easy and I think there are a whole host of reasons for it. Not the least of which is commodity prices even net of with their export taxes have got these guys in the cash position that you know, unheard of what is unimaginable to what it was years ago. So, they are in good shape.

Secondly, there is no reason for them to do it with us. I mean they think their rigs are good enough; we are still working on it. We got our design and alternatives and all that stuff and as you probably know, or I think we told you last time, Jim Denny who is running Russia FOREX running Alaska, still running Alaska, from here is working on that.

We haven't given up but the fact is they don't really feel they need help and, you know, who is -- I mean the TNK guys for example they are interested in cashing out mostly -- God bless those guys and HNP, I mean, BP has got other fish to fry then, you know, they are doing secondary, tertiary things and they are getting 15 to 17% increase in production doing it.

And while I think individually they know what if they could do with the western rig by fighting city halls, can get them to agree to do something in the head office to get to the field and they don't need something they are essentially I am not going to say that's not wrong that's all wrong. But you know I would say we don't have that at the high prospect, you know, if something happens, in fact I think that it's going to be like China. It's going to be hard to contain an edge there for very bloody long and drilling is the last place you can do it. And I would say that the local service guys are going see local competition pick up pretty quickly too.

And last question was on the boat business, you maybe indicated that you might take a look at what you'd do with that business. What is kind of the timing for making a decision there and how are you going to think about it?

Well, we will think about in terms of without any pressure. You know, I mean it is just a case where I see almost no downside from where we are at. I think we are chewing up, we are generating cash flow, we are chewing up both phases by doing so and you know, there is no real pressure unless there's some opportunity, always the question always is that is there something better to do than where you're at.

And the one opportunity that's not available to us is to sell it now as it was two years ago. So, but it is not a big deal, there is no impact on operating income, there is no impact on capital, there is no question of writing down the capital. We can get the capital, you know, our 10 boats, our new boats alone with the scale price increases I would say it was probably worth you know, more than we paid for them.

I think they were $12.5 million, a new one would cost $15 million, so we are you know, hundreds and a quarter million and the whole book value against the whole prices like $140 million. So, it is not a big problem.

So, no.

It's a big opportunity for that manner.

So no specific timeframe for evaluation right.

Right.

All right that is all from me. Thanks.

Operator, with that we will conclude the call and we would like to thank everybody for joining us today.

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