Nabors Industries Ltd (NBR) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nabors Industries third-quarter 2004 earnings conference call. At this time, all participants have been placed on a listen-only mode, and floor will be open for your questions following the presentation. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to Dennis Smith, Director of Corporate Development.

Good morning, everyone, and welcome and thank you for joining us this morning. Our format today will be as we usually do. We will try to hold the call to about one hour total time. Gene will make the summary remarks on the results of the quarter and the business outlook by segment for about 20 or 30 minutes, then we will open it up to question and answers.

With us today we have, in addition to Gene and myself, Tony Petrello, our Deputy Chairman, President, and COO; Bruce Koch, our CFO; Bruce Dayton (ph), our General Counsel, and a number of other of the heads of our various business units.

I want to remind everybody that a lot of what we're going to talk about is the forward outlook and the results and our expectations of the future, which qualifies as forward-looking statements and therefore subject to change as well. And with that, I will turn it over to Gene to get started.

Thank you. Welcome again to our third-quarter earnings conference call. Our quarterly results were, in my view, excellent. But I would like to emphasize that they are really only a progress report or a down payment on what I think is an early stage of a long-term bullish outlook conditioned by the constrained supply positions for both North American natural gas and worldwide crude oil.

Third quarter, our operating income, which we still think is a key metric, was 84 million, compared to 52.9 million in the third quarter. That is a 60 percent increase sequentially, and compared to 46.5 million in the third quarter last year, an 80 percent increase.

On an earnings-per-share basis, we tipped 48 cents a share compared to 33 cents in the previous quarter and 30 cents in the year-earlier comparable quarter. I would also like to point out that Nabors incurred the same sort of third-quarter issues as many others in the oil service business experienced.

Rain materially impacted our results, primarily in Canada, where, based on what has happened since, we have lost at least 15 percent of our third-quarter workover hours and probably something north of 10 percent of our drilling days. We also had -- we had a basically bad U.S. Gulf quarter, but it was made worse than it would have been by the hurricanes we experienced. Yet with all these hits, we still had a very good quarter, and frankly, it was a little bit better -- or some better than we had expected.

Before I get into our business unit discussions, let me make a couple, three overall points. I think the spot (ph) in futures prices for both natural gas and crude just highlight what I think is increasingly obvious, that virtually the only way that we can make up or attempt to make up the shortfall in natural gas in North America in the next five to seven years is by drilling, primarily land drilling, in the U.S. and Canada.

The crude oil situation is not terribly different. I think the tight situation in crude can only be mitigated or ameliorated by increased drilling in OPEC. Most of that is going to be in land. Most of that is going to be in the areas where we have pretty sizable position and good reputation, like Saudi Arabia, Algeria, Yemen. And I think the biggest picture of all means that overall drilling almost certainly is going to come to our sweet spots, and the question will be is how effectively we can execute in converting this to bottom line.

I think you will agree, when we get into our discussions of the United States and Canada, we are ready there, and I think the prospects and contracts and outlook is such in international that we will be demonstrating the bottom-line improvements reasonably (technical difficulty).

The other broad point I would like to make is there is no great surplus of rigs worldwide anymore. I think we have probably as good an overall position and perhaps better than anybody else, and just basically we have today 218 rigs working? 219 today. We got an extra one for the conference call. We have 219 working. We have six ready, of which three are assigned. We are working on eight incremental rigs, of which four are assigned. We have four rigs pending approval, and the approval will come when we have contracts, in essence, that make the investment justified. And we have 30 odd rigs stacked.

And I think it's -- I will get into more details when we talk about the U.S. But firstly, it has taken a little longer to get these things ready and it's costing a fair amount more, and I think that is a universal situation and it applies to us, even though I think we're better positioned than the industry average.

Okay, the other broad point is we're spending a lot of money, mainly to improve the quality of our rigs -- not so much to increase the number, but the quality. We're going to spend approximately $0.5 billion this year away from the amount we spend on our ramps on A&T (ph). And that's against a $250 million depreciation. And maintenance is going to be 150,000 of that, but rig refurbishments, upgrades, the technological improvements we've made, represent probably 210 million of that, and I will get into that as we discuss unit by unit. New construction, 76 million, and the acquisition we made internationally on accommodation units, which I think we discussed last time, 58 million.

Again, I think what we're doing is making our rigs faster moving, quicker drilling, and safer, and I think the overall position is that that is yielding us better utilization, higher prices, but it is also contributing -- not only us, but the industry -- contributing to better drilling practices and results in the whole industry.

For example, most operators will tell you anecdotally that they are doing drilling in a number of fewer days than used to be the case, and there were a lot of reasons -- top drives, hydraulic power, a lot of things that we do quicker moving -- and basically figure it this way. If we have a 15 percent faster drilling period, if something was to take 20 days before and it takes 17 days now, and if you figure that the drilling costs are maybe a quarter or a third of the per-day variable costs of drilling a well, the overall savings compared to drilling it in 20 days is pretty substantial.

And that accounts, I think, for the ability to cover increases in tubular costs, increases in service costs and increases in the day rates. So it isn't totally the commodity price that enables the drilling to continue at this rapid pace, but it is also the improved drilling capabilities.

Let me talk through our units. I will try to make this a little quicker than normal so that we can spend a little bit more time on the question-and-answer.

Start off with Alaska. Starting off with our poorest story short-term. We're the best in Alaska, the best ranked among ensigns (ph). but the senior ensign place doesn't do much for the bottom line. This quarter we had 2.5 million. We were way less than we had a year ago. Sequentially, we are down, and I think we're going to be -- next year is going to the down.

The only ray of hope is -- the ultimate ray of hope is when the stuff in Alaska goes away from the majors, lower down the food chain to guys who will pursue it much more aggressively, and I don't see that happening in the very near-term. What is happening is NorthStar Allen (ph), which had been -- it is reactivated, so we have a rig there which we will start to probably work on a long-term basis, and it had been only on standby. In a situation where our margins and profits are as small as they are now, that is a big step up.

The thing we've been talking to about for a number of quarters in the viscous oil exploitation, I think that is finally coming, although it is unbelievably slow. But there are still negatives in Alaska beyond that. But net-net, I think we're the best there. I think in due course it will come back. We will be able to take advantage of it. And in the meantime, we are generating cash flow in terms of higher depreciation and CapEx and we are making some money, and fortunately, the rest of our (technical difficulty) -- in fact, that's the only place in the whole circuit that's really down in any significant sense.

Nabors Drilling USA, we had an excellent, in my view, third quarter. We had 32.7 operating income, which is up from September 15 in the second quarter and almost triple what we had last year. We had 208 rigs working in the third quarter compared to 193 in the sequentially preceding quarter, compared to 157 a year earlier. And as I mentioned a second ago, we have 219 rigs working today.

So some people may say this was flattening off, and I think it ultimately will flatten off, not because of the demand but because the rigs are getting harder to come by and they're costing more etc. But we see an increase in rig count for the fourth quarter and for next year, and we are pretty happy with -- if this is a flat rig count growth for this year or this last half, we are happy with it. We would like another couple years of flat growth like that.

Margins, we went up to 3000 -- a little over 3000 from 2200 last year, and this was a bit of a pleasant surprise. I would say two-thirds of that was price roughly, and one-thirds of that was in terms of reduced costs, which I think we talked about earlier. A little bit less in the way of expensing moves, particularly to the Rockies. A little bit less in training people and having people ready to work on new rigs. If we're not going to go from 100 rigs to 220 rigs, we don't need that many people being trained for the next increment of 10 to 20 rigs.

So all that is so. And I think we're going to have an increase -- not as big -- in the fourth quarter, and I think we will have an increase on top of that in the first quarter. Again, in the first quarter, we have a lot of the early-in-the-year costs, about $150 a day, so that will hit the first quarter. But basically, the outlook is extremely good.

CapEx, we are going to spend a ton of money. We have depreciation of 80 million. We're spending almost double that. But in terms of upgrades and new technology and better equipment, including hydraulic power, top drives, instrumentation and really upgrading the rigs so they move quickly, we upgraded 53 rigs, or will have upgraded 53 rigs this year for an aggregate total of $109 million. And some of these rigs, in fact most of them, are really state-of-the-art rigs comparable to and competitive with anything out there.

And then on Ramshorn which is our E&P, we had, as you may recall, a dry hole last quarter, so our operating income went from abnormally low, 800,000 to a little over 4 million, and that is about double what we had last year. In the first half of next year, we will finish the El Paso program, which will have worked out pretty well. I don't have the returns, but probably the returns will be in the high teens on that. Plus, in addition to which we have the opportunity to put a bunch of rigs to work to our satisfaction and El Paso's satisfaction.

On the -- away from El Paso E&P, we're doing pretty well, I think. We are getting good returns there. We're spending about, I would say, $16 million a year, 4 million a quarter, on opportunities that crop up. And with the prices we're getting and we are getting a little smarter and we are promoting stuff out and things like that, I think the returns are pretty good.

One way to look at it is that we've done this kind of drilling, but we haven't done turnkey drilling, and it's the same sort of risk. In other words the over-optimism of the guys, etc., etc.. But basically, it's (technical difficulty), and I think we're going to demonstrate it, and I think it's a better deal.

Columbia, for example, we will start -- (indiscernible) that probably will turn out to be super good, because we promoted the hell out of it. We had it; we promoted it away (ph) from us. (technical difficulty)

Let me talk to Canada, which is one of our best stories. We were very lucky in the acquisitions we made to augment our fleet here in the last couple years. And we also have pretty good internal organic growth capabilities. But fundamentally Q3 '04, we did 13.8 operating. And I hesitate to estimate how much we lost, but we loss a hell of a lot because of rain, just like other people in comparable positions did on their Canadian operations. But that is a big increase.

I think the rig count was 42 in the third quarter. But right now, the rig count is extremely good. I think we have 58 drilling rigs working and we have 120 workover rigs working. And that is way better than -- in third quarter on the workover side, we had 86 rigs working in the third quarter, so we lost a bunch.

Let me talk a little bit about the new rig situation in Canada and let me try to explain this. Last year, I think what we told you is we invested in four rigs that are going to end up as new. Three of those four rigs, we took the worst rigs in our fleet, spent a fair amount money on them, making them PLC, AC, quick-moving, the best rigs, bluntly, in Canada. So three of the four rigs were rigs that we upgraded. We spent a fair amount of money; I'd say over 6 million U.S. on each of them. But most of them are locked up in term contracts -- at least two of the three; I'm not sure, made even three of the three.

Then another one we tried to do a 2 to 3000 horsepower rig, which we did, and that's rig 69. That's working for Suncor and that's making money for the customer and for us. So basically, those four rigs involved an increase in our rig count of one.

So similarly, on this year, we're converting 10 rigs from existing rigs that are not really good to these state-of-the-art rigs (technical difficulty). The 11th rig is a drill-tubing/stem-drilling rig, which will be done by January 1, and that's going to go to a four-year contract. And that's an AC rig, and that might be a prototype for additional rigs. The other two, we have 1000 horsepower rigs, like rig 34 up there. And (technical difficulty) by January; another couple after breakup for Canada.

And then we're doing four additional rigs. And these rigs are starting with skeletons or beginnings of rigs from the NDUSA and those rigs, in fact, will go to wherever it is attractive to put them. They could go in Canada. They could go in the U.S. They could go international.

Anyway, the picture here is pretty good and I would say that the fourth quarter is going to be more than double what the operating income was in the third quarter, and I see it growing all the time. In fact, as I was looking at this, it occurred to me that even though the rig count has not increased, i.e. it has gone up pretty slowly for the industry and not quite as slowly but almost as slowly for us, we're setting records in terms of profitability. We are, the industry is, and day rates too. So maybe we can conclude, although I'm not quite there yet, that the if rig increase slows down in the lower 48, we will be pushing the $7000-a-day margin that we're getting in Canada currently.

Offshore -- the offshore story is frankly not very good. Q3 was modestly, essentially even with -- actually it was down a little bit compared to Q2. But we will go up (indiscernible) the first quarter will be materially better. But it is still not going to be anything to write home about. We so far have a weak demand for workover rigs and workover jackups and the rigs that we built or improved modestly, like the MODS rigs and the 300 barge -- rig 300, which is an (indiscernible) barge rig, they are doing pretty well. And I guess we are seeing signs right now of much more optimism. But we saw that at the end of last year, we projected it, and we did not hit it, so I don't know. I think time will tell.

I think the other edge that we have in this is that we have opportunities to move some of the small jackups, two of them, to move them into international status. And we always have opportunities to move Sundowners and Super Sundowners internationally, and we're aggressively pursuing that.

But the overall picture can only be enhanced if, as, and when the wells get better.

Well-servicing, I think the results were pretty good. We went from an operating income of 14 and small change in the second quarter to 18.5 in the third quarter. The fourth quarter definitely will be down seasonally, but we will be back up next year and we will be doing better there.

I think it is kind of nice to know that the increase between Q3 and Q4 was essentially all a function of pricing. The rig hours were essentially the same. The truck hours were essentially the same, and we had increased day rates -- $13 an hour on the rig rate and $4 an hour on the trucking rate, and that made the 4 million operating income.

So I think what we're talking about doing in well-servicing is the same principle. We want to get the technologically most advanced rigs that exist that we can invent (ph) with our vendors to work there. And over the course of the next little bit, I think we will have a fairly substantial number, maybe three-plus dozen new millennium rigs, which will be 500 horsepower rigs, PLC, all the bells and whistles. A safer rig, a more attractive rig, a productive rig. We will also be buying a large number of trucks and disposal wells.

I think what we have decided to do here, as well as elsewhere, is go for the state-of-the-art equipment, even though it is a slower way to get there, instead of buying -- bluntly, buying EBITDA that may or may not be working a year or two down the road. But I think the story there is pretty good.

The international story is, again, pretty good. We had a big increase this quarter over last quarter, but there is nothing to write home about because we should not have been that low last quarter. But we are getting better. It will get better in the next quarter and it will get better thereafter. The point clear and simple is that we have demonstrated in Canada and the United States that we can produce these favorable underlying characteristics, we can convert them to bottom line, and I'm certain that we're going to be able to do that in international.

Rather than give you a projection, other than we are going to be increasing successively each quarter materially, talk about some of the things that we have not yet figured in, and we were rewarded over the weekend -- six oil rigs in Saudi, which is in addition to the four we were already awarded. That one I think the good news is that they are good returns and we know for sure that we have a substantial premium over our competitive bid -- not the most -- over, I think, far Eastern rigs.

But nevertheless, it was a real gap and they definitely wanted us to work there and they wanted us to be -- and I am pretty sure that by the time those rigs are working, that will be -- can I say how much the operating income should be? It should be $20 million for those when they are all working at the annual rate.

We are also -- I think mentioned earlier we're looking at taking some of the jackups. We're looking at taking a couple of those for working West Africa, which would not have a prayer of getting anything that continuous or those day rates domestically. The outlook in Algeria is good. Right now, we only have four or five rigs working; I think shortly we will have a fifth, and there are prospects for more than that. There are prospects in Mexico on the land side.

Anyway, the overall outlook looks good. I think we're in an ideal position to take advantage of it and we've got the money. We have got the rigs. We've got the infrastructure. And I am reasonably confident, as is our management and Board, that the capital we're putting into those things will be converted significantly pretty quickly.

Also I think mentioned that the Columbia situation with Ramshorn is a deal cooperating with our international operation in Columbia as well as our domestic E&P (indiscernible).

The small ones, I don't think I'll talk too much. Canrig's in the black. The accounting on Canrig and the accounting on our instrumentation is such that we expense almost everything, and there is no intercompany anything in these operations. Canrig is selling top drives at direct cost -- no overhead or anything. And the instrumentation folks are writing off 100 percent of the research and development it has incurred and also we had to consolidate. If you look at this decline here, but that is a result of consolidation of the (indiscernible).

But net-net, we're doing pretty well in Canrig. We are going to be in the black, even though actually they are losing a little money on the sales through NDUSA. And the Company gets the benefit of that in lower capital costs, not in reimbursement costs. But they have good positions in China, Algeria, and actually, Russia. And the boats were in the black. There is an issue of how long we will be in the boat business, frankly, but it is not a materially significant thing for us. We will probably make a little bit of operating income. We'll have cash flow from about a 6 or $7 million depreciation which we won't spend and we will see where we go.

On the balance sheet, we are in excellent position. We are down to a net 20 percent debt-to-capital, and most of the sell-side guys know how to figure out what total cash is, which is close to 1.2, 1.3 billion. Some of that is under a year. If you had a treasury note or bill that matures in 15 months, that's counted as long-term and it is in a different place on our balance sheet.

We have an issue with a contingent convertible, which will not affect anything at the end of the day, and I don't think that will be a material factor. And probably there are ways to get around it, but you all should be aware that there is a change proposed as to how you account for one of our convertibles -- both of them as a matter of fact.

Tax rate this quarter was up over the last quarter. I think next year, we had indicated 16 to 18 percent probable tax rate. I think it is probably more likely to be closer to the 18, because that is significantly a function of how much incremental income comes from the U.S. and Canada, and the more it comes, the higher the bill. As you know, the tax bill passed (ph), which probably essentially eliminates the risk of retroactivity on our inversion. We will have to some adjustment to treaties, but I think we will do that.

I think I will summarize very briefly. I have taken more time than I wanted. We are going to have a good 2004. We are going to have a better 2005, and we're going to have a still better 2006. And pretty quickly, we're getting to the point where -- we are already at the point where return on assets employed is materially in excess of our relatively low cost of capital. But I think in the next year or two, year or so, we will get to the point where we have the kind of a lead position in terms of return on capital employed minus cost of capital that we like to have. That concludes my --.

Operator, we're ready for the question-and-answer portion of the call, please.

(OPERATOR INSTRUCTIONS) Marshall Adkins of Raymond James.

Gene, it looks like we finally hit that inflection point for pricing and operating (multiple speakers).

(multiple speakers) to make you right.

It feels good. So help me understand how sustainable it is. And you went through a lot of rig numbers there that I want to make sure I understood as well. It appears you're roughly running 220 rigs now. And I kind of counted roughly about 50 rigs that -- in U.S. anyway -- that you can upgrade or over time bring back out. Is that the right (multiple speakers)?

I think the total we're talking about is like 272, of which 220 are working.

Okay, and the pace at which you are bringing them out appears to be somewhere between five and ten rigs a quarter, from where we stand now. Is that a ball park number?

I think that is probably right. We are working on 15 of them. Some of them are really ready (indiscernible). And we have four pending, four or five pending actual contracts. So I would say there are 20 above the 20 that will come out, I think, in the next quarter and a half.

So maybe a little higher, maybe next 20 in the next quarter and a half. Then that rate obviously slows down, I would expect, as you go through '05.

The prices are going up. So far -- I think I mentioned this. If not, I will. We have capped out in terms of CapEx at 3.6 million of rig, and these are really good rig, and the prices are getting higher. So ideally, we would like to get -- for some of these, we would like to get a term contract that covers it.

These are the U.S. rigs, not the Canadian ones you were talking about?

That's correct.

Okay. That leads me really to kind of the last part of the question, which is assuming you're putting those out, should we expect these kind of pricing increases to continue? do you think you're going to keep getting them with the additional rigs coming out or is the demand just that strong, to where you're going to be able to keep getting pricing like we saw this quarter?

I think the average will not be as high next quarter or the quarter after. This is the total gross margin average. But I think on the increments, we're doing pretty good, better than -- if we get an SER (ph) rig with all our bells and whistles, upgraded, with a moving system where a lift and roller or some of the skinning system that we can do pad drilling on, and we have top drives on. The margins are what would have made us smile normally three years ago.

But obviously, that's not 100 percent of the rigs. But the leading edge is pretty good, and some markets are still more competitive than others. But the new rigs, like -- I think I mentioned four of those Canadian rigs are eligible to come to the States if they get the right kind of pricing deal, and those deals are going to be pretty good when we get them. So the leading edge is still pretty good. The average, as usual, is not going to move up as quickly as it did last time. Although as I mentioned, I think, we're looking at $7000 a day U.S. margins in Canada right now.

Okay. So it sounds like bottom line, don't model an $800 margin improvement every quarter going forward, but it is still going to be well above the 2 or 300 you have been averaging for the last four or five quarters. Is that --?

Above -- I won't put an adjective in front of that.

Great job, thanks.

Arun Jayaram of Credit Suisse First Boston.

I was wondering if you could elaborate a little bit about the contract awards in Saudi Arabia. I think you mentioned that it could potentially increase your operating income on an annual basis by 20 million. That would suggest cash margins of 6 to $7000. Is that accurate?

No, I think higher than that.

Higher than that? Okay. And what kind of investment are you making?

I knew you would ask that question.

And where are you sourcing these rigs from -- is it from --?

Four from the States, one from Canada, one from Brazil. Bolivia, sorry. And the CapEx is appreciable, but the returns on assets employed are decent.

Maybe a ball park range of return on investment?

It is in the ball park of what we would like to have and it's above the average we have now.

Okay. A second question in terms of Canadian margin, do you have a number for Q2 or pardon me Q3?

Let me look back but I think like high 5s. One second, 5300.

Last question, looking at the other operating segments, manufacturing, logistics saw a little bit of a sequential decline in revenues. Was there anything specific there?

The main thing -- Bruce do you want to explain the consolidation?

Our boat business, we are now consolidating -- accounting pronouncement FIN 46, and we're consolidating those. So --.

There's no elimination, then?

The elimination, where previously we had shown revenue, where we leased the boat to our 25-percent-owned (ph) company and leased them back, effectively, revenues were a little bit grossed up.

So on a same-store sales basis, were revenues flat, up or down?

Modestly up, I would say.

Okay, that's all I got. Thanks.

Scott Gill of Simmons & Company.

Gene, prior conversation here, it sounds like your unstacking 20 rigs for the lower 48, with safety being a concern of your customer. Talk to us a little bit about what you're seeing in terms of being able to staff up those rigs, what type of labor costs, price pressure are you seeing in the market.

I think so far, we are able to do it. So far, we are maintaining our pretty good safety statistics, but we're not, frankly, improving it as rapidly as we would like to improve it. And I would say that we will solve the problem of crewing with a lot of effort and CapEx and stuff like that. But I think it is an actual fact that in the Rockies, the growth could be faster if we could staff up better.

There are almost no crews in the Rockies. We have to bring crews into the Rockies. The drilling is tough (ph). People don't like to travel up to 20 hours and work for seven days. So what we have done with one of our major clients is put in a pretty elaborate camp. We are about to do that with another client. And try to get a (indiscernible) type camp, which is a pleasant place to live. And we try to go to two weeks on, two weeks off, if we can. You know, that sort of thing.

But I would say that with just a couple of clients who are with us in terms of being concerned about safety, safety and operating efficiency both, there could be in one case a doubling of the rigs, in another case, a 50 percent increase. We could have 6, 8 rigs more now if we and the client were convinced that we could crew it up satisfactorily. That is the biggest problem in crewing, is the Rockies by far.

Gene, those camps that are being installed there in the Rockies, is the customer paying 100 percent of those costs?

Yes, so far.

Going over to Saudi real quickly here, it sounds like there's been two tranches of awards, with six rigs being awarded more recently. Any other bids outstanding for Saudi Arabia right now?

Not for us. I think there were four gas rigs which we did not get.

All right, thank you.

Kevin Simpson of Miller Tabek.

Good morning or afternoon, Gene. I guess still morning. A couple of questions. This is the first time that you have mentioned the rates that were achieved in '01, whereas maybe in prior presentations you seemed to be encouraging us to mute our expectations about how high rates could go this cycle. Have you changed your thinking on this and, if so, is this just a question of the enhanced opportunity?

No, I would say that, bluntly, thinks have gone a little quicker than we had hoped. I think, if you recall, we originally said that we thought we would be maybe ending this year domestically with a 3000 margin and we thought -- the subsequent call, said we might average that in the fourth quarter. Now we are averaging it in the third quarter.

And some of that, again, let me emphasize is price, but some of it is cost. And the cost thing I don't think we will have again; in fact, there will be a negative cost by the first quarter, a one-time seasonal thing.

So I would say that to the extent we talked about the ultimate price being 42 or it was interpreted that way, I think we will get to -- have a good chance of getting to 42 before the real long-term, but not any time that we are predicting yet. But the way things are going, that isn't impossible in a year, 1.5 years -- or quicker.

How much of the fleet is tied up in pricing arrangements that would delay the price increases?

Very little. I think the main thing that is hurting us now is when we have bigger rigs on long rails and, up until now, you cannot increase the price during a well. So that's been the major thing. I think one customer with seven wells, seven rigs working, now has a deal through the end of next year.

Anything else like that?

Not too many. It isn't even 10 percent of the whole fleet. We have one or two coming out that we like -- new prices (multiple speakers) happier commitments. Not enough of those though, yet.

I just wanted to get a clarification on the tax rate. I guess I missed some -- are you thinking, whatever, 18 type percent for 4Q and '05 or just for '05?

'05 (ph).

And assuming that --

It's probably something about 13 percent for fourth quarter.

Thanks, Denny. And if we are looking out, now with a better looking cycle, people are going to be thinking a lot harder in '06 potential, and assuming a decent amount of that increment is going to come from higher rates in the U.S., do you -- is low mid-20s -- does it keep on ramping up?

To the extent that the international stuff ramps up, that's the lower tax rate. The marginal tax rate in the U.S. and Canada is pretty high. The marginal tax rate is 30 odd percent here. So it depends how quickly the international stuff comes up.

I guess I will just actually do one more. You mentioned international. It looks like you just put up a great contract in Saudi Arabia. You did mention Algeria and Mexico. Could you talk about what else is out there on the radar screen over the next 6, 9 months that could be awarded?

A lot. The question is how do you convert that to taxable income? Otherwise, it is irrelevant to your question. So I would say Algeria, there are prospects beyond the fifth rig. I think I mentioned -- I didn't mention maybe there is a second rig in India that should be pretty good at a pretty decent day rate. We have a couple of rigs working in Mexico we are not getting rich on, but we are bidding a couple, three more with a better chance.

One of our very best rigs is rig 801. That has got all the -- 2500 horsepower with 1.5 million book load (ph) and three 1600 (ph) horsepower mud pumps and 7500 psi. That is idle. And we have got to find a job for that either internationally. And ultimately, that might go, but not quickly, to Mexico. And we are looking at U.S. Gulf prospects for that.

So there is a lot. But the question is -- there's a lot so that we are almost no-bidding some stuff right at moment. But the question still is how are you going to convert that and how quickly we are going to convert that to taxable income. That is the whole point of the whole thing.

Presumably the bar on pricing goes up as the U.S. pricing and margins go up.

As you and I discussed one time, you send six rigs to Saudi, that tightens the situation every place.

Thanks, that's it for me.

James Wicklund of Banc of America Securities.

Good morning, everybody. Gene, in the workover rig segment, you are adding some capacity there. You talked about you would rather have those high-end rigs than combine older fleets that may not be working in a couple years. What are your return criteria in adding capacity there?

Pretty good. We have to do probably twice -- whether we do it all --. First let me say, this replacing, reconditioning some of our old rigs too, so that the net-net increase in fleet might not be much, if anything. In other words, we have a significant number of rigs -- I don't have really right on hand. But this year, we will refurbish, remanufacture, if you will, 35 rigs domestically workover rigs. And that is like 10, $12 million. But if we buy these new rigs, when we get in there, we won't be doing this other stuff, so it is not necessarily 100 percent addition to capacity. Probably not.

And I would say the return -- when you look at buying something, when you put it crudely to buy EBITDA, you're talking 5 plus times EBITDA, and we are looking at 3, 3.5 times EBITDA on these things. Hopefully, less, but that's what we are looking at. But it takes longer there.

And the lookout for workover remedial activity with these commodity prices is what is driving the increased demand there, or is it more just to have a more modern fleet with the demand that exists?

To have more modern is never with us an intent. We think the activity is getting better. Even the conservative oil companies, I think, are up from 16 to something in the low 20s for --.

25 for Shell.

Okay. And that implies a whole bunch of things, including it pays to go after workover stuff, more than at 16.

Next question, Saudi Arabia, you said that you won the bid with a much higher margin than some of your competitors. Typically, he who bid the lowest wins. You obviously didn't do that. Can you tell us how you won the contract without the lowest price?

What (indiscernible) tells me is that his organization is superb. I think what is obviously happening is that in terms of total availability of crude, particularly the light kind of crude, which is the only kind incrementally that is marketable, the Saudis say they are going to have a spare 1.5 million barrels at all times. But obviously, they're going to have to work like hell to get there. And when they are in -- I won't say a crisis, but kind of a super accelerated program, they want to have a little assurance that it will work. That's all.

The six rigs that you're going to put in, like you say, one Bolivia, four in Canada, how about the couple that you had won before this rig order? Where are those four rigs coming from? Were they already in Saudi?

Some came from South America. They are all existing rigs (indiscernible) national fleet (ph) in there. Coming from South America; one is coming from Kazakhstan; this is coming from other places.

Just managing them around. Last question if I could -- (multiple speakers).

Let me add a comment to what (indiscernible). One of the factors was a part of their pressure to do what they have to do is to get the rigs there on a timely fashion. And I think we were, for a variety of reasons, in terms of the rigs we have, in terms of our purchasing power and all that stuff, we are probably able to get them there quicker. (indiscernible) likes the first answer better, though.

I don't blame him. Last question, can you catch us up on what is happening in Russia?

Not much for us. I don't think there is much for any drilling guy. We -- Deutsche Ag (ph) are building two rigs there, I think, for Shell. Some of the guys -- we did not succeed in the former Soviet Union with (indiscernible), and there is probably another rig go into Russia. We will have an announcement probably in the next day or two about people that might help us get there.

But realistically, I don't see anything immediate there. I don't see really much there for any drilling company. But we think we could do a good job there, but between -- there is at least two steps. We think we can do a good job. The customer has to think we can do a good job. Then the guys in the field have to think that they are doing something that we can do better. And when you put all those things together, it doesn't add up too easily.

Okay, thanks.

Roger Read of Natexis Bleichroeder.

Good morning, gentlemen. Specifically with the rig mobilizations and reactivations, I guess you would call it, going into Saudi Arabia, does that hamper the margins in the fourth quarter and the first quarter, and are we going to see -- you've already said we will see an increase, but is that going to be something where it's an increase in Q4, Q1, and then a bigger one even in Q2 as everything goes to work?

You're talking about the Saudi thing?

Yes.

I don't know. I frankly don't focus on that. What do you think?

(indiscernible) won't have any negative impacts.

Okay. No real impact then?

(multiple speakers) capital, but then we get a big (indiscernible) fee upfront, Roger. And then the average of the margins should be creeping up as these rigs go to work.

Okay. So it will just kind of step in -- the way we would model it, just step in the rigs as they come in.

Exactly.

In the U.S., could you give us an idea? You mentioned that the cost to reactivate rigs has gone higher. Could you give us an idea of maybe what that has been doing throughout the year and where it is today in terms of reactivating these rigs?

I think the average cost for the 53 rigs domestically, including the so-called technological things, was 2 million a rig. And that includes drill pipes and mud pumps and the whole thing. I think I can't be totally precise on that.

And the last ones, the most expensive ones we've approved so far, are 3.5 million plus drill pipe. And one of those is going on a 2.5-year deal that is fairly attractive, and the other ones will go on to good customers at good prices for good returns.

Right now, for example, we have a couple of mechanical rigs and we don't normally spend money on the (technical difficulty) would be at less than the 3.5, but mechanical rigs are not our long-term statement. So we said we will do these if you find a customer to take them for, say, 15 months. And then we have some other ones that are SER rigs, but the CapEx is even higher. Then we would have to worry about not only whether we can get a contract or whether or not the kind of Canadian rigs that we can build, the AC rigs, are the way to go compared to fixing up these rigs.

So I think is a high-cost problem, because whatever our situation is, I think most folks are in a higher cost position. Even when we have to take a rig like Ziggy's (ph) rigs, I can't believe that our ability to get timely delivery of mud pumps, SER, drill pipe, all the things that are there, much less the cost, I think we have a competitive advantage.

Okay, and cost of drill pipe, has that been stable, continuing to move upwards? What is your inventory situation there?

It is moving up. We have some inventory, but we are buying a lot.

George Gaspar of Robert W. Baird.

Good morning to everyone. First question, I would like to pursue just a little bit on the Saudi situation. Can you give us some color on how many rigs you were operating prior to the 10 contracts you're now talking about. What percentage of those previous rigs were working for gas versus oil? And what is the intended use of the 10 rigs that you're going to put on contract, percentage to oil, percentage to gas?

Bob's 10 (ph) are easy. They are oil.

Yes, I think when the six rigs go online, we will have 29 units working there in total. That means we had 17 before the last four awards and these six awards.

Is that gross or net?

That's gross. (multiple speakers).

If we get it to 100 percent owned rigs, it's four rigs fewer, is that right?

Yes.

What would be the percentage then working for oil overall versus gas?

Of the 29 rigs, how many work in gas?

On the 29 rigs on the gas, you have to deduct there's three accommodation (ph) units in there; there's 26 drilling rigs; and in the gas, my guess is about 8, 9 rigs. Plus the oil and some workover.

Okay, fine. Gene, pursue a little bit on your comments on the lower 48 day margin. You did very well in the quarter, obviously, going quite above what your thought process was at the last conference call. And you are alluding to the possibility here of getting up over the previous cycle high.

Not the previous cycle. Previous cycle high was like $6000 or $6200. I didn't mean even to allude to that, except we are above that in Canada.

Yes, okay. Well, if you look out over the next year, the fourth quarter and the next year, what kind of incremental up steps can you take on this margin?

I can't. I think we will have an increase in the fourth quarter. I hope we will. I think we're planning to. We are implementing things that will get us there. It won't be as big because it won't include any elements of the cost that were included in third quarter's numbers. I think in the first quarter, we will have another step up, but it will be probably even smaller because we have plus costs that are seasonal early in the year.

So beyond that, I see no reason if the demand stays there, which, as you know, I am a firm believer that it will, and if the cost of rigs are higher and there is no more -- a whole bunch of rigs available, then I think the rig count will continue to go up modestly and I think the day rates will go up, I would say, modestly. If they go better than that, we will be able to cope (ph).

Your thought process has changed quite a bit, evidenced by your performance in the third quarter. I know previously you did not really think that there was much of a shot at getting up into the previous cycle high. Do you feel that the way you are seeing things that you're going to have a shot at that within a year or two?

Frankly, you can think we have a shot, and it is irrelevant. The point is we are at 3. Before we get to anything higher, we have to go to 3.5 and 4, and we're going to try real hard to do that. We previously said that we thought this cycle or this little boomlet or strong period would cap out at 4, 4200 bucks a day, and it looks like we have a chance of getting there quicker than I thought.

Great. Okay. A question on Russia, just this YUKOS situation. How much are you doing for them, if anything, and if you are, are you still working for them?

No. No to all of those things. Part of the benefits of not succeeding is you don't get clobbered.

One question on South America, Venezuela (multiple speakers).

We have places we don't succeed, right?

On Venezuela, you had a lot of rigs stacked there, and is that your supplying going international?

No.

What is your status there?

We have one rig working I think and --

One rig working there right now in western Venezuela and we have one rig stacked. (multiple speakers) That's all we have.

Oh, that's all you have. Okay.

That's down from 16 in '94. It is all been repositioned to other markets.

All right, thanks.

Mike Urban of Deutsche.

You have talked a good bit about your plans to potentially add capacity. I was wondering what your sense was for what the competitive landscape looks like out there, how many rigs might competitors be able to add (ph), and then are they the kinds of rigs that customers are looking for?

I frankly don't know. I think one of your peers put out a pretty good report. I haven't had a chance to look at it, and that is Craig Diehl (ph) put out the comprehensive report. I think basically we are in as good a position as anybody in terms of really availability of (technical difficulty) costs. We put out 50-odd of them this year. We have access to (technical difficulty) -- I think we're in as favorable a cost supply position as anybody, probably as anybody in the aggregate to tell you the truth. (technical difficulty) --the costs are going up and I've got to believe they are going up for them too.

I think you may have alluded to this a little earlier but as comp moves up and as crews become in shorter supplier are you running into -- either again you or are you seeing out there in the industry any efficiency issues such that it causes some pushbacks along the lines of what we have seen in prior cycles?

Not yet really. I think one of the reasons the rig count has not increased quicker in some of the Rockies is that we and the clients are both pretty alert to those kind of issues. I hear once in a while that we have a new crew working for -- especially do I hear it if I know the customer and he tells me. But it doesn't happen too often, frankly, nothing remotely like what it was before, 2001/2002.

That is all for me. Thanks.

Dan Pickering of Pickering Energy Partners.

When we look at the Saudi rigs that you're moving in, if those rigs were going to be built new, purpose-built for Saudi, what would they cost?

The rigs are basically existing structures that we have (multiple speakers) the new cost I would say probably $20 million.

Okay and I guess it is safe to say that you're taking existing assets. Are you going to have to do meaningful upgrades to your assets to put them at Saudi quality?

Yes.

20 million is for the oil rigs. The gas rigs are even higher specifications, probably 30.

Is it fair to say, then, that your book value plus the upgrade costs still gets you in at less than half of replacement costs?

No, way below though.

Ball park.

Okay, so 50, 60 percent of replacement costs is where you're going to be, okay. And I don't think -- or if I missed it I apologize -- the timing in terms of the startup of the 10 incremental rigs, when would you expect them to be generating P&L impact?

The first four are going to be all started up in Q4 and then you see the first one -- first few rigs starting Q1 next year and then Q2 you have the full impact of all the rigs.

The end of Q2 all will be kicking out past -- (multiple speakers)

But you should slip the contribution about a quarter.

Ok, so third quarter '03 will be the full impact of all 10 new rigs and will scale in starting Q1 and Q2.

The first four are going in this quarter, Dan, which means that the full impact of first four should be felt in the first quarter. That (technical difficulty) whose impact in full will be felt the second quarter. The last four will go in in the second quarter whose impact will be felt in the third quarter.

Got you. And there was a question earlier about startup costs, but I just want to understand in terms of infrastructure in the country and is there any fourth-quarter impact in terms of new facilities or other expense costs?

No.

All right and did I hear the number correct on the well service rigs, three dozen, 36, Gene?

That was an approximation. It might be -- you might round it up a little.

Okay, so it might be 25, it might be 40.

Yes

And in general 2005 CapEx, have you talked internally or externally about the number yet?

No.

Is it safe to say that it is going to be a bigger number than 2004?

No.

No, okay. What areas will the number be down? Because I am hearing up in well-servicing, I am hearing up in international --?

Well-servicing, I would say that we spent almost $60 million in those accommodations (technical difficulty) and that could come anytime but I don't really see that. We've done 50-odd real significant upgrades in the lower 48. We are not going to do -- I don't think -- 50 in one year even though they might be more expensive per unit.

Okay, so theoretically less money in the U.S.

Also I should have pointed out that earnings and depreciation and also exercise of other cash income is offsetting this whole CapEx, the 0.5 million -- 0.5 billion CapEx plus 45 million for Ramshorn plus an increase in working capital. So we are generating all we need, but what we are doing is really plowing back into upgraded facilities and equipment our cash flow.

Last question, U.S. customer base. Are you seeing any indications of interest in terms of three- or six-month contracts? Are you too much well-to-well right now?

We are getting some of them and we are open to more, particularly on for example the $3.6 million 1000-horsepower rigs, I would like to see us hit (ph) terms on all of them. And then all these Canadian upgrades, super upgrades and new rigs, we have got or will have terms on all of them.

Is the mix of your drilling changing? Are you seeing any increase in acquired (technical difficulty) majors or still smaller companies?

The majors are still -- we have like a 33 percent position in the majors, but I would say one or two or three of the independents are more than all the majors put together.

Okay, and so no rejuvenation of interest in some of the bigger rigs from the majors?

I would say that some of the fancier rigs, BP, Danzig (ph), one of our newest, best rigs, that is pad drilling configuration and Shell might take one or two. But that's two or three rigs compared to a big increment of rigs, even in the slowdown mode of increases.

Operator, I think we're past our time, but let's go ahead and take one more question please.

Kurt Hallead of RBC.

I appreciate the opportunity trying to slip me under the wire, but in the interest of time, I will catch up after the call.

Operator, with that, we will conclude the call.

Thank you, this does conclude today's teleconference. You may now disconnect your line and have a wonderful day.