Nabors Industries Ltd (NBR) 2004 Q4 法說會逐字稿

Good morning and welcome to the Nabors Industries, Inc., fourth-quarter earnings conference call. [Caller 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, everybody, and welcome to our fourth-quarter and year-end conference call. Thank you for joining us today. We will use the usual format we do and try to limit the call to one hour. Gene will give some remarks about the results of the quarter and the full year, and our outlook for the next quarters and going into 2005 full-year.

With us today in addition to Gene and myself are Tony Petrello, our Deputy Chairman, President, and COO; Bruce Koch, our CFO; Bruce Dayton, our General Counsel; and all presidents over various operating units.

As always, we need to remind everybody of the forward-looking statements. A lot of what we are going to talk about obviously is what we anticipate the future to be. And while we are super bullish, things can change as everybody knows. With that I will turn it over to Gene to get started.

Thank you. Again, welcome to our fourth-quarter and calendar year conference call.

I think we had a real good quarter and a good year, but also I think it really confirms the bullishness and optimism that we have been reflecting for at least a couple of years. The numbers specifically, and we really focus on operating income, was fourth quarter was 113.8 which was a 73 percent improvement over the preceding quarter, the third quarter of '04, a 35 percent improvement over the fourth quarter of '03.

And for the year, the operating income was 330 roughly, compared to 213, a 55 percent increase. Net income was almost as good, although we had a higher tax rate. $0.68 for the quarter; $0.42 for the comparable quarter a year ago; $0.48 for the third quarter; and $1.92 for the year compared to $1.25.

Let me go through, before we get into the unit by unit discussions, some of the things that underline and support the kind of optimism we've had for some time in which we think manifest a confirmation of sorts of the kind of bullishness we have had and in fact still do have.

Let's look at what's happened in the Lower 48 which is, you know, a pretty key market. Not the only market, but a pretty key market, Lower 48.

Look back to the beginning of '03. We had 100 rigs working. We had a gross margin per rig of less than $1,800 a day. And if you look forward at that point, looking through the wall of worry, it would have been a pleasant surprise to know that we, for the calendar year, we did 143 rigs and the average was 2,100.

Then, as you may recall, everything was supposed to level off, and the second derivative was going to go negative and all that stuff. But in '04, we did 199 rigs, and instead of decelerating, the gross margin increased to just under $2,800 a day. In the fourth quarter of the year, we had 217 rigs working, with- and I will get into this a little bit more later- with something a little north of $3,600-a-day margin.

Today we have 223 rigs working, and I will tell you pure and simple, I will be very disappointed if we don't have 15 to 20 percent more rigs working in '05 than we have had in '04. And I will be disappointed. I am not projecting any of this, but I will be disappointed if our average margin per rig doesn't go up to around $1,500 compared to what we averaged in '04. We have a similar situation for Canada, the work over, International.

And the bottom line is, everything is really hitting on all 12 cylinders and it's manifesting itself in the bottom line. The second broad point is that we run our Company based on return on capital input. That's our key metric, and that's operating income, and that's why we emphasize operating income, minus cash taxes.

And you notice a big chunk of our taxes are deferred taxes, and that's over capital employed, net of spare cash which is the conventional way to do it. I think- I don't know know enough- I think you maybe need a Ph.D. to figure out what our cost-to-capital is, but it's pretty low. And looking at our return on capital employed, '03 we had 6 percent, '04 we had 8 percent, in the fourth quarter it was around 10.5 percent. And I'll again be very disappointed if it isn't north of 14 percent in '05.

So the kind of metric that usually in my view determines value in the long haul is the difference between 14 percent and a pretty low number in terms of our cost-to-capital. And our objective is to maximize the difference between those two. Then I think the third broad point I would like to make for all of our divisions, and I'll kind of emphasize this primarily within the USA, is the emphasis we have on quality, not quantity. And I think this has manifested itself in terms of more market position, more rigs, easier price increases, et cetera.

We've emphasized more top drives, more hydraulic power, increased mud pumps, larger-capacity engines, automatic drillers, faster moves, including the ultimate in fast-moving, the pad drilling technology which we've had in Alaska for a long time. And there's been more horizontal drilling as we- as the industry goes to horizontal drilling, so more of the rig requirements are moving into our sweet spot, which is bigger rigs.

Some with top guards, but also total midget [ph] depth is a whole bunch more with horizontal drilling than the vertical drilling. And that's been a major contributor to our market position going from 14.5 to 22 percent and I think it's largely- I don't think it's noticed enough. Because the other thing is, the doomsayers or the pessimists are saying this is- this is it, and I can tell you that our NDUSA profit operating income next year, I'll be disappointed if it isn't more than double next year in '05 what it was in '04. The same thing is true for every one of our operations. I'll just go through a few of the things where we demonstrated that the whole Company has had more capability.

I think International, I think it speaks volumes to say that we've got ten rigs in Saudi, not the lowest prices, and we are going to get them there on time. Is that right, [indiscernible-unidentified speaker]?

Yes.

And I think they weren't the lowest price, but this reflects with the -- the [inaudible ] were worried about spare capacity.

And, you know, that we got ten rigs at a higher price than some of the other people indicates that they didn't want to be in a position of getting something 5 or 10 percent cheaper and not having the rigs there on time and not having the rigs perform, and I think we have- that's a case where some of the generalities we've been talking about got converted to awards, and this'll manifest itself this year, later this year and next year.

I think Canada probably is the best example of quality, not quantity. What we did was we took the worse rigs in our fleet and converted them with pretty intensive upgrades to the best rigs in our fleet. And we did this without adding very many net rigs. So we have four rigs now. Almost all of them- all of the four we have, we brought out on the hope they would be more competitive, vying instead to be the first to work, instead of the last, get the highest day rates instead of the lowest, and they are all on-term contracts already?

We will have four more of these, and the fifth should be spudding right now. That's -- that's on AC. Kind of a new thing. An AC rig that is coil tubing to become stem drilling. And that's right now drilling for Apache in Canada.

Let me go through the individual companies relatively quickly. And leave a little more time for questions because I am sure there will be even more questions than usual.

Alaska, '04 was about- Q4 was about the same as Q3. Q1 will be higher, seasonally better than Q3, but still '05 is going to be lower than '04. If we're lucky, we'll be, you know, lower by a smaller amount than 20 percent. We still have a lot of things to cook there, but until something happens, like Anmar [ph] opening which is now worth mentioning, it's a possibility. We have a couple of really good rigs there is that we hope to get a better value from in the future than we have in the recent past. Rig 33, rig 273. Both of those good work -- 273 is a good 3,000 hotspot [indiscernible] work anyplace in the world and rig 33 can get full-time employment instead of the part-time employment it's had.

What we really need is for BP and the majors to farm out acreage to people who don't have as much choice and who will use something other than a 20 or $22 price tag for WTI. NDUSA, the metrics, the numbers are really good. Fourth quarter we had 31.8 operating income compared to 30.2 in the third quarter and compared to 8.7 dig increases. For the year, the operating income will be- was 92.9 compared to 16.8 in the preceding year. We went from 143.1 rigs to 199.

This- I went over it sort of in my introductory remarks, but, you know, I'll repeat again that we'll more than double the operating income, I think, and I think we'll be up in rig count at least 15 percent. And I will go through a little bit of that.

We- the two Shell rigs that we have- big rigs showing on, one of them, rig 143, was declared the Shell rig of the year, which is the best rig out of- Land Rig of the Year. The best rig out of 58 land rigs that Shell works worldwide. And we have a rig like that going to work for BP. I don't know if that- that's spudded, working ready rig 413 in the Rockies.

And in general, we have been spending a lot of time, as I said, on increasing rig moves, increasing rate of penetration by a variety of ways. And we can give you details on some anecdotal illustrations that we're- the fast rig moves and the increased rate of penetration have actually, in some cases, lowered well costs in the same area compared to 2001, and in many cases kept it the same. In all cases mitigated the increase.

So we- the story right this second is we have 223 rigs working. We have 8 stacked, ready to work; 3 of those are committed; 4 are being worked on. And that's the total of 435. One is being upgraded big time in Canada and that'll come down probably April. And that'll be an AC rig. Take, you know, one of our lousy stack rigs and making it a real good rig. They have 3 potential additional rigs like that depending on whether they go here, Canada or International. We have 2 rigs ready to go, subject to getting a payout for the term of the rig, one of which I understand is pretty close. Beyond that, we have 9 rigs that were- we can put out for approximately an aggregate of $15 million, plus pipes.

So I think a couple, 3 things are true. I think there's a good deal of discipline, not only by Nabors, but by everybody in the industry, and the discipline is comprised of two things. There aren't a ton of extra rigs around that can economically be upgraded and the capital costs of new rigs are not trivial. So we have an edge there. And I think that'll continue to do well.

Talk briefly about our EMP operation in- we've done pretty well. It's not a big deal, but it's, we look for it to make decent returns on its own right, and we look for it to be a lucky strike extra in terms of rig work. And I think, you know, it's basically worked that way. I don't know what the return is, but my guess is we've done better than 15 percent return on all these things.

The dollars aren't humongous, but they are significant positive high return and also we don't count it, but, for example, we have most of El Paso's rigs, we have all of two or three other taps rigs because the ramps aren't [indiscernible], we recently started a program in Columbia where we really have a very promoted to others position and rig works.

Okay. Talk about Canada. Again, the numbers are as you would expect. Really good because this Q4 is the second-best quarter of the year, and we went from operating income from 13.9 to 31.4 in the fourth quarter, and that was a record quarter, and the number- we had 54.4 rigs working. Average margin was $6,700, compared to 42 rigs working in Q3, $5,300.

But the big picture, I think, is that that's far from over. I would be disappointed if- well, we went from 60 and 91 million operating income 2004 from 2003, and I think we will have at least a $30 million increase next year. So it's not- yes, it goes from 50 percent to 33 percent, but there is plenty of room left. And Canada is the place where we had a number of rigs working.

I think I mentioned earlier, we had 4 AC rigs that we took from i.e., almost never working to first to work and we thought they would be very competitive. In fact all 4 of them are on term contracts, two of them with Suncor. And I guess the one with Anadarko, I can't think of the other one. But they are all that way and we have 4 more coming pretty quickly and as I told you, the coil tubing from stem drilling rigs will be working as well. And if that works, there's a lot more behind it.

Also, Canada built the mods rig, the modular offshore dynamic series, mods rigs for Nabors offshore AC rigs and they're doing super well in terms of minimus downtime, et cetera. In Canada, I think we'll continue to do well, and hopefully- although it will grow, it isn't growing as much as everything else of the seasonal hits that we have had in the past will still be there but not as dramatic. Nabors offshore, I guess, you know, I hate to put it this way, but things are getting better but it's not getting a ton better. In Q4 we had operating income of 6.5 million, Q3 was 4.5 million. Next quarter will be an improvement.

But in the aggregate, we did about $20 million operating income this year and even if it were up as much as 50 percent next year which I think we probably will be, or possibly will be, it still isn't the great big number. What's been happening here is that we've upgraded the rigs, these 1,500 horsepower and 2,000 horse power AC mods rig are doing really well in every regard. The large rig 3,000-horsepower large rig which I discussed before is doing pretty well.

But, you know, frankly what Nabors offshore has been doing lately is providing rigs for more attractive work, you know, international markets. International has done really well, and we finally- as one of our sale side analysts said we finally had a good quarter for the whole Company but including International, we had a 27.2 operating income compared to 24 in the preceding quarter and 19 in the comparable '03. The operating income in the aggregate will be- was 90 million compared to 78 million in '03. Again I think that will be up more than a third this year.

I think some of the more important things, the 10 Saudi rigs which we discussed a long time but that will hit the P&L -- entirely this year sometime?

Yeah, but in the second quarter.

Into the second quarter.

The ramps on project that I mentioned to you in Columbia will at the very least have two rig gears with almost no downside on the EMP investment. And the big possibilities next year are the Saudi thing which I have already mentioned four times, Columbia, Algeria. We are generally doing pretty well there.

U.S. well-servicing. It's good, and looking better. Operating income went from 47 to 57. I think we'll have a probably much bigger than $10 million increase for next year. Maybe as much as $20 million.

The fourth quarter this year was below the third quarter but not near as much as we normally would expect for seasonal factors, and, you know, we've -- we've been actually able to implement price increases that were somewhat better than we frankly had expected. And I think- I don't want to go through the time now, but if you want it later we can give you the rig hours and the rates and the truck hours and the truck rates.

I think- talk about the Canrig, Epoch [ph] and other things. Canrig is doing pretty well. Let me just summarize it's not all that critical because while we're doing 50 rigs in Canada, the 22 rigs that go to Nabors and the supplies that go to Nabors are zeroed out. There's no profit for the Company, but it helps us get the top drives we need when we need them.

And they're, I think, doing much, much better on the top drives and we have been approached in fact as whether we want to sell that. On the Epoch and Ryan, we are doing better, although it is nothing to write home about in terms of bottom-line impact, yet on the boat business, there will be a lot of interest in this. Basically it is getting better, but as you know, there were U.S. flag developments that make it difficult for us to continue ownership, and I wouldn't be surprised if we sold the boat business sometime in the next year or so. And I can assure you one thing that I'll be very disappointed if we have to take a book loss, which I don't think we will, and in a number of cases where we're not doing well, for example, Alaska is nothing to write home about, but we make some profit there, and we make a significant amount on the different cash flow on the difference between depreciation and actual CapEx.

So- well, I think the numbers were 16 million to 12 million- 12.5 million, frankly the forecast for next year. But the difference between depreciation and CapEx is pretty substantial, nearly as big actually.

Okay. I think I'll go to some of the other points that I think will come up.

Balance sheet -- balance sheet is in great shape. We have a debt-to-work ratio gross of around .41. Net of around .17. Maybe it's time we start to push for an upgrade in our S&P [indiscernible]. Depreciation was running around 255. CapEx around 545. But the stuff that was replacement was, like, 90 percent of depreciation and the other thing was that acquisitions, the big ones being the accommodation vessels and all these enhancements that we have been talking about, top drives, automatic drillers, iron rock mix, faster moving systems, that sort of thing.

So, but I think I'll talk a little bit about the tax rate next year. Next year the tax rate will probably be 22 percent compared to a 10 percent this year. I think we will probably have some questions on the increase in GSA in fourth quarter. A lot of that is nonrecurring.

That's a- 2.5ish was bonuses because we are anticipating frankly fewer options next year than we traditionally have had, and guys have done a good job and we want to reward them with bonuses. So we took probably 2.5 million more for bonuses. There's also another roughly 2 million, just under 2 million in what I would hope would be one-time accounting costs associated with the work we had to do on the 2023 convertible that exchange offered to get rid of a stupid accounting rule. Most of it was because of stupid accounting rules.

You know, a lot of these, I think, we had to change our domicile- the domicile of our finance company and a number of other things which I don't think will be recurring. So I think the 2 million of accounting costs will be largely one-time things, even though, you know, our accounting costs are increasing as the rest of the world's are. And the bonus was kind of a special thing because of the change in accounting that's going to affect the third and fourth quarter next year.

In other words, we will have to -- but overall, considering everything that is being considered, higher taxes next year will have- already- what we've done already, we'll have probably $0.06, $0.03 in each of the third and fourth quarters next year because of option accounting.

With all that being said, it is still- I don't think it should be a big deal to hit the first call consensus which I think by now it's like the middle 270s, and you know, [indiscernible] and I think the bullishness we've had for the last two years has worked out to be reasonable. That's what I [indiscernible].

Operator, that's the end of the overview, we'll open it up for questions, now.

Thank you. The floor is now open for questions. [Operator Instructions] Your first question is coming from Marshall Adkins with Raymond James.

Hey, Gene. Last conference call you mentioned you were rolling out, I think it was about 8 rigs a quarter was kind of your run rate in getting rigs up and going. Has that changed at all? Or are we still kind of looking at 8 rigs a quarter?

I think we are not looking at that. We have 223 now. I think we will end up with 230 or maybe 240 average for the year and, I think as I mentioned before in some detail, I think we have that many ready to go, provided the demand is there in some cases, the contracts are there.

But I -- if it needed to be more than that, we'd find a way to cope, Marshall, but I think we, and the rest of the industry, are exerting capital discipline, and some of it is not altogether optional. There aren't that many routes around and the comps are higher, and I think that is generally good for everybody.

Paints a pretty good picture. Day rates up 500 a day. Can you comment on kind of daily margins? You may have mentioned it but I didn't catch it.

More like 6- 600 a day. Yes, I would say on a leading edge- on the big- greater than 2,000 we are probably doing 16,000. I'd say we don't have all that many of those, and we're in the process of finishing lawn wells, and going up on the 2,000 horsepower, 14,000 but 2,000 were top drive. And I would say generally you can use $7,000 for cost [Indiscernible]. So the margin would generally be the difference between 7,000 and the day rate.

A little bit more for the big rigs and a little bit less for the small rigs, but that's a pretty good average, and when we have a top drive, if we have a rotating [Indiscernible] that extra 250 usually pays almost all the costs for it. So the top drives- and we have 48 top drives domestically. Most of them working that they contribute, and will contribute even more to the margins because as rigs get scarce, we're more likely to say the rig is available with the top drive carry it, you know, that kind of thing.

So it doesn't sound like you are getting much cost creep?

We are. We're getting some. I think we are going to be paying more for everything that involves steel. The last time I check with our purchasing people, we were only up like 1 percent on our [Indiscernible]. Do you have a more recent thing? That was like up for a quarter which was pleasant surprise. Drill pipes up a bunch. I had to say that because [Indiscernible ] asked me to say that. I think we are still doing pretty well. What would you say your costs have gone up overall? [Indiscernible] Maybe 100, Marshall.

So not much. All right. Last question. If we're kind of running $500 a day rate increase this quarter. Is that a trend kind of you see accelerating a little bit at this stage given that we're out of rigs or just kind of steady state marching upward?

I would say more the latter, although we've had a pretty big increase. The first part of the year we had like $175 per day of hits, stuff that gets first payroll taxes and other taxes, property taxes you pay in the first quarter. But I think we'll go up at least that amount next year, and then what I told you what I think we'd do for the average, I think we'll have a $1,500-a-day margin higher than what we did this year. Don't quote me on any of that. But, that's what I really think. And I think fourth quarter will probably be- well, the year will probably be like, if it were 4,200, that would be $1.5 million per rig per year but I think it will be that or a little bit higher.

That's, as usual, very helpful Gene. Thanks.

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

Thanks, morning, Gene.

Hi.

I wanted to come back to the land margin outlook and try to understand that you're just indicating that you're seeing a bigger pickup on the high-end rigs and the low-end rigs. I think we saw Rowan [ph] with a $1,400 a-day sequential pickup in their margins and H&P with a $1,000 day increase. I guess I'm trying to figure out a couple things. One, how do you see the high-end, low-end dynamic playing out and, you know, why is your 1,400, 1,500 number the magic number in your mind at this point?

Now, it isn't- it isn't magic. If we can do better, I assure you we will. We are pushing as hard as we can. That's kind of what the guys come up with as the best guess with a reasonable amount of prodding on our part and the division management's parts, too. I think if you look at our best rigs, you know, we do at least as well as the other guys. I mean, for example, our rig 304, I think is the best 3,000 horsepower rig in the country. I am a little prejudiced but it drills the heck out the guys who are supposed to have the best rigs in the country.

And, you know, we're working our way up, that day rig will go to 14, 14 plus 2,000 for the top drive. So these are our [indiscernible] wells that big rigs will get. It depends how- if you have a lot of them coming due quickly, it will go up quicker. But I think the small ones are doing pretty well too. There's just a dirth of rigs around. But when somebody needs a bigger rig, you can justify a higher price quicker. I don't know.

If you look at that 600 number sequentially in the fourth quarter, the big rigs were- did you indicate a couple hundred dollars of expansion stronger than that, low-end rigs a little bit.

I haven't looked at-

-- on the other side? Where is the U.S. land margin today? Can you share that with us?

The $600-a-day increase we had Q4 versus Q3 in margin, how would you break that down between increases in the big rigs compared to increases in medium and small rigs, if you can?

Well, I don't have the exact numbers. But --

They will never know the difference.

We- obviously the big rigs, we begin to see pretty significant moves in numbers. I'd like to say we're having some regular [indiscernible].

So would you say it's across the board or more weighted toward the heavy rigs? In this quarter, last fourth quarter.

I would say it's weighted to the heavy rigs.

That's the best we can give you, Terry, right now.

That's fine. And then first quarter we typically have a payroll tax impact on the U.S. land margins, $150 is sort of the number that rings a bell in my mind from the past. Do we see a similar type number this year or is that number going to go higher?

A little higher on payroll and property taxes, 175 to 200.

Okay. And lastly, Gene, wondering where your thoughts are, you know, on buyback- stock buyback at this point. Obviously you've got a great balance sheet, your stock has lagged relative to OSX and other land drillers. You've got a pretty optimistic outlook. Is that something that you are considering at this point?

Yes, I think we are hoping that it will be a relevant consideration real quick. I mean, so far we've been able to have investments, quality not quantity, or steps outside of the mainstream like the accommodation units. That, you know, if we get a return on assets, incremental assets invested in over and above our return on capital, that's what we're supposed to do. But I think by next year- also by next year we are going to pay off 800-odd-million. That's next February- February of '06, of our- of one of our convertibles.

But we'll still be generating money, and I think sometime in the next two, three quarters we'll be considering. And I think buybacks will probably come first and dividends later. But it's a problem we're looking forward to and I think we're progressing towards needing to address it. And the reason we have- we haven't had to do it earlier is that we've had, so far, good investments that didn't increase the quantity of rigs that have paid off for us. And that- that will not continue forever that big I don't think. So we will be in there. I would say by midyear, we'll be considering that.

Okay, that's helpful, thanks.

Thank you. Your next question is coming from James Stone with UBS.

Good morning, Gene.

Yep.

Can you just talk a little bit about what you are seeing internationally in terms of bid activity beyond- in areas that might give you some additional growth as you go into 2006?

Yes, I think we- we've had, as I mentioned, probability of sizable growth, and even some more in Saudi, but Kuwait is possible, Algeria is really a tangible possibility. Pardon me?

North Africa in general.

North Africa in general is a possibility. We have another rig going to India right away and the possibility of that. A couple of rigs going potentially to West Africa. These guys are going to have one last hurrah in Russia next week. We are sending our top guys there and they'll come home with something, maybe some caviar. But I think there are pretty good prospects there.

And you know, it's starting to hit the bottom line. It is not just prospects, but we're starting to execute. And it's hitting the bottom line and the return on capital employed is getting better. But lots of possibilities. I don't know if you consider Canada foreign, but we, you know, as mature a market that is, we still only have like 13, 14 percent of the rigs. So we're not going to cannibalize ourselves if we do any logical expansion, which, so far, has been in terms of upgrade.

But in terms of the equipment first-class rigs we have more even though the number of rigs has not increased. So lots of places internationally. Not even counting Russia which I have some hope for still. All of north Africa, the Middle East including possibly Kuwait. South America we're actually doing a little better than we thought we'd do in Columbia. We might have a second rig in Venezuela.

And second follow-up. You- I thought you said in your closing remarks there that within your outlook for the year, you are now factoring in $0.06 to $0.08 in the second half of the year for the adoption of FAS 123. Is that correct?

Yes. I think it's- if that's the option, expensing FAS, that's it. And all we know about is $0.06 so far and whatever we do this year will be incremental to that, if anything. And as I said that's taking into account we still- in the higher tax rate, we still think we'll do what's first call consensus is for us and that has been going up a little bit.

So the $0.06 is on carrying the cost of the historical options that you have to have expensed through, and then if it gets you more, it is on top of that?

Yes, if- you know, there are other ways to do it. I mean, technically, the option expensing doesn't hit things that don't vest. If it vests before June 30, it is not a problem. There are a whole bunch of things, but basically we're going to go to less options, more- probably more restricted stock, and more cash. And that's why one of the reasons that we had, like, $2.5 million incremental bonuses this quarter.

And are you looking at a wage increase in NDUSA?

Almost all the time, yep.

What do you think the average wage cost is going to be up this year?

Joe?

We had a [indiscernible] in the Rocky Mountain fourth quarter. We don't foresee one in the coming year at this point in time, again, the rate count will determine whether that's true or not.

And the Rockies as you undoubtedly know already is the toughest place to recruit hands and drivers and everything. I guess the really toughest place has got to be Calgary. You know, the unemployment rate in western Canada is like under 2 percent. And that's part of the increase in bonuses that you- that we talked about.

And then just- I didn't- I might have missed this, but what is your overall CapEx budget for 2005?

Hard to say, but I would guess it's going to be about what it was this year, which is around 550.

Thank you.

Okay.

Thank you. Your next question is coming from Kevin Simpson with Miller Tabak [ph].

Good morning.

Hi.

So, you know, we've heard some noise from several of your customers, or at least a few, about the- feeling the pinch from higher rig costs. I am just wondering, you know, whether, you know, whether Gene or Joe possibly, have you seen this increase, you know, relative to what you've seen in other cycles? In other words, I guess the question, how much is rhetoric and where, you know, companies are just trying to do their best to keep their costs down and is there anybody at the end of the day decides, I guess, this large Oklahoma customer who actually has pulled rigs. And then, you know, if rigs are being pulled, I guess- or do you have new players coming in or maybe more from the majors, you know, were you to be able to deploy rigs where you had higher market share historically.

Before you finish your question, you going to list the companies that have announced increases in their budget since those 3 companies announced decreases?

I figured that would you do that, Gene.

No, I won't. But, I mean, take Chesapeake, we went- on November 1st we had, I think, 19 rigs working. 17 rigs working. Now we have 18 rigs working. The rigs that they laid down which gross- I mean, net/net we were -1 but they laid down probably 4 or 5 rigs and without exception they went to work pretty much without skipping beat at 2,000ish, you know, 1,800 to $2500-a-day more.

That same thing was true with the rigs that we [indiscernible] because what we were doing was saying, you know, we have a market for this, away from this, away from Chesapeake, away from the midcontinent, you Chesapeake, you are a good customer, you can have it but if we can get $3,00 a day more from someplace else you got to pay 2,500 to keep it. And they're- all the rigs that they have are from $1,000 to $2,500 higher on average. Same thing with Pogo. I have two rigs in Pogo. I didn't know we had any. Those were average 1,200s and went to work at $1,500 [indiscernible].

So, what was the other one, Anadarko? Anadarko, I don't know, we- it is hard for us to go berserk over, you know, one guy going down when there are ten guys going up, Kevin. So Anadarko now is down to, probably, I don't know, 30 rigs? Well, yeah, 35 rigs. And now we're [indiscernible] lower than what we traditionally had with them, but also they are half of what they used to be.

In the meantime, you know, you said it right. The main Shells actually- we have a 100 percent of Shell's work and an increasing percentage of BP's work even though it is less than a majority of BP, but we are drilling really well from them. And that new rig 413 I described was for them. And the best 3,000 horsepower rig is working for them and doing their [indiscernible]. Anyway, the majors are increasing somewhat, but everybody- and we spent a lot of emphasis, a lot to really small operators and that's paying off too.

So I don't , you know, there's a distribution of people. Some guys are going to have prospects -- I have no idea what their prospects are. Anardarko I just don't understand you know, with -- with the good returns they get on [Inaudible] Why they are [inaudible] But they must have good reason. But then [inaudible] so we can't get too excited.

Okay.

Some guys are going to have prospects. I have no idea what their prospects are. Anardarko I just don't understand, you know, with good returns they get [Indiscernible], why they are returning [Indiscernible]. But they must have good reasons. But then it doesn't hurt us so we can't get too excited. I don't see 450 gas still.

Well, we'll see. One other quick question. There was a- Key sold their land fleet to Patterson. Was that- did you guys take a look at that? And it's- in the- and if so, was it price or just fleet quality that made you pass?

We definitely looked at it, and, you know, we've been talking about two years quality not quantity. We have been acting on that basis, and we even put in a bid.

So quality, not- price was not a factor?

Correct.

Thank you, that's it for me.

Thank you. Your next question is coming from Roger Read with Natexis Bleichroeder.

Good morning, gentlemen. Just coming at the U.S. land business again. Gene, you talked in the beginning about, you know, solid returns on capital and obviously we've got some sort of growing demand for land rigs in the U.S. And I was just wondering if you looked at the potential issues here, is it the rig quality in your fleet that's still idle? Is it lack of crews? Is drill pipe costs significant here? Is that what is slowing you down?

No, I think. To tell you the truth it's, when you have a couple hundred and 23 rigs working with guys coming down and guys coming up and, you know, we haven't got to the point where 100 percent of the risk of a site not being ready or, you know, rain or something. We still bear some of it. So I think when we have as few as we have now available to work, and we have, like, 95 percent working of those available. So- or 98.

So there's always going to be some of that. I think maybe we have one or two rigs at any given- right now that we'd like to have a customer for that we don't. Everything else is spoken for but maybe not right this second kind of thing.

So does this mean you are not getting a standby rate at this point on just those two rigs or any rigs that go idle?

No, some we do, but we don't get them on all of them.

And going back to 2000, 2001 did we at any point get to where you have a standby rate on essentially all of your rigs?

We didn't do as much as some of our competitors did on term contracts. So we had a little bit more of the upside, and a little bit less of a hassle when prices came down. I don't remember. But we got- what happens when the market gets tight is all the terms of the contract get better. The allocation of risk, the move rates, you know, standby, all that stuff gets better and directional is getting better and will get better on every single variable. The bottom line of which is risk adjustment, how much money you are going to make per year on investment.

So I guess that kind of gets to my original question. I am just trying to understand where is the greatest risk, do you see it in the trained crews or do you see it in some other part of that reactivation area?

In the Rockies, it's crude.

And elsewhere?

Elsewhere I would say- well, we discussed we want term contracts to pay out the - Yeah, we're talking about rigs that need some work and some money. We- if it's not a- for example, if it's a mechanical 1,500 horsepower rig which is not our breadbasket, it's going to cost $2 million to fix it up to where we want a contract to generate $2 million for us. If it's a rig 413, which is a fancy high investment modification for a very good customer, we will settle obviously for [inaudible]. But with two and a half years which gives us a good start on getting a fair return for it.

Okay, so you essentially need to see a greater commitment from your customers for more active reactivation program.

But I think I've heard that from a number of our competitors, which is, in the aggregate a pretty good sign. The ones that could spend the more money have, I've heard, talked about getting payoff contracts and I think that is true for two of them. And the smaller guys who maybe don't have the money to build, you know, over $10 million rig on spec which is also a pretty good thing now.

Okay. And last question, cash margin in Canada for drilling I believe you said was 6,700 a day in the fourth quarter. Where do you think that can go in the first quarter? How much is pricing up on a year-over-year sequential basis?

I'd say, easily, north of 7,000. I think north of 7,000 for the year up there. Don't hold me to that. That is not a projection, but that's what I think.

Okay. Thank you.

You're welcome.

Thank you. Your next question is coming from Ian McPherson with Simmons & Company.

Hi, good morning. Good morning. Can you hear me?

I sure can.

You mentioned $1,500 a day is sort of your hope for cash margin improvements in '05.

Year-over-year.

Year-over-year. Can you spell out sort of what your expectations are for the International fleet in that respect?

It's a whole different thing, but I would guess, you know- it's getting tighter generally. In Algeria we are looking for pretty good margins- are you getting it- what are you going to say, no. In Saudi, things were getting better. We got good rates on ours, but one of our new- essentially a new competitor, ADC has got new investors and they came in with ten rigs at kind of low prices and I don't know what is going on there, so that market, the upward momentum in that market has been, at least temporarily- but in general, prices are getting better because the rigs aren't available.

And also, when a bunch of rigs go from the States with augmented capital, say to the Middle East or- it tightens the situation here. So they are really related. Not dollar per dollar like mobile water- on the water rig, but they are related, so the markets are getting tighter every place, and it's hard to average them because you got- you got nuts and grapefruit.

Fair enough. Just as a follow-up. In terms of sourcing your incremental demand on the International front, are you looking at doing that more from your existing U.S. fleet or more through tapping your source of readily available supply? And reactivations?

So far we've been doing, either from our international stacked rigs or domestic stacked rigs, you know, something that's kind of a hybrid where we take a little bit from [indiscernible] and take the rest of it new equipment. So we've done a little bit of everything.

Okay. My last question, could you just say- talk about what drove the investment income line up to $17 million in the fourth quarter?

Well, we're not nearly as good as investors as that, but we took it all the way up to like a 4 percent return on our 1.25 billion. In other words, I think they had like 50 million of investment income.

Right.

4 percent. So if you guys shoot for 20 percent. Now we shoot for 5 percent next year.

5 percent next year?

I'm not, you know, 4 percent is higher but it's really nothing to say is unusual, I wouldn't think. I mean interest rates are going higher. So we can be very liquid and get a little better but all we got last year was 4 percent. The reason I say that is because we've had three or four questions about that already, not on this call, but, you know, that's if we got 4 percent, and I hope we'll get more next year.

Great, okay, thanks, Gene.

Thank you. Your next question is coming from James Wicklund with Banc of America.

Good morning, guys.

Hi, Jim.

You talked about you've got, if I heard this right, 9 rigs that you can put to work for an aggregate of about $15 million.

[Indiscernible].

Okay. Do you plan- and Eugene, you talked about you'd be disappointed if your rig count wasn't up 227 to 237 or so this year. Do you plan to put those out? I mean I am assuming the answer's yes.

I don't think we're going- we haven't approved the the AFEs on spec yet.

Okay.

So if we have a customer in demand, we'll do it. There are a couple of rigs that are further along. I mentioned them a couple times already, the 1,500 mechanical.

Right.

And you know, I think we have one contract, and that's been teed up for like six to [Indiscernible] weeks already. And there are others like that and, you know, we have these lift and roll, you know, the pad like drilling rigs that take special everything and we have- and Shell is going to increase rigs. Anyway, when it gets to talk turkey, then we pull the trigger.

How long of a commitment are you looking for in terms of talking turkey? What would you like to see?

I guess if it's the size of- well, you know, we've gone from- in the recent past from 12 months to 14 months to 2.5 years. And the most recent [inaudible] two years.

Two years in terms of the commitment you want or you'll take or you need? I am sorry, I missed that.

We get what we want, Jim, you know.

Well, you're in the driver's seat, I agree.

I am teasing a little bit. But, you know, 2,000 at, you know, a decent margin like 2.5 million a year per rig or better, 3 million. That covers a lot of capital investment.

Okay. Now we've got your day rate year-over-year right now gone up about $1,400. And so we're close to what you are expecting, and obviously utilization, you talked about the rigs you can put back to work. You still got, you know, just looking at your utilization, you've still got a lot of rigs left. At what point do you start- or start thinking about or do you have to throw a wet blanket on your guys when they start thinking about building new rigs?

It hasn't been relevant yet. The closest we've come to it is the really big upgrades that we've been internalizing in Canada.

Right.

Where we take an existing rig and we have Academy, we have the AC technology inhouse, we have a whole bunch of things inhouse and we spend, you know, what do you think? 50 percent of what a new rig would cost, kind of thing. And there have been many of those. And I've told you a couple of times, we had 4 done in Canada with long-term contracts already. The fifth one is deciding on a long-term contract and one in the states is long term.

The ones you are doing in Canada, are all those staying in Canada?

Well we got- now they built a couple for Nabors offshore, which are Nabors offshore ready. They are one of the th AC drilling rigs is 1,000 horsepower, it's coming down to one of our best customers here in April. So most of them are up there, but there are 3 or 4 that are kind of jump balls. If NDUSA can get a good contract, that's where it goes. [indiscernible] gets one, that is where it will go. Canada, unfortunately, is still like 275 days a year working. We're trying to get that higher.

Right.

They find it a little hard to compete.

Have you looked to see or updated what you have provided us in the past as to what margin or day rate you would need in the U.S. hypothetically to justify or building a new rig.

I can tell you, Jim, I'll repeat again, we're going to double our operating income- more than double our operating income.

I got you up 125 percent year over year. I agree, I hope you -- I hope you more than double it.

Anyway, and we won't have any new build rigs.

I understand. I know you don't have any for this year and like I say it's hypothetical but looking at '06, '07, the longer cycle. I'm just wondering what the economics would be, not that you're going to.

I don't know. We're focusing on giving the shareholders back all this excess cash before 2006, 2007.

So you're going to initiate a dividend?

We talked about stock buybacks or dividends in due course when the excess cash doesn't have a return well above our cost to capital.

Okay, thank you, gentlemen.

Thank you.

Operator, we'll just take one more question and wind up the call since it's about an hour right now.

Thank you, your last question is coming from Mike Urban with Deutsche Bank.

I'm all set. I will follow up offline. Thank you.

Operator, with that I think we'll just wind up the call. If anybody didn't get an answer to your question, just feel free to call and thank you for participating today.

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.