Nabors Industries Ltd (NBR) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Nabors Industries first quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] It's my pleasure to hand the floor over to Dennis Smith, Director of Corporate Development. Sir, the floor is yours.

Good morning, everyone. Thank you for joining us today. We'll use the customary format we do. We'll keep the call to as close to one hour as we possibly can, and entertain as many questions possible following about 20 minutes or so of review of the quarter and the forward outlook for the sequential quarters, as well as the balance of the year by June.

With us today are, besides Gene and myself, are Tony Petrello, our Deputy President and COO, Bruce Dayton, our General Counsel, Bruce Koch, our CFO, and all the representatives and presidents of our various business units.

I need to remind everyone, of course, that a lot of what we're talking about is the current outlook as good as we think it is, and all of that is subject to change and subject to a lot of risk factors, and we would ask you all to refer to the risk factors as enumerated in our 10-K for those kind of things. With that, I will turn the call over to Gene to get started.

Thanks, again, welcome to our first quarter earnings conference call.

To briefly summarize from an operating income viewpoint, the Q1, '05, was 172 million, which a little more than double, the comparable number in the year-ago quarter, and sequentially, it was up 50%, roughly from the 114 million we had in the fourth quarter of '04.

Those numbers could have been 5.6 million high from an operating viewpoint. Let me briefly explain. We had 2.4 million of operating income, GSA hits because of the [Indiscernible] attacks on options exercised by mostly Tony and myself. We also had an 800,000 non-returning hit. Hopefully that was hit is recurring. But probably it isn't.

Much higher prices.

The eighth, we had a director retire after potentially 19, 20 years of service and his accrued deferred comp was payable net was an 800,000 hit. We had 2.4 million in dry holes. And this is strictly a function of the way we do our accounting. We do big boy accounting and successful method. It's a 2.4 million hit in an overall successful program. So had we done the accounting the way most of the big independents do, instead of doing the way Exxon does, that 5.6 million would have been there.

Net income was also pretty good. Up 74% year-over-year and 18, 19% sequentially and, you know, frankly, I believe that the quarter really confirms again the kind of -- the kind of a variable issues we have had for over two years. Although, we have to admit the timing of what is happening now and the magnitude and the strength is bigger than we had -- came sooner and stronger and bigger than we had projected.

First quarter '05 represented our best quarter ever in terms of operating income. No [indiscernible] net operating profit after taxes. Income sales, EPS -- everything is a record. And I think the other thing that is probably a record is the outlook. The only certainty is treasury bills, I guess, but in terms of the factors that likely drive our ability to earn money, I think the outlook is as favorable as it's been in the whole time I have been here, which is a long time.

I would like to comment on a couple of things before we get into our business unit-by-business unit discussions.

First, we are our most important metric, in terms of how we run the business. In fact, how we get paid. It's return on capital employed. And in the first quarter part of this number was over 15%, this compares to an 8% return on capital for all of last year for the Company as a whole. And I can't project what the number will be precisely this year, but I will tell you that it will be shocked and amazed if it was not higher than 15% for the year.

Let me remind you that this calculation, for this calculation, the denominator is net of surplus cash, capital employed, and net of the surplus cash. And the numerator is net profit after cash taxes. So while there is going to be a lot of observations and probably some discussion on our tax rate going up pretty sharply this year and even later in the year, compared to the first quarter by a little bit, I think it's important to note that the cash taxes remain for this year, probably under 5% and that's on net operating profit after cash taxes, means that the metric by which we run the Company, the tax rate is still low. And that's totally independent of the inversion. That's because we have been making a fair amount of, hopefully, and so far, profitable investments in the Company.

While I'm on the subject of cash taxes, let me comment a couple of seconds here on the balance sheet.

At this balance sheet date, we had a million $550,000, 1 billion, excuse me, 1 billion $554 million dollars in cash, and that's in a couple of three places on the balance sheet, which we'll be glad to explain where they are. And the debt-to-worth number for -- the gross number was is .38, and the net -- number is now down to .12.

This year, we currently anticipate CapEx to be something not -- 600 and say, around 650 and our depreciation will be around 300 and has been the case in the past, we hope, opportunistically, better opportunities arise which can enhance our aggregate return on capital employ, minus our cost-to-capital.

Also, I would like to comment briefly on the worldwide supply and demand for rigs.

The first point to make is it costs an awful lot more and takes an awful lot more time to get incremental rigs ready for the market. I won't spend a whole bump of time talking on demand, because we have discussed this, you know, more than is necessary in every preceding quarterly report. But it's still true that the North American gas story is going to be incrementally addressed by land drilling through our -- [Indiscernible] And for the most part, not exclusively, but for the most part, the international worldwide crew shortage is going to be met largely, or for the most part by land drilling, in Saudi Arabia, Algeria, Amman, Iraq, Russia. Much of it, not all of it is on land and that again is our sweet spot. Let me now switch to our business unit by business unit discussions. Alaska is the weak spot, although it's getting stronger. I will briefly run through the rig years, 6.7 in the first quarter, compared to 6.4 a year ago, compared to 7.8 in the fourth quarter of '04.

Operating income is up pretty sharply from the fourth quarter, 2.3 from -- from 2.3 to 7.3, but it's below last year. I think in brief summary, I would say, Nabors is still the really the best operator in Alaska. That's the good news.

The not-so-good news is, Alaska is not doing nearly as well as an overall market as every other market we have. There are some pretty positive indications this morning. We signed a two-winter contract for an incremental rig, which will help things. The stuff we have been talking about in terms of the shallow biscus oil is, I think, finally coming fruition. And, I think, this year for the first time that I can remember, I think, we're favored to get [Indiscernible] Not immediately but longer term and substantially.

Let me now move to Nabors Drilling USA. The rig count was 222.4 -- 222 lets say, close enough. In the first part, compared to 175 last year, about 45, 50 increase, 47 rig increase, and sequentially, a 5 rig increase from the 217 in the preceding quarter.

I think, the important thing is that the rig -- the industry rig situation is essentially embattled and with that permitted to happen was that our average margin sequentially went from 30 -- average margin at the rig level, in effect EBITDA at the rig level, went from 3,640 in the fourth quarter of this year to 5,280, an increase of 1,644 and, you know, that -- if there were seasonably normalized, there are a whole bunch of taxes, both social security, FICA and property taxes that get paid in the first quarter. Defacto, 150 to 200, so this is, this was a real pleasant surprise and I think it will continue.

We previously had said that we didn't think we would get in this cycle, we didn't need to hit the previous quarterly high, which was 6,200 and second or third quarter in '01. I think, now I would have to say that we will probably hit that -- in either the third or fourth quarter. And everything else has come earlier than we projected so far.

If you look at the operating income, first quarter was 73.5, that's per quarter. Compared to the preceding year's quarter of 8.6, and sequentially 41.8. So, the impact of a modest increase in rigs and in a healthy increase in margins is pretty dynamic.

Again, if you look at it on a year-on-year basis, '03, we had 16.8 operating income, '04, 93 essentially, and the last quarter, I said that if we did 232 this year, which is pretty heroic, that would be consistent with the 275 first call, earnings projects for the year. And I think, pretty obviously, more comfortably will beat that.

Anyway, I think from an operating viewpoint, things are still going well a part from the price increases. We -- we will not get reflected but in the second half of the year, get two of the major updates, the upgrades in Canada, manufacture in Canada. This is a real top-to-bottom update from a 288, state-of-the-art AC rig. Those two are on contracts of two years each. Two years each at pretty good rates. Generally, there's a movement to more term contracts and some of them we're instigating, and surprisingly numbers of other that are being instigated by the operator.

CapEx is still moving along. Basically, I think, our program of quality, not quantity is starting about here. I think, we had an increase of 5 rigs from the fourth quarter to the average in the first quarter. Today, we have 229 rigs? 229 rigs working and I don't think we'll have much more than, my guess is 240 or 240 something. Low 240's by the end of the year. And the incremental rigs are now more expensive. They take more time, and we are looking to get pretty close to a full payoff. If it's less than one of the ideal long-term rigs, for example, we have, you know, improved a couple of 2,000 mechanical rigs, which are not long-term ideal, and if we do that, we insist that we get more than the total renovations of cost in the first contract. And we have a couple three like that, a couple three waiting to be taken up on that basis. If they are not, we won't do it. If they are, we will.

The other rigs, the newer rigs are term contracts. 413's, term contracts, the 2 AC rigs, the term contracts and multiterm contracts, desirable contracts, more than a year, at a price that we're happy with. So, things are moving in that direction pretty sharply.

Canada -- Canada will have a record year this year. There has -- I hate to say this, but Canada's not big enough. I have to say, we have had some weather problems in the first part of the -- it's overwhelmed by, not only the results in Canada, but the overall results. The first quarter, we had 66.2 rig years. A year ago, we had 54.4 rig years. In the fourth quarter of last year, we had 63.2 and the margins have improved. This quarter, there was $7,600, the fourth quarter of last year, $6,900 and the year-ago quarter, $6,700. The operating income was 4,700, compared to the year-ago quarter of 31 and sequentially, preceding quarter of 43. We'll do pretty well.

I think, and also, let me talk briefly about the well-serving. The well-servicing business is pretty good. It was also impacted by weather. I think, the most point of the whole thing is the quarter-on-quarter gross margin per hour in Canada went from 148 to 168 U.S. dollars per hour, and the actual number of rig years was a little lower compared to the year-ago number.

And I think the overall position in Canada was, we're getting good returns on employed, except that when the world becomes competitive. In other words, when we have a rig, one of those new refurbished AC rooms or newly refurbished AC ones. They can work in the states. They can work in Canada , or they can work internationally. While Canada is very good, the historical policy of working 250 or 275 days a year because of weather and laying a 100% of that responsibility and risk on the contractor is great. God bless them. They can't compete the rigs. Something's going to have to change.

This year, we're look at a situation where we improved everything. Records, dispatch and the other thing. We have 75 six rigs working in the first quarter. And the the average number of rig years for the year will likely be 51, 52, and, again, you know, that's history and everything else but the world is changing in a direction that doesn't let that happen forever. Hopefully.

I think the international is hopefully the next area, if I happen to skip something. The first quarter we had 75 rigs working. This is like a fruit salad with all different kinds of rigs. But just for a theme, compared to a year ago, 65 rigs and the preceding quarter of maybe 2 or 3 fewer rigs. That doesn't say too much.

Looking at the operating income, we essentially did 30 million this quarter, compared to 19 million a year ago, the same quarter, compared to 27 million in the preceding quarter. The outlook, however, is still very good. I think in the last conference call, we described the 10 new rigs in Saudi, which we said would be in place by the end of the second quarter. I think they're all in place by the first half of the April. And I think we had big increases projected for this year. Basically, the operating income. We're looking at something like 40 plus percent increase in operating income for this year. And I think, we are likely to do that for the year as well. And the big increase will, obviously, come in Saudi but there will also be big increases -- increases in Algeria, Columbia, India, Kazakhstan, et cetera.

In addition, I think last time we told you that we were contemplating or maybe commencing the building of two state-of-the-art 3,000 horsepower AC rigs with all the bells and whistles we have. Since we last spoke, that program has not only been initiated, but the probability is that we will have short-term contract with both rigs with satisfactory returns. And in -- in general, we're just doing better in a lot of places. I think the only problem that exists for international is it's also is competing with capital and rigs with every other market and good has to be not only good, but maybe better than the competing use for the capital. And the rig in this case.

Nabors Offshore is doing better. I mean the percentage increase in operating income is really good and satisfactory. We're going from -- in the aggregate, something approximating of 20 million operating income and we'll do this year. We'll go up like 60, 75% and basically the AC rigs that we described to you, the new rigs in the Gulf are working pretty good. I think, we have demonstrated that we can build the kind of rigs that most demanding operators want, including we're upgrading another rig for Shell to go to the Far East, New Zealand, I think. And we're -- the Jacket market, we're on the real low end of the Jacket market and we're doing a little bit better. The prices are a little better, but nothing like what the, what the real jacket -- the drilling jacket companies have.

Generally, we're doing a little better. I think, I should have mentioned earlier, with connection with International, the two of our Jacket rigs likely go on a very attractive long-term contracts to International and, I guess, West Africa Indiscernible ] Well-servicing, U.S. well-servicing, that's an area that does real well.

This quarter, we had 297,000 rig hours, compared to 275 in the preceding requirement. I think, also, a more modest and noticeable increase from the preceding quarter. Operating income, 19.4 million, compared to 9.7 in the comparable quarter a year ago, and compared to 15.1 in the December quarter.

Pricing also pretty impressive. A year ago quarter, the rig rate per hour was $220. This quarter was $260. Sequentially, it went from 245 to 260.

Truck rate a year ago was $81 an hour. This quarter was 96, and in the preceding quarter, it was 89. So, really good increases in price.

What is happening in this market, basically, is there is a confluence, again, of supply-and-demand, and I think some of our competitors are now more concerned than we have been in the past about generating profits. Two of them are going public and the third one, the biggest one, is under new management and I think, they're controlling their field of operations and pricing a whole bunch better to unusual benefit.

We have had for sometime a pretty high return on capital employs in well-servicing. Against an overall company average of 15% in the first quarter, which I think I alluded to. Well-servicing did 31%. They often did pretty well last year. Pretty high rates of return. In fact, very high rates of return.

So, one of the schemes that we -- or one of the policies that we have encouraged was to get more attractive investments around the birth of a well site and we're doing that by, I described this, we described this to you last time, in terms of newer rigs, we've got 20 to 40 new rigs on order now with National Oil, the state-of-the-art rig. We have a bunch of rigs ordered for California. We're experimenting with AC workover rigs. A whole bunch of things are cooking. In the meantime, the operating income is paying for all of this.

Let me briefly go through -- I'm taking more time than I want to, but go through the Canrig, Epoch, Sea Mar and Ryan. Just briefly, they went from a loss a year ago to a profit, not a super profit, but a good, healthy profit in the right direction. This year, for example, in Canrig, we went from manufacturing rigs last year to manufacturing 60 this year. Last year, 2/3 of them were internal and five of them were third-party this year. 35 will be internal and 25 third-party. You know, I meant to mention, but I forgot to, that in the USA alone is going from 48 top drives currently being employed and they have at least 18 on order -- and I think, we're going to get more orders elsewhere.

Epoch is doing well. They have a pretty substantial installed base, which is increasing decently, not superbly and they're in the black.

Sea Mar, we discussed a lot of times before. Whatever reason, that market is improving and, you know, we might go from -- what had been under a 3 million operating income number last year to something, maybe three times as much, or more this year. Let me truncate this a little bit and go to my summary to leave more time for questions.

I think we're in great shape. Internationally, I think we have the best organization in the industry.

We had made 90 million last year and I think we will have close to a 50% improvement in operating income this year, and I can see that.

We have very good people.

We have a good, broad infrastructure almost every place where it's worth, having an infrastructure. We have access.

We have everything. And that market is going to be -- is good and is going to continue getting better.

Alaska, again, we see signs of places in -- not super market but long-term that's good. Long-term war's going to be in the picture. Long-term, gas pipeline is going to be in the picture. And the overwhelming [indiscernible] an otherwise dominant factor in Alaska, that will pay off down the road.

Canada, we're doing super well. We have room to grow organically as well as by acquisition, and we're pursuing all those alternatives. Bear in mind, that we're doing pretty well there with a 14% market position. It's pretty small with a lot of room to grow.

The Nabors Offshore is getting better under tough circumstances and heater gets better in the shallow gulf. We use those assets as a source for better and more profitable employment internationally. However, I think everybody is still under estimating the impact of the U.S. land situation, both from a drilling and workover viewpoint . And I think, you know, I think -- just stay tuned and see what happens quarter after quarter, because, I think, the demand is there. There is not one high order of a slackening demand that I can see, and, you know, this is from hundreds and hundreds of different clients. And, yes, Anadarko did cut back on their rigs. But, I mean, in spite of -- that's the one Company that did cut back. God bless them, I hope they're right. We're still doing work for them and frankly, we are still increasing the rig rates for them still.

I just think that the outlook is, as I said, is promising as we have ever seen. I think the guys after delivering -- I think we are in a position to take advantage of this situation for personally, I think, years to come. That;s it.

Operator, that concludes the formal remarks, and we are now ready to open it up to questions and answers.

Thanks you. The floor is now open for questions. [OPERATOR INSTRUCTIONS] Your first question is from Marshall Adkins of Raymond James.

Good morning, guys.

Bet you were right, Marshall, right?

That's what I was going to get here to. You said last quarter, things were as good as you have ever seen them in the business, and if I recall correctly, you know, margin's probably up 1600 for the year, and you've gotten your 1600 and one quarter. Can you give us some help for where those rates are trimming right now? Are the rate increases decelerating? Obviously, they're still heading upward. Can you just give us some help going-forward? Not that I wouldn't expect you to say a little on your answer.

I think, basically, the God's truth is that every day there is a relatively present, pleasant surprise, and which you would expect in this kind of supply and demand situation, surprised to be positive and, in fact, they are. And I don't know. Perhaps, an illustrative example, a couple of good friends needed a rig and anyway, got converted to [Indiscernible] rigs. That's pretty good rigs. You know, every day there is something that comes up and the operators are more polite to us than they have been, which is a good sign. I think -- I don't see any slacking on the rigs.

We're not going to go up 1650 a quarter, I can guarantee you that and maybe some people are worry about about the second derivative, the implications of that. But, you know, I think we'll go up. As I said, we'll -- sometime this year, we'll have aquatic, I don't think -- it will be the third and fourth quarter, frankly, where you see $6,200 a day, which is our previous peak. And I think -- it's still, not superattractive to build a rig, because you have a long time to build a rig, it costs a lot more than you thought. And we're doing it essentially with contracts.

Right.

Even that is limited. Even though we can't doing everything, we would like to do.

Reading between the lines, I understand what you're saying. One more quick one. Saudi Arabia, you went through that pretty quickly. Refresh -- you know, where were we in Saudi Arabia in terms of the numbers you had there, say a year ago versus today? You mentioned you had 10 that you put in place.

Right now, we have 10 more than we had a year ago. And I think, we have 26, including 8, --- that half of them. In other words, 24 equivalent-owned and 4 that we run for a joint venture there. We have 28 rigs now, and I think, the total in the country, including Jack-ups and ours includes a couple of Jack-ups, 78.

72.

72. And there are pretty strong rumors that they'll be adding some more rigs. Frankly, they have to be competitive. They're at -- there are other guys now operating or about to operate in the kingdom associated with those sections, and I think, we'll have a good shot at those guys. And, frankly, those contracts have a little bit more flexibility. I would like to have more flexibility than the Aramco. But the Aramco's guys will have to compete with the rest of the world. It's good as three-year contracts and all of that stuff. But anyway -- I think, it's clear they're going to have to drill a bunch more, if that's your question, Marshall.

Basically, that is where I was going. It sounds like you're seeing even more interest going-forward. You're up 50% of last year. Sounds like things are still trimming upwards. Is that fair?

I think that's fair.

Okay. Great job, guys. Thanks.

Thank you, your next question is from Kurt Hallead of RBC Capital Markets.

Morning.

Hi, Kurt.

My question relates back to this refurbishment and capacity -- incremental capacity issue. Patterson announced in their press release today, that got 7 coming on, this last quarter and 30 for the year. [Indiscernible] Can you just walk us through what some of the bottlenecks may be? And what sort of the incremental costs now are vis-a-vis what you may have experienced in the back half of 2004?

Yeah, I think almost everything is in constrained supply. Whether it's drill pipe or CAD engines. CAD engines, they tell me they are going to go in allocation, shortly, and the lead time is six months-plus on some of those things. You put an order in for some of the maps, and you might get, you know -- with all that we have, and all the purchasing power, and all the inducement, you still might have to wait five months for one. And you talked about, or somebody talked about the H&P program. Well, they have a program where they will have the first rig in November, if it's on time, and then one a month thereafter. And those rigs could go to work tomorrow, if they could have been available. And so even H&P, who has done more new building, than almost -- not almost, than anyone else in the last four, five years, they can't do it quicker than that.

So someone coming -- so to speak, off the street, who doesn't have logistic plan that we do and, you know, contracts and relationships, it's going to take a long time.

Prices are higher.

I mean the $2 million-a-rig-days are gone forever. Especially a rig that can compete in 2005. I would say our AC rigs, probably the last couple three we bought will cost us 7 1/2 to 8 1/2 million. That's delivered here, maybe extra bite, but with taxes and all of that junk, and if the refurbishment are getting up to four or five million, then that's where we're choking and saying maybe we build, or refurbished to the state-of-the-art, instead of refurbishing to an older rig with new components.

Anyway, I think, I think they're doing 30. I think, we have gone up 5 quarter-to-quarter, and I think, I said, we would end up, maybe 15 higher than that. So I don't think we will do -- we said we wouldn't do anymore than 30. We'll probably something closer to 20 than 30. Again, our emphasis is quality contracts, the kind of rigs we want. And I don't know who else is doing a bunch. There are rigs popping up but --

Okay, and then my follow-up question for you, is on the international side. Can you give us some regional areas where you think you meet see the incremental demand over the next 12 months? Do you think it could be an order of magnitude greater than what you experienced over the past 12 months in terms of the number of rigs?

Yeah, I would think so. In terms of operating income, I think so. I don't know when it will come exactly, but those two 3,000 horsepower rigs that I alluded to, you're talking about --

Yeah, on the international front. I want to get a sense as to what areas of the world.

I would say Middle East, Algeria, South America. That's broad but that's it.

You think the number of rigs will be greater than what you --

That's why -- I was trying to get the -- to operating income. Because on operating income on a 3,000 rig might equal, you know a couple of smaller, even 2,000 -- [Indiscernible] I think, that you know, if we're going to go to 40, 45 million operating income in 2005, I think we can do that again next year.

Okay, on U.S. well-servicing --

I don't have to do it.

I got you. On U.S. well-servicing, you think you got incremental pricing power in the next couple of w quarters?

Yeah, we're projecting that, frankly.

All right, Gene, thank you very much.

Okay.

Thank you, your next question is from James Stone of UBS.

Good morning, guys. Nice job on the quarter. Two things that I wanted to discuss with you, is I guess, last quarter, we talked about the contract that Hemlerich one in the Peonce, and you said you were going to check on why you guys haven't been the forefront of the new build long-term contracts. I'm wondering if you can update us on that?

[Indiscernible] Why that one?

They just announced another one with Conoco yesterday, right? Or two days ago.

Okay.

San Juan.

Okay.

I want to know kind of where you stand on that, in terms of long-term contracts, new builds, what you have done? If you have added anything that you haven't announced? Maybe it's just, that's not your practice to announce it. And secondly -- .

I think I sort of mentioned it. First place with respect to this pad drilling thing. I think we were sort of -- not sort of. We were the forefront in actually having rigs that successfully worked in pad drilling, starting with the pad drilling with the big wheels, wheel rigs, and then the lifting roll rigs, we had 333 working in Alaska, six years already, and then we had rig 59 working for Suncor for a few years already. And then we have 3 rigs, 2 for Shell and 1 for BP working in the States.

If we're working on term-contracts, and if we have 2-- 2 of those AC rigs, I think I mentioned them. 2 of the AC rigs that are on term contracts. 1 of them is for Oxy and the other one is for you who? And they're on multi-year contracts at real good rates. And we also have a descent deal with Williams. So, that contract they had helped us. We'll do 1 rig like that, and we have with them now are, have been switched to attractive term contracts.

The direction is in terms of term contracts, and I think, they're smart to do it in terms with the term contract that essentially takes it out. That's, we think that's the right attitude. That's our attitude.

Uh-huh. And just secondly, I thought one of the interesting things in the quarter was just the sort of how little operating costs went up both on a year-to-year basis and even on a sequential basis. I wondered if you could come back and talk about that more? And how you so that rolling out over the next few quarters?

I mean one thing, we'll have to pay more for folks. We know that. Another thing, we adapted to a smaller option component of compensation. And we're paying our directors more.

It's a tough job, so I think costs are going up. The glass ceiling, it's up like 25% for the business unit managers. All of whom are sitting here. And, you know, I think costs generally go up. But so far, the devicer has provided a basis for, you know, not making it up, totally burdensome. We have done pretty well on knock-on-wood insurance, health costs and things like that, which we have been successful in watching. But pure labor costs, man power is scarce, and good man power is very scarce.

What do you think between here and the end of the year, your sort of daily costs structuring the Lower 48 is going to go up by?

I would say the minimum of --

I couldn't hear that, Gene.

He said minimal increase.

He's got a little laryngitis today.

But Nabors gets pass-through as you know.

Okay.

That's not something you're -- you're concerned about in terms of surprising negatively on the margins. No. We don't pay for fuel. Labor is a pass-through. We know pretty much what the other things are, because we have contracts on much of the stuff. And I won't quote a number, but the number for rope, soap and dope was quoted me for the quota was amazingly small. I hope it's right.

Okay, thanks, appreciate it.

Thank you, the next question is from Kevin Simpson of Miller Tabak.

Morning.

Hi, Kevin.

Good performance. A couple of questions. First one is on the international side. It sounds like you're kind of impling that your rates internationally are going start to go up fairly, substantially because of the strength in the U.S. I wonder if you could elaborate on that a little bit? Is that part of where the 50%, the big increase in '06 earnings, you know, that you're looking for would come from?

Some of that. Yeah. I mean it's not just the U.S. The U.S. shortfall is a reflection of the -- In other words, we were contemplating moving a couple of rigs to Columbia, just three weeks ago. First, they were supposed to go to Algeria, then Columbia, and they can't compete. That were swallowed up by domestic demand, you know, and frankly, pretty good margins.

What is going to happen? What is already happening, for example in Columbia, Argentina, probably elsewhere, is rigs are in tight supply. So, we have to get to the point where we do what everybody else does all over the world, when we have a little bit of edge. You have to press it home. We have like, I don't know, over a billion invested internationally. A big part of the uptake that we see down the road is the historical investment is going to earn more, as well as juicy big new projects. We emphasize, and count and rejoice in the big new projects, but we have a whole bunch, 75 rigs already working before those 10 rigs, the 65, if we get increases on those, hence the bottom line, the dollars are refundable. I think it will be both, Kevin.

And specifically, Canada. Sounds like you're, you know, kind of giving us a hint that you might be moving rigs down from Canada to the U.S.

Well, I think -- what has happened, basically. We had a very good Suncor rig. A small 2,000-style plus AC rig, one of the state-of-the-art rigs. Suncor was a partner in it in a well in the Rockies, and they asked us if we could move it down, and they did and it's working pretty well. You know, in this kind of a market, if you have the rig and a good crew, you're going to get work for it. You know, frankly, I don't know, if our Canadian folks are on this call, but what we have been telling them is, that you're going to be down over 100 days a year because of weather. We have places where it won't be down 100 days a year because of weather.

So, yeah, and we are designing some of them so they're binational and customers like Shell probably, where we do all the work on both sides of both sides of the border, they probably will be in the lead. Number one, having more rigs, by the way. Probably in the U.S. and Canada. And they'll be in the forefront of the one client using rigs and crews in both locations.

Okay, so may be on an isolated basis or one or two off basis, a couple of customers and maybe not on a wholesale basis.

I think that's right. I think last year we had, however, we probably had 30 guys down here. Canadian crews down here during the breakup. This year we have -- during breakup, we have a bump in Saudi Arabia and maybe -- how many do we have? Do you know?

Probably a couple dozen.

A couple dozen. You have some down here, too?

Yes.

So, it's an edge we have uniquely, Kevin, if you waited for me to say that? We're trying to take advantage of it.

Okay. And then one last question, just have to ask this. I think, I know the answer. Are you getting, I mean, does anybody else in the U.S. doing at Anadarko, and walking a way from rate increases? They may be like a Chesapeake or customers sticking with rigs, and if anything, trying to lock them up for longer-term.

Decidedly, the latter. It's not even close. Anadarko did go down from maybe, whatever it was, 60 rigs to 30-odd rigs. We went down proportionally and more. We're down to 5 or 6 rigs, with Anadarko. And things have never been better for us, and I hope they can do the same thing. I don't know how many customers we have that have fallen. It probably closer to the 500 than 100. You know, Chesapeake are drilling more than ever. We still have 17 rigs working for them. They're all at higher prices than they were when we last chatted, but they're working for them. And they probably have 70-odd rigs working. I haven't looked at Pogo, which was the other announcement.

Okay, that was kind of what I expected. Thanks.

Sure. You probably know that from your ENT contact, don't you?

Yes, this is true.

Okay.

That's it for me.

Thanks.

Good quarter.

Thank you, Your next question is from Geoff Kieburtz of Smith Barney.

Morning.

Jeff, you had a good call a few months ago.

Thank you, Gene. Can you just help me understand a little bit better the $1,600 increase in margin sequentially, big jump, more than you expected? You're telling us that customers are getting more polite. I suppose that means they're more concerned about capacity than price. Sounds like you have your costs, you know, under control. You are you telling us you're not going to keep seeing margins increase at that rate. Why not?

How many -- how many times 1600 do you get to infinity? No, I mean I think we'll have healthy increase.

We have already committed that we'll be over 6200. We'll beat our proceeding record. We could probably be comfortable with something approximating 500 a day or there abouts on average. If it goes easier, I assure you, it will go easier. But I'm just saying, before the tax, what is a prudent thing to project? And --

Not to interrupt you, but, I understand the concern about having us all on the call here, plug in 1600 a quarter and what kind of EPS you come up with and so on. But kind of separate from that, trying to understand the dynamics that you're encountering on a day-to-day basis in the marketplace. Why -- why won't it keep doing this? Did something -- is there something special that happened in the quarter that caused it to be such a surprise?

I think, what happened basically was the demand for rigs clearly outstriped the supply and the pricing when it was pushed, there was no resistance, and that happened in workover as well.

Uh-huh.

Now, whether how fast it will go in the future, I don't know. What we're -- as I said, we're doing some term contracts. And a term contract that pays out a rig in three or four years will do it from that until doomsday, so long as we can get the rig. I think somebody put it correctly, it wasn't me. It was one of your peers, that said, what is the ultimate margin going to be?

They came up with a number that is probably the equilibrium number. Which might be, I don't know what -- I think 8500 and things overshoot and it might get to be a higher number than that before settling back to 8500. We don't know. I guarantee you we won't stop when it gets to $500 this quarter. If it gets there. If we can do more than that, we absolutely will.

You know, in that context with the capital availability that you have, even with the extending lead times or whether you are talking about refurbishment or buying -- buying other rigs. Why aren't you going to accelerate the pace at which you put rigs out into the marketplace?

I don't -- I don't know. We have limits on a lot of things, including people and components and all of that stuff. The other thing is prudence. So as long as there is an environment of scarcity, and we can use that to reflect better prices, better terms, better contract terms, why wouldn't we do that? Even if we could do twice as many rigs next year, why in God's name should we announce that?

Okay.

But we can't anyway.

Yeah. Okay and what are you doing in regards, you mentioned personnel limitations.. What actions are you taking?

We're paying these guys more because they are going to work hard.

Okay.

No, seriously. We have a program of recruiting and, you know, what I just said was only half. We're having to pay more.

Uh-huh.

And it can't be as much stock compensation as it has been historically. I mean, like we're going. What is true for, you know, at the rig level and everyone was concerned at the rig level, and I always said that was not, that was the problem we get paid well to overcome, it's tougher.

There is a shortage of smart managerial types, pure and simple.

And, you know, we hired -- I would say in terms of the top dozen or two guys, we hired one guy. And we, this past, you know, six months, quarter, two quarters and if we can hire a couple more like that, we will.

Okay. If that's the case, what do you do with all the cash that you have got?

That's a good question. So far, we have been able to, to deploy it affectively. In other words, I think I mentioned, our capital budget this year should be something approximating 650.

Uh-huh.

The appreciation of under the 300. Even that, frankly, will generate the surplus cash. We have 800 in small change debt to pay off in the first quarter of next year.

Uh-huh.

Unless the stock goes to 97. Okay. You know, but I will still end up with a fare amount of cash, I think, at that point in time.

Are you --

Yeah, you know, we have authority to buy back shares, and we'll contemplate doing that, you know, when the time comes.

We spent a ton of money. We earned a ton of money. We built up cash a bit. The build up in cash was equal to the exercise parts of the options that were exercised.

Uh-huh.

And I think that will increase as we go in, as we cope with it. We won't lower our standards in terms of have investments, although we're looking a lot. We end up with surplus capital that we invest, 15, 16, 17%, after the fact, and we'll distribute it to shareholders probably in the form of buybacks first.

Okay. Okay. And last question, you did touch on this earlier very briefly, but with an $0.80 quarter in hand already, aren't you kind of keeping the bar a little low to say you're going to beat the 275?

I don't think I said that. I think, I just said the last quarter, we said that, I think the number was 230, domestically would equal, be compatible with the 275 first call at that time. We'll beat that handedly, I said.

Just got to try to get you to raise the bar a little bit.

I don't raise it. The market's raised and it's raised. Everything's raised except the stock markets apparently.

Very good. Thank you, Gene.

Right.

Thank you, the next question can is from Paul McRae of Tower Bridge Advisors.

Hi, Gene. A couple of thoughts. We've discussed labor a little bit. Would you discuss a little more the availability of qualified rig level labor and to the degree you can fully pass-through all of these labor cost increases? What are these labor cost increases you're experiencing?

Well, I am not sure we can pass-through 100%, but basically, if there is a wage increase, we can pass it through. Frequently, if we have to move people from one location to another, in order to get the qualified people, the operator will, with pleasure, eat that. We have incremental training costs, which we don't get paid, reimbursed per sa. We have incremental capital investments that make it easier and safe to operate.

We don't get paid for say for that, except in the overall willingness to hire our rig at a good price. I don't think that's -- I mean anecdotely, when you have 230 rigs and 2 years ago, yeah, a little over 2 years and a quarter ago, we had 100 rigs working. There are going to be incidents. I could relate one that I thought was humorous but it might set the wrong tone. So I won't.

Ladies, thanked me very much for getting her a rig. She said that we could get together a crew. That doesn't happen much often. It was a problem that we know, the problem was going to happen. We focus on safety incredibly and not 100% successfully yet, and that's a good corollary for fish and crews. You know, you work it.

Hello? You still there?

Yes.

Yeah, okay, so you are finding it, you're capable of finding qualified people, In other words, the availability of labor?

Yes.

Okay.

Not usually but yeah.

Second question is, are you go took entering Libya?

I hope so.

Excuse me?

I hope so.

You hope so. Okay.

We're planning to.

Yeah. Okay. Thank you.

It takes two to contract, though.

Uh-huh.

Thank you, your next question is from Scott Gill of Simmons and Company.

Operator, we better make this the last question, since we're bumping up on our one-hour time limit.

Go ahead, Scott.

Yes, thank you. I'm going to actually go back and kind of -- the US. cash margin issue. Gene, during the first quarter, was the month-by-month progression in the cash margins, was it increasing every month during the quarter?

It increased in the third versus the first two.

Okay, and, you know, kind of simple mathematics would say your exit rate is already, probably fairly close to that 6,200 dollar a day mark. And I guess, I'm wondering as we look into the second quarter, are there some contracts in place that would bring that back down or -- or, you know, I guess I'm trying to understand it.

I didn't hear what you said. It was pretty close to what number?

6,200 a day?

No, I don't think so.

No. Okay.

I mean maybe before the end of the year, Scott. Not maybe, probably before the end of the year, but not this quarter.

Okay. Gene, on the internationals, you talked about these two new built 3,000 horsepower rigs having satisfactory return. Is that just kind of Gene Isenberg talk or fantastic returns or -- .

No. It depends on definition. If we can get essentially a -- I don't know, a four-year payout, a little over four years, 100% payout, no residual value, I would consider that -- that's four times EBITDA for a really high-quality rig that's capable of working another 15, 20 years. I would say that is pretty good.

Okay, are you considering many more of these opportunities in the international arena.

Yeah, but the opportunities have to be there. I don't -- speculation. We can always -- we always have internal opportunities but we don't pay ourselves. You get -- you have to have the pretty good probability of getting the customer, preferably have the customer on there. I think it's these 2 rigs, wherever they go to work. It will be some place in the Middle East. There will be advertisements for the next 2, I would hope.

Very good. Good quarter, Gene.

Thank you.

Thank you, Scott. Thank you, Ladies and gentlemen for joining us today. That will conclude our call. If you didn't get your questions answered, feel free to call us any time. Thank you again.

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