Nabors Industries Ltd (NBR) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Nabors second quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] It's now my pleasure to turn the floor over to your host, Mr. Dennis Smith, Director of Corporate Development. Sir, the floor is yours.

Thank you, ma'am. Good morning, everybody and welcome to our call. As usual, we'll try and wrap things up in about an hour. Gene will review the quarter as it was, what the individual business units did, more importantly, what the outlook is going forward, and try and wrap that up in about 25 or 30 minutes and hold about 30 minutes for questions and answers. Besides Gene and myself this morning, Tony Petrello, our Deputy Chairman, President, COO; Bruce Koch, our VP-Finance and CFO; Bruce Dayton, our General Counsel; and all the heads of our major business units are with us today. We definitely want to remind everybody about the Safe Harbor Act of the SEC, that everything we're talking about is forward-looking and so far, the last few quarters everything we've talked about forward-looking has turned out better than that, but always can go the other way. So with that qualification, I'll turn it over to Gene.

Thanks. Welcome again to Nabors quarterly earnings conference call. I think the numbers this quarter sort of speak for themselves, but we'll try to put them into context and give some expansion on our thoughts on the outlook and what we hope to do to capitalize on our expectation of a long-running period of worldwide oil and gas supply challenges. First, the numbers themselves. Again, we emphasize operating income Q2 174 million roughly, operating income. Q2, '04, 47 roughly, and Q1, '05, 172.

I think pretty obviously Q2, '05 was almost four times the operating profit of Q1, '05, but perhaps even more impressive is the fact that Q2's 174 million was our absolute record income for a quarter in the Company's history, and that was in the face of a drop between the early quarter of $47 million in operating income in Canada. We are overall basis, every business unit in Q2, '05 that we handily beat Q2, '04 except for the aforementioned Canadian situation where we were even lower in operating profit this year than last year. June apparently had a -- in one-month period a 12 month normal annual rainfall in Canada, and that sort of explains it, and I might add that our performance is consistent with the industry. It didn't just rain on our rigs. On a sequential basis, the big increases were in the United States, both in land drilling and well servicing and we had the big drop, which I just referred to in Canada and a relatively modest drop, which is also seasonal in Alaska.

I will cover some big-picture items and perhaps spend more time on this sort of thing than we normally do before we go to the individual business reviews and outlook. Since the First Call consensus for Q2 was $0.72 compared to our $0.82 actual, I guess that the 3.35 or 3.37 First Call consensus for the year would go up something approximating $0.10 a quarter and I think we would be comfortable with something like 3.65 to 3.75, 80, and I think we can comfortably do that. I'd like to point out that I've heard some comments about sandbagging this particular quarter. We don't do it, frankly because it doesn't make that much difference to us whether we hit our objective 20 days earlier or 20 days later, so long as we get where we want to get in a reasonable period of time and I think we're going to do that.

Let me turn to the balance sheet. We're in super great shape. Cash and cash equivalents, including investments that are convertible to cash quickly are 1.6 billion still. The net debt is now 0.12. Year-end it will be 0.11. And even more impressive is the fact that on a cash flow basis this year we're going to spend approximately 1.1 billion CapEx, and I'll describe that in a little bit more detail later. We already bought back stock of about 80 billion, 1.5 million shares in the first quarter, and still, cash at the end of 2005 -- cash equivalent at the end of 2005 will be well over $100 million more than it was in the previous year, so this enormous capital expenditure program essentially was funded by operating income and maybe -- not maybe, but approximately, we think, a couple hundred million of option exercises.

I'd like to cover a couple of points now in the format of saying that we're going to have an analyst meeting September 28, and we hope most of you chaps can attend. I think what we'd really like to cover in some detail is what we have done, are doing, and are continuing to do in terms of rig technology. We have had for a long time-- not a long time, but for a year and a half, two years, the programmable AC electric rigs. We're now going to be calling the PACE rigs, and we've had those with pretty substantial success initially in Canada, and we have a number here in the Lower 48 and we have a couple in the Gulf and that program is expanding pretty rapidly in the future and we'll tell you about that. We also have the only AC hybrid coral tubing, stem drilling rigs, I guess in the world so far. We have it in Canada. We've had one working for our good friends at Apache for a while now, and I think they're really happy with it, but we have made some modifications, improvement, and we're probably going to have 20 more of those coming pretty quickly. Well, as quickly as we can get them, which isn't super quick, but as quickly as we can get them.

Also, this is the 1500 meter it's pretty good, and we have ideas about doing something that will quickly give us the technology, 3000 meters, which should in a major way expand the applications. In addition, we've talked to you about what we're doing in our portfolio business with the Millennium rigs and whether we told you or not we've ordered 20 additional smaller rigs. We have a bunch of trucks and things like that, which I'll get into in a little bit later.

The other important thing that I'd like to chat about and we'll hopefully get into more detail is we're trying to deal, actually just yesterday afternoon, with the Texas Municipal Gas Authority, I guess the proper name is -- Texas Municipal Gas Corporation. They have the charge of developing reserves for all the municipalities, either for their own use or for the municipality-owned gas -- electricity-generating units, and they have a requirement to develop -- well, they're going to have $2.4 billion to spend on it, and they can only buy proven gas reserves of BPP's and they need about 300 million cubic feet per day, and the deal with them is I think this is almost an ideal match. We have the capital; we have the experience in this kind of semi-proven reserve exploitation, so they can't put up the risk capital, they can't do exploration or even develop drilling, they can only deal with proven reserves, so we're going to put up the risk capital and we've committed to spend at least $300 million on this, and also to provide the rigs.

And by the meeting at the 28, we'll be able to probably give you a specific example of how these things work because we're pretty close with doing this with one of the very big independents, and what happens, basically, is because of the characteristics of the Texas Municipal Gas Corporation, they can afford to pay a relatively high price for proven reserves. They're tax-exempt in a lot of ways; they can borrow money on a tax-exempt basis. So their connections can buy stuff that probably something even below a 6% NPD.

On the other hand, the operators are going to have potentially relatively high finding costs, really, finding and development costs, particularly finding costs on a new set of assets, potential reserves. And what we're talking about doing is we, Nabors, put up the money for the first phase and we estimate these will be four-month phases. The operator stays in charge the whole time. They develop the prospects to proven reserves, then they sell the reserves to us. And they sell it to us at a high price because we're going to pay them exactly what the Texas Municipal Gas Corporation will pay us, which is really a pretty high price for the thing, so the operator in effect gets pretty good finding and development metrics; he gets a relatively high price or a low-cost -- the other way around -- for developing this stuff; and he probably almost certainly gets incremental reserves quicker.

Anyway, as I said, we have one pretty sizable major independent who's pretty close to doing this. We've presented it to three people so far and everybody seems pretty interested. It's kind of a legitimate thing that -- we take advantage of the fact that the municipality has a need for gas and if it's proven, they can pay a high price for it. Okay, moving onto more direct subject matter. Since the First Call, I already said that or did I? Did I talk about what the estimate for the year was? Okay. Turn to the balance sheet, then. We have, as I said, $1.6 million -- I think I went through that too. Let me talk about return on capital employed. I got all excited about this Texas Municipal Gas Corporation. The return on capital employed, last year we averaged 8% for the year. First quarter we had 15%. Second quarter 16%. For the year we expect to average 18%, and this is our most critical metric, and the way we do this is operating income minus cash taxes, and let me then turn to the tax situation.

For this last two quarters, the tax rate, the GAAP tax rate was 24 to 25%. We're projecting that to be 27% for each of the next two quarters, but the important thing is the cash tax rate is extraordinarily low, like approximately 3.5%, so in effect, part of the capital budget is being financed by our deferred taxes, and I think that number is much more relevant personally than GAAP tax rates because we can make these investments and generate a bunch of money instead of paying the tax. In any event -- and also, that's got nothing to do with being a Bermuda company. That's 100% of functions with that that we’re investing money have invested money, have pretty high depreciation and carry-forward for the losses generated by depreciation.

In terms of -- if you noticed on the earnings release, you probably did, we think that we might do as many as 100 new rigs over the next two years, and that, as we said, they will be partially conditioned on what the market tells us. In other words, in essence, we're going to be committing and exercising options that we've got in place in carry pursuit with signed contracts and delivered rigs, so give you an idea of what we have now we have -- and these are things that are firm redeveloped. Nabors Drilling International, they have six or seven already of these PACE rigs and they had two more this year and three additional ones will be coming probably this calendar year. One might stretch into January. And behind that, we have 10 more for them, and again, we're getting ready to do it, we have options to do it. And if the market stays the way we think it is, even if it stays the way it is now, these things will turn into rigs.

We also have the coral tubing, the AC hybrid coral tubing thing, and we have one now and we'll have 20 coming, and they'll come by the end of '06. Nabors Drilling International Limited, we have a number of new rigs, one new one started India. We have two 3,000-high power rigs, these are the brand new AC rigs. They have 3-year term contracts with Lukoil and Saudi early next year, and one of them is working now or shortly will be working on an interim job. It's being mobilized as we speak. And we took one of the Dolphins which -- and we put it on a real long-term contract in west Africa. Saudi Arabia we got the 10 rigs fully employed now and the operating income is manifested as we speak. Nabors Offshore has a new rig tree, it's a barge rig, and this is going to be a 3000 horsepower 7500 PSA, all the bells and whistles, except it will be the only Hayes B deep barge rig in the Gulf so far.

All those things are in addition to what we previously told you about the work over business. So I think the new metrics are not how many stacked rigs we have or somebody else has to be refurbished, but I think it's really the overall global ability to tap profitable demand, to have good purchasing relationships, contract, (INDISCERNIBLE) et cetera, so that you can get good rigs at decent prices quickly. Time is of the essence in these things. (INDISCERNIBLE) So, we think when we have a situation where we have "X" rigs that could work in Canada, International and the Lower 48, and the guy that comes with the first good contract gets the rig, and that's a pleasant position because of our diverse operations.

I think it's important to note that our biggest relationship will still be almost certainly National Oil Well, Grant Prideco will be the vendor, Pipe Cat engines, in all of them we do our own top drives and we do a lot of our AC work in Canada with our academy affiliate. I'm not saying we do anything cheaper, but we do have a priority in getting stuff when we need it, and I don't think we pay more than anybody else, and I hope that's an understatement.

Anyway, let me turn briefly to the business units. Alaska has been better than expected. Last time we chatted, we expected '05 to be percentage-wise significantly worse than '04. Now we're talking about actually a little increase this year. We always have been the best rig there, best rig company there. But it's been a lousy market and it's still not a great market, but it's tilted into at least a neutral or modestly positive direction. Viscous oil is still the upside. There's still a chance for Anwar even though it wasn't in the energy bill and NPRA is going to have discovery that's going to require rig work. We did 18 million-ish last year, we'll do a little bit more than that this year. We'll generate cash flow because we don't have CapEx. The depreciation is bigger than the CapEx by 5, 6 million. But the prospects still are good long-term.

NDUSA, this is a pretty good story. Let me start with the rig count. We had 222.5 rigs in the first quarter, we had 229.5 rigs in the second quarter, today we have 244? Sorry about that, 246 rigs working. The margin in the first quarter was 5280, let's say 5300, in the second quarter it was 6400, actually, 64 and change so we actually had $1,130 per day gross margin spread per rig, and things are getting better. I think the exit rate was probably around $7,000 a day, and our guys who are usually down the middle, not too optimistic, not too pessimistic, think we'll average $7,400 a day in third quarter and perhaps $8,000ish in the fourth quarter. This represents an incredible story in terms of operating income. We go from 72 billion operating income in the first quarter to $101 essentially this quarter, and the way we're going, it could be 425, 450, something like that.

I think what we're also doing is we're doing, we're at the point where we think the prices are such that it warrants doing term contracts or some term contracts. Essentially for all of the new rigs, we're getting term contracts three years from the time they're delivered and generally they're not being delivered until very late this year, early next year, and the rates are such that they virtually assure that they'll be a good return on those rigs throughout their lives, even though there's a very significant portion of that return is achieved in the initial contract. We have both 70 rigs on term contracts now, 28 of these are -- and not many of these are new, one or two, three are brand new rigs -- of these 28, they're scheduled to be renewed in the next six months and day rates will be up over what they were then. Of the 28, about half will be renewed from one year and a half will be for two years, and the term contracts, generally, by the end of the year, counting new rigs, everything we're doing, we expect to have 100, 105 rigs on term contracts out of what, 450? 475 rigs? At the end of the year. And on average they'll be on 18-month terms and we're saying is the average probably will be something modestly north of 8,000 by then.

So these numbers include Shell's now. As you guys know, we do all of Shell's work in the states, and in Canada, you probably noticed the Shell's North American management is talking about how bright he thought the prospects were in North America, including Alaska again, and given the offshore, our interest is where we're seeing it. I'll take whatever questions you have on -- well, before I leave -- and the U.S.A. -- let me emphasize the work we're putting in on training facilities and training people. We have essentially three training facilities. I guess these are all new? Casper, Polk City, New Iberia.

When I was talking to the top BP chap covering North America before he left, he had a big, important request. I said what was that? He said don't transfer the guy that we now have in the Rockies out of the Rockies, the training guy. Happily, he said we could do that, but I think our safety record's improving, and as you know, we believe that safety is a good proxy for efficiency. We made an acquisition which is a strategic acquisition and was not an EBITDA-type acquisition. Alexander Drilling and we're going to make a fair amount of money on that pretty quick.

Canada, again, Canada had the weather. As I said it didn't just rain on our rigs, but we had $47 odd million operating income in the first quarter, essentially nothing in the second quarter, but I still think we'll hit our regional target of 120 million operating income, which will be about a 33% increase over last year. We essentially do almost all of Shell's work, we do all of Acu's work that we have rigs to do. We started the program of the PACE rigs in Canada and the initial momentum was taking the worst rigs we had and making them the best rigs we have. And pretty soon it got to the point where they're for all practical purposes, new rigs, but as soon as we have them done, they're employed and mostly on term contracts, and as I said last time, in Canada, the problem has been that the tradition has been the contract appears during the weather seasonality and the weather, and we've been pushing that so that we go from 500 days in two years to 250 days a year to 300 days a year, and I think we can do better.

Actually, just moved a big rig from Canada down to the Rockies, which is kind of a message. We did it based on pure economics to send a message. 365 days a year, two years of high day rated is better than worrying about seasonality in Canada, but it also sent a message. Anyway things are really going great, and hopefully, by the next report, we'll have some additional work that we're doing in Canada to describe to you.

Talked about -- talk about the offshore business. I'll be pretty brief here. We're doing much better in the offshore than we anticipated. It's still not one of our raving success stories, but essentially, we did $20 million-ish in operating income last year. I think we'll do almost twice that this year, although this year includes a little over $2 million in an insurance adjustment that won't be recurring. We have a new thousand hot spot Sundowner rig and we will be building a 3,000 hot spot Bodge rig, as I mentioned before, and the rates on those have gone up nicely since we started talking about this, and we have an incremental jack up imminently going to work.

Nabors International. I think the outlook for Nabors International is pretty incredible. In December/January of this year everybody was saying the U.S. is dead, the rate of increase is small, the second derivative doesn't exist, et cetera, and the whole world is going to revolve around who has the international business. Now, in July nobody worries about, or talks, or thinks about the international business and I'm sure the focus seems to be on the domestic business, but I can assure you that we have prospects that are almost unbelievable internationally. We have the reputation. I think we've got our act in order now and I basically think -- for example, if we look at '06, and this year we're going to go up whatever the difference between 93 and 135, but, and we'll -- what we've done is we've looked at the existing assets and the new assets that we've been deploying, including new assets that are unemployed in the state, and on the existing assets, I think there's a shock of improving operating income by 15 or $20 million in '06, compared to what we're doing this year. That's for existing assets.

And then for new assets, there's a chance, at least four of those assets would be idle assets elsewhere in the paper circuit, but the other ones are, we're making investments there where we're getting after-tax returns 100%, no residual value, 100% returns after the fact, say three and a half years, three and three-quarters years, so I mean, not that we're getting, we're planning to get, and I'm confident and I'm prepared to commit that we'll execute, we'll do that, so I mean, the point is that we got five rigs bid in Saudi and they want a lot more than that. We're arguing about what had been a traditional system of penalties. We won't pay penalties. We're looking at possibilities in Venezuela, and we told them what it will take, and they seem to be willing. And we have two new rigs going into Venezuela, by the way, this fall, and that will be like a marketing through these PACE rigs, 1000 horsepower with, one's got a 3-year, one's got a 5-year contract. So anyway, the outlook is pretty good and I think we could be up $50 million in '06 compared to '05 with really good returns, and we get the return on assets employed up there as well.

Nabors, well servicing they're -- I have the summary they gave me everything is a record. Income is a record. We'll probably do 100 million this year. Every single rig we have is working. We wish we could have the rigs we ordered from National delivered quicker and we may have to chat with them about it, but as it is now, we're going to do 40 of those, and they won't be finished until the fourth quarter of next year. We ordered 20, 200-horsepower rigs, and that will be finished mid-year, next year. (INDISCERNIBLE) the whole business. The point pure and simple is if we can get a return of three, four times EBITDA with the first-rate equipment that's going to work forever, that's the way we're going to go, and if we could do it quicker, we'd all be happier. I won't go through the specific details, but we have them for you if you want them.

Just to summarize, and I've used up as much time as I was allotted, the outlook is really powerful. We're in the sweet spot of demand. Most of the world's requirements -- drilling requirements for gas on the one hand and oil on the other hand, happen to be on land. There's a lot of gas, standing gas, but you know, pure wells are going to make a whole bunch of BOEs. Domestically, I think we're going to be doing a bunch more. (INDISCERNIBLE) Canada for gas, Alaska's oil, and internationally it's oil. You guys probably have read Matt's book, and if it's at least partially right, which I think it probably is, they're going to be drilling -- forget the book even. The way Saudi ramped or requisitioning rigs tells you that they probably can get what they say they will, but it's going to take a lot of effort to do it.

Anyway, I'm also excited about the Texas Natural Gas Corporation and that could be a couple dozen rigs in the next year, and I think, I emphasize we have an exclusive contract here. Anyway, I think the outlook is good and I think next quarter and the quarter thereafter will tell the story better than I can. That does it. Operator that, wraps up the formal remarks. We're ready to begin the Q&A.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Marshall Adkins of Raymond James.

Well, Gene, great job. Totally unexpected. Couple quick ones on your capital spending here. It's up dramatically year-over-year, up over a billion. Can you give me kind of a rough breakdown of where that's going in terms of both business segment and maybe geographically, U.S. versus international and land rigs versus workover, et cetera?

Yes, Jim, do you have a rough idea of what your capital budgets would add up to on the workover site, same thing for you Jeff? If we need to look at it for you quicker, we'll get it for you there after. The only acquisitions were like 50 million, there and I say the new rigs were feeling substantial portion of the total drilling rigs, and a relatively small part of those would be in the Lower 48, but what we have here, without the increase -- a third of it would be in the Lower 48, 130 would be in Canada, international would be the biggest, 420, but some of that Lower 48 is not new rigs. A lot of that is top drives. We've doubled our top drives. Faster moving, more hydraulic power, all that stuff. So pool is -- well servicing is 100. I'll give you the breakdown, but it's -- the biggest chunk is international, then domestic, then Canada and well service about the same.

That's perfect. That gives, that helps a lot. Can you give me some sense as to your rate of return expectations on that? I mean, that's a lot of incremental capital invested. I think the market sees it and says oh, oh, they’re spending a lot of money. I'm assuming the returns are going to be pretty phenomenal. Obviously, you went through your returns earlier, but the returns on the incremental money being spent, can you give me some sense of what you're looking for or expecting?

I don't know. If you have a full payout in 3.5 years, which is the international stuff, if we execute, which I'm counting on doing it, I don't know if -- that number's probably 20%. Yes, that's probably 20 on a capital employed basis, which includes working capital and that stuff. I mean, but here you have the best rig in the world and you've paid for it before it's really broken in, and in the meantime, it's advertising like crazy, which is the case on the 3,000 horsepower rigs in the Middle East, and we're now starting to promote -- we had been under the impression that putting up the numbers is better than putting up announcements, but we're going to try to do a little bit of both from now so, that's why we're having this -- anyway the returns are a real good margin.

That's obviously a phenomenal return. Great job. I'll let someone else go for a few questions. Thanks.

Thank you. Our next question is coming from Scott Gill of Simmons & Company.

Yes, good morning, Gene.

Hey, Scott.

Gene, on this relationship you have with the Texas Municipal Gas Corporation, I think you mentioned a $300 million capital expenditure. Can you talk a little bit more about when the Company expects to make that investment and then talk a little bit about how that return will flow through the P&L, the timing of that and kind of what we should be expecting in terms of--.

I think we'll know a little bit more maybe by September, by which time I'm hoping we'll have the first yield locked up, but basically we had a -- the Texas Municipal Gas Corporation is giving us a bunch of things: access to their low-cost capital; their low -- their ability to pay high prices with a low NPD valuation basis, et cetera, et cetera, and we said okay, well we got the money and we've committed for these kind of deals we've put it up and we will give these kind of deals priorities and we've set it up so that we can probably get new rigs in time for there, and that will help our program of new rigs return, so I can't tell you. We'll tell you a little bit more -- we'll do great without this, but I think this is not only the icing on the cake, but I think it's a good mix of what our strengths are, financial strengths. We had been dabbling a little bit in E&P and had done the deal with El Paso, as you know, and we have the ability to get a whole bunch of quality rigs, best state-of-the-art in the world on real quick notice.

All right, and the El Paso went quite well for you.

It was, yes, right. I don't know what the ultimate was, but we were capped out at 17.5%ish on that deal, and the whole dig was whether you could make it in a year, or a year and a half. And the numbers are probably pretty good. The return on actual cash outstanding probably is in the 20s, but I don't really know because it isn't that much money, you know? It's like we ended up spending $80 million, 17% of 80 million is 12, $13 million, so it had a lot more bust than bottom line and I hope this is going to be the other way around.

And my last question, in the press release you talk about 100 additional rigs over the next (INAUDIBLE) months. Can you give us some indication, if you were to allocate those 100 rigs, how many would be in the U.S. market, how many in Canada, how many in the international markets?

I would say, this is over a two-year period, and this is on the assumption that the domestic, international, and Canadian rig count might go up 250 rigs per year for each of those two years, and we think we should have 20%-ish, I think we should have more, but 20% of the increment in the States. I think we should have 15% of what goes on in Canada, and internationally, I'm thinking we might do 40% and when you put all those together, you come up with these numbers. We don't have the specific bids for the whole two years, pretty obviously. We have bids in hand that will get there at that rate if we’re successful.

Okay, thank you.

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

Good morning, Gene.

Hi, Dan.

You mentioned we've moved from the point where having spare capacity is the issue to sort of being able to add incremental capacity, via new builds and you talked about your relationships. I guess my impressions has been that if you wanted to add 50 rigs a year for the next couple of years, that that would probably burst at the seams sort of the existing capacity that a National Oil well would have. Do you have other relationships that are going to help you get where you need to be?

We're looking everywhere. As I told you, we do our AC work in Canada. We've built the PACE rigs so far, the ones that are working the AC part at least has been in Canada and sometimes the whole rig. That's true for the 3,000-horsepower rigs. We have a couple of these in the U.S. gulf, we have or shortly will have four in the states, we have about seven or eight in Canada, but we're looking all over. Worldwide.

Okay, so I would assume that that would include some of the low-cost manufacturing areas China, et cetera?

Brazil no, I'm kidding. Actually, in plain English the two rigs that are going to Venezuela in the next couple months, I would say, what do you think, 35, 40% of that from China? 40% from China.

Okay. Wow. And if we think about 100 rigs and the mix that you're talking about, I mean, where does that average out in terms of sort of capital commitment, do you think? Are these rigs going to average 15 million a piece or 9 million a piece?

It depends where they're going to go and it depends what kind of rigs. I would say a fast moving land rig, a PACE, which is our state-of-the-art rig, all in, ready to drill, top drive, drill pipe, every -- including sales tax probably is $10.5 million. Yes, 1500-horsepower or a 1000 virtually the same. Internationally, if it's in Saudi, it would be more than that. If it was in Venezuela or Algeria, it would be less than Saudi, but a lot more than domestically, those numbers would probably be around 15. I would say 15.

13 and 17.

13 and 17, depending on where they're going. And the 3,000-horsepower, to give you the other extreme without taking up the whole call, pretty close to 25 million, 26 million. If we do it with a whole bunch of our own stuff, we get it down to 22 or something like that, 25.

Okay. All right.

And those are the numbers we're talking about 3, 3.5 year after-tax total payoff with zero resid internationally.

That's helpful. And Gene, obviously rates have moved up in the U.S. quite nicely. Have you seen any push-back from your customers? I know they always complain, but have you seen any programs be canceled or reduced because rates are higher?

No, those are two different things. Push-back we get all the time, and frankly, we lose some bids, including some new rigs but I have yet to see a program and I've been in this thing 19.5 years, I still haven't seen my first program that a rig rate has been canceled.

Last question for me. Your manufacturing logistics and others segment had a real nice quarter. Was that a sort of new level of profitability there or was there anything non-recurring?

No, just a big turn-around, that's all. I would say our high-tech stuff in Canada -- Ryan went from a loss last year to a nice profit this year and they're not only a healthy contributor, but their synergistics with our Canadian drilling operations, Canrig -- well, Canrig we're doing probably 2/3 of the rigs go domestically, internally, and the other 1/3 goes to third parties, and when it's internally, the profit has to be eliminated.

Yes.

So, but they're going to be doing 100 rigs a year next year -- I mean, 100 top drives a year. As a stand-alone entity, that would probably be worth a bunch of money. Epoch is doing pretty well. Even our boat business is picking up it's beyond me why it is. Not why we are but why the industry is. The boat rates are increasing, but we're still planning on not being in this five years from now, the boats. Right now they're a better tool big-time.

Okay, thank you.

Thank you. Our next question is coming from James Stone of UBS.

First of all, just for some clarification points, Gene, how much CapEx did you spend in the second quarter? And then how much of the--?

209, sorry.

209 in the second quarter? And then how much of the CapEx of the remainder to be spent in the second half of the year is on production or E&P-related?

You mean Well Servicing?

No.

None of that's in there. I'm sorry, you mean--.

Implied that there was -- that in that 1.1 billion for the year there was a reasonable amount that was related to what you were going to be doing with either TMGC or others.

We had nothing in there.

Okay.

Not because we think it's nothing, but we have no idea -- it's not a big number, generally.

And just with that sharp acceleration in CapEx, is a lot of that sort of pre-ordering equipment and sort of getting into your manufacturing slots in anticipation for the buildout next year, and do you expect to see CapEx come down in '06, excluding what you spend on exploration and production-related stuff?

I hope not.

Okay. So you're just taking this up to a whole new level in terms of where you're spending and just based on the growth you're seeing?

I mean, the market and customers are going to determine what we do, and so long as they keep wanting rigs and being prepared -- I mean, right now the situation in terms of longevity of this, guys are talking about committing at high rates for rigs starting a year from now for three years. Sometimes more than a year from now for three years. And in Venezuela, one of those commitments was on this (INDISCERNIBLE) for five years, so they don't think it's going to run out pretty quick.

That's remarkable. And can you just give us a sense on -- or Bruce, maybe you could help us kind of map out what's going to happen to depreciation and amortization over the next several quarters or how we should sort of start placing that into our model?

I think 300 depreciation this year, right, Bruce?

290 due on depreciation. For the year.

Okay, and it's -- 4 million a quarter? And depletion is kind of hard to figure, but--.

So, but basically, even with the step up in the CapEx budget, 4 million per quarter as we go into '06 sounds like a pretty good run rate?

Yes.

We haven't focused on that, but that's the rough estimate now.

Okay. And--.

$10 earnings target estimate. (laughter)

All right, that's all I had, I appreciate it.

Thanks.

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

Good morning and great quarter.

Thanks.

I had a couple international questions. Since you're looking at substantial -- I mean, your target would be to be sending a lot more of the rigs overseas that may be built. I just wondered where you are, your cycle of turning over contracts and how much upside do you think there is in -- for the existing contracts that you have right now that roll over and when might that be -- what kind of timing should we be looking for?

Actually, that's sort of what I tried to present, batting in '06. What we're saying, in terms of existing assets in international, I think we have an upside. They told me 20, but I mentioned 15 million. That's for the existing assets and for new assets with these high returns, the separate category could be 40, 50 million, depending on how quickly we get, how many of these contracts we get, how quickly we get them, but we've broken it down in terms of how we're approaching it from a management, how Ziggy's looking at it, because people are focusing on what are you going to do on the stuff you've already spent separately from what you're going to do on the new stuff, and one of the problems is these initial contracts are long-term. Sometimes if the market isn't hot, they get renewed at less-than-perfect prices. Sometimes there's a lag between finishing one contract and getting another contract, whereas in the states, it's almost instantaneous. In other words, overwhelming portion of the 400 odd million is from increases on rigs and it's hard to do, and if we can do 20 million in '06, that will be frankly very good and more than we've done in the past.

Well, market's in a different place than it was as well. And then--.

And we need a different -- it's a little easier to do it with one guy talking every day to the two guys running the regions, talking the same day to the district managers and salesmen. Everybody's one place, one philosophy, everybody knows the story, and it's not as easy internationally. But we'll do it.

Okay. The other international question is what new regions are you likely, or new countries, do you think you've got potential in, say over the next year? I mean, you've really, the business has been pretty concentrated with Saudi Arabia obviously being the gorilla, but then a few other countries really being the majority of where your exposure is, and wondered if you're going to get -- there's an opportunity here to build up other significant profit centers.

Yes, I think we're talking about aspirations in Kuwait, aspirations in Lithia--.

Gene, it's the Middle East, Kuwait, Amman, North Africa and the southern plains of South America.

The big new hope is Libya, Amman, Kuwait.

You think we could see something in say Libya, Kuwait the next year?

Yes.

Hopefully quicker.

Quicker would be good. Thanks. Great quarter.

Thank you. Our next question coming from James Wicklund of Banc of America.

Did you fall asleep?

Oh, is this me?

Yes.

Sorry, guys. Yes, nodded off. Has no reflection on you, I promise. Talk about difficulty in hiring people. You're going to put 100 rigs to work, a lot of them in the U.S. How do you find people? Everybody talks about they're tough or and impossible to find.

They're not impossible. We've gone from 103 rigs to 244 -- 246, I'm sorry and we've improved our safety rate -- Joe why don't you address that?

What we've done and Dave mentioned earlier, we actually hooked our first training rig up in Casper last year to accommodate our -- doubling our rig count in the Rocky Mountains. To add to that, our increase on the Gulf Coast, south Texas, east Texas area we've now combined with Nabors Offshore to work with their training facility, which is in the home in New Iberia area and now we're also putting a third rig up in Mid-continent in Oklahoma. We've had tremendous response, people coming to work. We've got about 87 to 90% retention of the employees we've run through. So we've (talking simultaneously).

We pay them more.

Yes.

I'll ask this question very carefully. What are you having to pay roughnecks more per hour today than you were a year ago, base labor?

Double.

Two years-- (talking simultaneously).

Year to-to-year we're probably 25% up on the roughnecks.

Entry level.

Entry-level roughneck we're about 25% up.

Okay. Gene, do you think we're ever going to see Chinese rigs and Chinese crews in any meaningful way in the U.S.?

No. Rigs components, yes. We've had rig components for a long (Expletive) time, including from the major domestic supplier of capital equipment, and I think -- I don't think you'll see Chinese crews here. I think you'll see Chinese crews internationally, and I think you'll see technicals, if they sell rigs here, which they almost certainly will, then you'll probably have technical service people, service people, make sure it gets going and maybe they'll even have facilities to fix them.

Okay. Gene, with the breadth of drilling expertise and the breadth of geography you have and with your cash horde, of course, do you ever get tempted to build a couple of new jack-up rigs or anything that you're not in now?

We haven't succumb to temptation yet.

Any near-term chance?

I don't think so. We have so much cooking, and execution is so critically important on a full plate that it's kind of late. It isn't like you're going to buy any kind of asset, something that's going to be triple in value potentially two, three years from now. It's way up there now.

Okay, guys, that's what I needed. Thank you.

Thank you.

Thank you. Our next question is coming from Geoff Kieburtz of Smith Barney.

Thanks, good morning. What is your CapEx year-to-date? You said $209 million in the second quarter. That brings us to what for the first half?

380.

380. And how many new rigs have been added to the fleet in the first half of '05?

Well, you have the two -- and this is a little bit of apples and oranges -- two, 3,000-horsepower rigs, which are probably equivalent to three, 1000-horsepower, 2.5, 3 and Joe, how many do you have?

We put three major, four -- I guess four major refurbs into--. You've gone from 209 to 246.

Eight of those are acquisitions, right?

Yes. We've done--

Six Saudi Arabia--. I don't know. We'll get that number for you. It's hard to sort out.

I'm just trying to get some sense here. It sounds like maybe we've added in the first half of the year something on the order of 50 rigs to the fleet?

Yes.

For $380 million. And we're looking at a run rate of a billion something with like 100 rigs being added, is that right?

I think that's going to be more like it because there are going to be a lot fewer refurbishments, less than 10 million. A lot of rigs around 10 million and a significant number overseas at 15-plus. So it's going to be, order of magnitude, with the numbers you guess you've put forth are what we would guess off the top.

I didn't quite catch that, Gene.

I think the numbers you came up with are probably as reasonable as we've come up with.

Okay, all right, all right. And you're not running into, you believe at that level, any bottlenecks of significance in any components, including people?

I didn't say -- I mean, it takes a lot of work to do it and we haven't executed it totally yet. Hopefully, what we have is we have the programs for everything. We have contracts, options, understandings, all that stuff, in terms of the physical components we got plans, processes for people, and we're talking about TCNs, we're talking about Hungarian -- what are we doing in Algeria?

We're getting more quotes from Eastern Europe.

Eastern Europe is a new source, Egypt.

Okay.

Also, we've done really good this year by using Canadian crews internationally during the breakup there. Hopefully it isn't about a breakup, but that enables us to mitigate a little bit. In fact, if you wanted some they couldn't get it. So the multi-faceted thing has synergies, including with people.

Okay, and you can move those people around or do they-- when you hire people for say work in the Middle East, are they going to stay in the Middle East or can they move around to Latin America or even the U.S.?

I mean, typically, people in the Middle East stay in the Middle East because at the moment in South America there's not really a labor shortage at the moment, but they can be moved around both directions. Not only that, but there's not many third country nationals in Latin America. It's mostly indigenous groups.

How about in the U.S.?

All indigenous.

Okay. Well, fair enough. And can you just give us a sense of what's happened in terms of your drill pipe orders?

They're bigger and more expensive.

Order of magnitude versus a year ago in terms of order rate?

Close to double.

Okay. And last question.

Volume.

Right. Last question. On the -- you explained, Gene, that the TMGC deal, but I wasn't quite clear what the Nabors' role was. I understand why you want to do it; why isn't TMGC just partnering with an operator directly?

We have to be the middle man to effect the swap I think. We have the rigs and if they did it, they would have the high-finding cost up front. They wouldn't get that benefit of it. I mean, could they sell proven reserves without us? The answer is yes, but that isn't the whole story of what we're performing as a team.

Okay.

In other words, what we're doing is taking stuff like Mad Island for El Paso. Which they know they have fines, but it's going to be high cost developing, economical as well as high cost and it's conceivable that we come in and do that, swallow the high cost and let her pay for those high costs with really high-priced, low NPD valuation bases for proven reserves, and we'll discuss that tomorrow morning, actually.

Great. Thanks very much.

Operator, we'll just have time for just one more question, please.

Our next question is coming from Aaron Jayrom of Credit Suisse First Boston.

Gene, real quickly, can you just talk about the demand increments you're seeing in Saudi Arabia? You talked about five additional, I guess, rigs that you're potentially bidding on and perhaps how the cash margins would compare to the last 10 you put out, which I believe are in the $9,000 range?

I think, this is Ziggy Meisner, I think in Saudi, the recall around here is the increase (INDISCERNIBLE) to more than 100 rigs and present they're running like 80 rigs, so there's room for like another 30 rigs, and typically, we would get some of these rigs, and these are land rigs for the most part, and therefore all for gas. And I think the margins, they go back to what Gene said earlier, that we're basically looking at these rigs that go in there on a 3, 3.5 year payback.

That's helpful. That's all I've got. Thanks.

Ladies and gentlemen, thank you for joining the call and with that we'll wind things up today and appreciate your interest in our ownership and Nabors. Thank you again.

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