Nabors Industries Ltd (NBR) 2005 Q3 法說會逐字稿

Good morning, my name is Karen and I will be your conference facilitator today. At this time I would like to welcome everyone to the Nabors Industries, Ltd third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Dennis Smith, Director of Corporate Development. Sir, you may begin your conference.

Good morning, everyone. I'm sorry we had a little technical glitch there. The mute button didn't go off on the call for some reason. I want to welcome everybody to this morning's call and give you a little highlight of what we are going to do today. We are going to depart from our normal format slightly. Gene will give a very brief overview of the quarter, mainly just the major contributors to the quarter and dwell a lot on what our new built program and the outlook is as we focused our press release. In case you didn't see it in the body of the press release, we mentioned in there there are some slides we are going to use and those are available for you to bring up and view or either download off our website, and that's nabors.com, and under nabors.com there will be a title investor information and under that the events calendar and the first item there is the news release and there's a PDF file that you can either view online or download and print the slides.

Gene's going to review slides one to nine, which are the body of it. And there is a number of other slides on there. The traditional information that we mention on the conference call, margins by our different business units and reg activity are posted on slide number ten, by all the business units for your use, as well as slide 11 gives a matrix of the operating income with all the business units. The balance of the slides are the required reconciliations to GAAP terms. With us today is, besides Gene and myself, is Tony Petrello, our President and COO and Deputy Chairman. Also is Bruce Taten, our general counsel, and Bruce Koch, our Vice President of Finance. Bruce Taten reminds us that these are forward-looking statements. And with that I will turn it over to Gene to get started.

Operator, is everything coming through okay?

Yes, sir, you can be heard just fine in conference.

Thank you. Again, thank you all for joining our third quarter conference call. As Denny intimated, there are a surprising number of really favorable developments which are affecting and have the potential to significantly affect the outlook for Nabors. In fact, these developments are larger and more rapid than even our more optimistic expectations had been. As a result, as Denny suggested, we are going to change the format of the conference call. We will start by discussing our third quarter results and a few of the major metrics affecting these. We will skip most of the unit by unit details, most of which have been made available to you on the website. And we will also be covering the performance of each of these units in much more detail in the upcoming Nabors analyst meeting on December 14th here in Houston.

This morning I want to spend the bulk of my time on the big picture, what's driving our profit, earnings per share and return on capital employed and how we see that for the foreseeable future. Hopefully, we will be able to integrate how our strategy fits in with this outlook. Significantly, we have pricing power of today that we would not have expected six months ago and, frankly, maybe even three months ago. This pricing power will soon be evident in our international operations as well. In the past we've had a significant number of rigs available for, in essence, taking out of the reeds for major, major refurbishments and upgrades at relatively low costs. We've exploited those opportunities. Today the number of major refurbishments available is diminishing, although upgrades will probable be with us forever. Increasingly important in the Nabors' overall growth picture is the Company's new build program, specifically emphasizing state-of-the-art Pace rigs. We will tie this to our capital expenditures program today.

And I will also say, probably more than once today, that we are trying and are generally successful to get the U.S. government, by virtue of deferred taxes, and our clients/customers, by virtue of take or pay term contracts, to in essence finance the CapEx program for new rigs and help us get a state-of-the-art fleet down the road. Going back to the third quarter, our earnings per share, operating income and returns on capital employed were the highest in our history. EPS 111 after the hit for, I think, $0.03 for the hurricane compared to $0.48 a year ago, and $0.82 in the subsequent quarter. The operating income was proportionately high or, in fact, even higher because the tax rate increased this year compared to last year, 242 versus 84 in operating income this year versus last year, and sequentially 242 versus 174. The metric that we think is important is the return on capital employed rose also to an all time history, 21% in the third quarter.

Key contributors to this performance were a more important operating units, not that they are not all important, but our U.S. lower 48 land drilling, U.S. land and well-servicing and international made the most contributions. Canada also did, but Canada is materially influenced by seasonal factors and that's kind of a special situation. The most impact was felt by our lower 48 unit, where we had operating income of 135 million compared to 30 million a year ago and 102 million in the second quarter of the year. We are also projecting operating income this year for something, not the $450 million compared to something just under $94 million in 2004. This quarter is driven by the $1,200 per day margin improvement over the second quarter. We went up to $7,600 per day for every single rig in the fleet, almost 250 working now, and it was almost $4,600 increase of a little over 3,000 what the margin was a year ago. Rig count was also up substantially from 229 in the second quarter to 244 in the third quarter. Right now we are operating just under 250. Operating income in the U.S. well-service operations was also up substantially.

Third quarter results of 29 million versus 26 in the preceding quarter and 19 million in the year ago quarter. The major drive to this improved performance, frankly, was improved pricing with a major contribution from the deployment of refurbished rigs with a modest, I'm sorry, with a modest contribution from refurbished rigs and new rigs. Those two things will have a bigger impact in the future but even next year we are looking for material price increases. The operating income for this year will exceed probably $100 million compared to 58 million last year. And next year, we haven't finished our budgets, but it looks like it will be appreciably better. International operations were relatively robust this year, 39 million in the third quarter compared to 33 million in the previous quarter and 25 million in the year ago quarter. Rig operations were up. This was mostly operations, a start up in India, price increases, redeployment in gutter, in Kazakhstan where a rig went to work and that operation went from a loss to a profit.

But the outlook internationally, I think, is even more promising. I think the income this year is supposed to be around 135, 138, I think, versus 89 last year. And my guess next year will be a much bigger percentage increase. Now I would like to move to some of the slides we posted on the website. The first slide is historical return on capital investment and capital investment. And I think I would like to make a couple of points here. One is obviously we want high return on capital employed. Also equally obviously, we want to have that capital employed be a large number and have it growing. In other words, the more opportunities we have at a higher return on capital the better we like it and the better it will impact our earnings per share and all the other metrics that we like. The next slide, maybe the next slide or maybe it's the slide after that, but potential impact of 1 million barrels -- excuse me, $1 billion invested at the current rate that we are doing on rigs. So that may be slide four and slide five instead of four. What we did there is look at the rig rates we are getting.

We are deploying new rigs, generally speaking, internationally and domestically at something between 20% and 22% return on capital employed. That creates an EBITDA of 22% of $304,000 per, what, $1 million -- excuse me, $1 million per $1 billion. So those of you who like the EBITDA metric, that's a little over 3.3 times EBITDA. And we end up with a state-of-the-art rig. The contract, basically, guarantees the full payout. In terms of earnings per share on a full tax diluted basis, it ends up to have $1.10. We not only want high returns on capital employed but we welcome the opportunity to employ capital at, incremental capital at high returns. And right now we are seeing a tremendous amount of that. The next slide shows how we calculate the return on capital employed. I think this is a relatively conventional methodology. It's exactly what Stern Stewart use, et cetera. The next slide really talks to our 2005 budget. Let me go through what we are getting for the $1 billion, roughly, that we expect to spend by the end of 2005.

We are getting 25 state-of-the-art high specification rigs. Six of them to be delivered this year and 19 to be delivered in 2006. We obviously have more rigs than this committed and contracted for. So there's going to be increased capital expenditure in succeeding periods, 2006 and beyond. But this is the story for this year. We are going to get four coiled tubing drilling rigs, state-of-the-art AC, stem and coiled tubing rigs, well-servicing rigs. The schedule is a little delayed, but these are the -- mostly the millennium rigs with, or entirely the millennium rigs with 15 more delivered next year. And we think we can employ these rigs pretty well. These rigs are not really susceptible to term contracts except the first couple. We are trying to do two things. One to get to 24/7, rather than a daylight owned operation and secondly to the get real terms.

The CapEx also includes the part of the ten Saudi rigs that were delivered in '05. And we will also have a lot of CapEx in terms of top drives and rolling stock and food hauling trucks and frac tanks, which is of increasing capital investment in the work-over business where we are getting good returns. Again, this doesn't cover all the capital we expect to invest. We have customer commitments for 51 new drilling rigs, 40 in the United States, eight internationally and three in Canada. Let me also point out that in terms of full payout of contracts, we are essentially getting those in the United States lower 48 and internationally. In Canada we get long-term contracts, but so far the number of days committed for is less than 365 days a year. For instance, we get three to four-year contracts that assure 280 or 300 days so far maximum per year, although we are working on that. In the work-over business it's more the perception of demand, our perception of demand than the term contracts that we get. And that's true work-over on land and that's true, basically, for work-over offshore.

Next slide is -- well, the next slide actually talks about our new building program which I alluded to. We've got contracts for -- customer commitments for 51 rigs. We have committed to build 54 of them. I would say that eight of them are rigs that could have contracts, and I'm certain will have contracts to assure full payout, and the other rigs that aren't susceptible to term contracts. So this is a markedly accelerated program and we are buying essentially every place in the world, from the Middle East, from China, from the United States, from Canada, et cetera. And I think at our conference in December we will show you the details of these Pace rigs. But I'm convinced, and most of the customers that we are talking to are convinced, that they represent the state-of-the-art in AC rigs. The next chart, eight, is not a projection, although it can be interpreted to be that. It isn't. But what we would like to show you is what's happening to the principal drivers of our operating results.

Starting with 2004 let's go to the bottom-line. 2004 had a operating income which is -- the shortcut of adjusted income derived from operating activities and we ended up with $1.92 earnings per share that year and we had a return on capital employed of around 8%. What we are now forecasting for 2005 is starting with the 377 we did last year, see if we can sort of approximately isolate the factors, the drivers of the improvement in the operating results. So pricing was almost a phenomenal $347 million improvement, largely in the United States but some every place. Reactivations were $112 million and new or substantially new rigs were 52 million. If you look at that and look down the road, pricing improvement is going to continue but diminish. So that you can see that next year we are saying -- again, this is illustratively to illustrate the point of what's going on with pricing, reactivations and new rigs. And it's not specifically a projection of what the earnings will be. But we see price improvement still being material, but maybe 60% of what they were this year. And a lot of that is kind of locked in.

We have some pretty good ideas what they are going to be in the USA and Canada and we are going to have a rush internationally with price improvements. And then reactivations will still continue but they will be lower. New and substantially new rigs will be a big factor. If you look ahead, even for '07, pricing will still be a factor but much more modest contributor. There will always be enhancements and upgrades, but they'll be a much more modest contributor. New and substantially new rigs will be a big time contributor. So this, again, is why we are aggressively pursuing the new rig business. Number one, we get a good return on our capital. Number two, we get an assured -- right now it looks like we are getting the government and the contract itself to payout the rigs, or essentially all the rigs, and that's as close as we can come to a no brainer in our business. And it finally contributes to return on capital employed and earnings per share, whatever the metrics you care to use.

And we emphasize return on capital employed. They are really good. I think I would make one modest point on this principal drivers of operating results. If we had a chance to invest an incremental $2 million or whatever at a 20% or 22%, like with the new rigs, we'd do it in a New York minute, even though it would lower the kind of returns we are talking about here. In other words, if the increment is still good enough we will do it as quickly as we can. Before I conclude, I would like to make a brief mention of safety. We are doing, I think, a really unusually good job with safety. Bearing in mind that we have -- the total hours are at least twice Patterson's and seven and a half times H&P's and a lot of the guys are kind of new to the industry. And I think the good safety record and the decent very good trends, I think, are reflective of the kind of time, money and attention every single manager at Nabors puts on this subject. This is as important a metric to us as the financial ones.

Anyway, let me briefly summarize. I could take a long time summarizing but I think I won't. We think the market is telling us that the growth cycle we're currently experience gives every indication that it will be a long-term cycle. I could go on on this, as I have in the past, but let me simply say that our customers are committing to rigs to be delivered right now in late 2007 and they are committing for three years. Which means these guys, at least, and they are some of the best, brightest, biggest names in the industry, are basically saying that they are going to have use for these rigs through the end of 2010 and it's a little bit of a hedge to get a good rig at a fixed price, only escalated for cost. The level of rig commitments in the United States is increasing dramatically and we soon expect to see the same level of increase internationally, where we have a host of proposals currently being considered. Some of them big. Some of them in areas like Libya, which are relatively new. Others elsewhere in the Middle East, where we have operated in the past. And we will go through those details as it becomes public.

That's generally true because there are competitive situations which require less than discussing every single prospect with you. But internationally, for example, we have two state-of-the-art 3000-horsepower rigs already committed away from Saudi Arabia going in those gas projects with the Russian company. And there are at least two or three other non Saudi Aramco prospects for big rigs in Saudi Arabia and elsewhere. The investment opportunities we have before us are like -- frankly, we've never experienced before. So 100 million this year looked like a big number, but when you break it down it's entirely possible, and in fact we are hoping, for example, we have 25 rigs paid for in this program but we have 26 rigs committed to contracts by customers to us for delivery after that. So at least that part of the budget will be at least the size it was this year. Anyway, we think these factors will be driving us for 2006 and beyond. And we are pretty optimistic and I hope this will create a discussion basis that will increase the, hopefully, the understanding of where we are going and why. And that completes my prepared comments.

Operator, with that we are ready to take questions, please.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Kurt Hallead of RBC Capital Markets. Please go ahead.

Did you guys get that? Gene, congratulations on a good number here this quarter. The outlook here, as you said, is the best you've ever seen. You now laid out the groundwork for the next couple of years. Where's the potential upside from here above and beyond what you guys have laid out?

I think there is the entirely possible that we will have -- every driver we've had has done better than we would have thought it would have done three months ago. So I think we still have price improvements. What's happening is the spot market is going above the contract new rig market. We have a decent rig that's getting a heck of a lot more money or a lot more money than a state of the art new rig on a three-year term. I think all these drivers will continue. What also is -- what happens historically and probably will continue to happen is that the new rigs will go up in price and that will be a further upside potential there. And once we get above, I can't tell you what the upside is beyond $10 or $12 a share, though.

All right. Just one follow-up along these lines. The sourcing quite a bit of equipment from China and is there any concern whatsoever on your part that there may be a significant ramp in the ability for CNPC to manufacture and deliver rigs above and beyond what the market may need over the course of the next year and a half to two year period?

I think there's always concern. When we talk about rigs in China, the rigs that we are building in China have less than 50% Chinese content. And the rigs that we buy in the States don't have -- they don't have zero Chinese content either. They are significant -- . I think there's always that risk. I think what we can do -- we worry a little bit about the whole industry but we worry more about what we can do. And we are making, I think, pretty discrete and conservative investments. We are aggressive but we are conservative. Right now, for example, the exposure we have on rigs we are committed to that we don't have contracts signed today is eight rigs in total. And my guess is, well, we need that because we told people that if they say, yes, we will deliver them in a schedule that requires the commitments. But I will bet anything that those rigs are gone in less than a month. So that's all we can do. I mean we can worry about what's going to happen three years from now. I think the Chinese, our theory with the Chinese is if you can't beat them you join them, frankly. So it's not impossible that we will have Chinese crews outside the United States, too.

You talked about gaining incremental share of the new rigs coming on. What's the reasoning for that and your ability to capture that share? Could you give us some color on it?

I'm not sure what it will be, frankly. I'm worried about what we can do and I haven't really looked at -- .

You mentioned that you would gain a disproportionate share of the incremental stuff that comes in. I was just trying to get a sense as to -- .

I think we are but I'm not sure we are. I think we will get the incremental share in international because we are better suited -- we don't have any domestic competition internationally to the speak of. I mean it's always latent, but there isn't any to speak of. I think if a guy wants five rigs, state-of-the-art rigs in six or nine or ten months, we can do it and I'm not sure how many other guys can do it. I don't think the Chinese, while they ultimately will be able to compete with us, right now I don't think they have the integrated ability. They can make the rig but they can't market and perform the way we can, yet. That's been demonstrated in a lot of places including Saudi Arabia and Venezuela, former Soviet Union. Western operators when is they have a choice will take the assured performance that we can deliver. Even in my view Saudi Aramco leapt over some lower cost prices to give us business.

I appreciate it. Thanks.

Thank you.

Thank you. Our next question is coming from Chris Edmonds of Pritchard Capital. Please go ahead.

Hi, guys, good afternoon. Jut a couple of things. Gene, could you talk a little bit about the pricing you are seeing in the term contracts in the out years? You talked in the press release about term contracts into 2007 for multiple years. Just what type of pricing are you seeing there?

Generally it's the pricing that goes with roughly a three-year payout of the rig and I would say that's probably, depending on the capital expenditures of the rig, which would be higher internationally than domestically, higher on a big rig than a small rig, all that junk. I would guess no lower than 11,500 a day and on a 3000-horsepower rig internationally, 30. It will amount to 30.

30,000 a day, then?

Yes, I would say. You have got to break it down what the costs are, what your specific investment in that specific application. Then if you divide -- say a 3,000-horsepower rig, probably it's going to be more like three and three-quarter years than three years and that will kick out what we are looking to get and we're able to get in terms of cash flows, after tax cash flows per day.

Then on the international side, just could you give a little more color in terms of what you are seeing in Saudi Arabia, appetite going forward, what type of pricing you are seeing and also the same type of color in north Africa.

In Saudi Arabia we've had, for a long time, the lead drilling position. As you know they went from 40 rigs a year ago to probably 110 or 120 rigs within the next six months. And we've increased significantly. We have 26 gross rigs plus the two rigs for non-Saudi Aramco customers and other prospects for non-Saudi. Basically, the competition -- Saudi Aramco is facing competition that makes them less than the most preferred client in the world right now in terms of the alternatives we have. For one thing, at the moment they don't provide cost escalation protection for us. And I think everybody else, including the other folks working in Saudi Arabia, do. So we would like to work for them. We have five or six rigs that are ready to go for them. And if we can get together on pricing terms and if those pricing terms are better risk adjusted for us than other alternatives they will get it. If not, sooner or later, I think, they will come to us. The difference now compared to a year ago is we have alternatives Not only domestic versus international, but even within international.

And then on north Africa?

North Africa I will just comment, we have a presence in Algeria and I think we are the biggest nongovernmental thing there and we have got two new rigs, new builds, going there and we have probably prospects for additional ones. In Libya a whole bunch of guys are going in there with whom we've had historically good relationships. But not many of them have incremental rigs yet. In Oman, I'd say similar story and unfortunately for Shell, who is a good customer of ours, and fortunately for OXY, OXY is going to be moving in there and we've had a historically good relationship with them. But in all these places we are competing, so I am not going to describe stuff that we are working on that other folks will be helped for by our discussion here. Very good, thank you very much. You're welcome.

Thank you. Our next question is coming from Marshall Adkins of Raymond James. Please go ahead.

Good morning, guys. Just a couple of real quick once here. A follow up to Kurt's, and let me just ask it a different way. At current commodity prices, Gene, do you think there's any reason to think that industry new builds overwhelm rig demand any time soon?

Not for the foreseeable future, I can't see it.

All right. So, with what you know today -- looking out to '08, I understand it is a long way out and whatnot, but any reason to think '08 is lower than '07 in terms of earnings?

No. We will have a ton of these rigs that are going to be delivered in that [INAUDIBLE]. We talked about the role of incremental rigs. They are not going to work for one year. Some of them are only going to start in '07 and they will work through '10.

So with what we know today, '08 is better than '07.

Yes, sir. I would say it's a long way away. We are worried about this quarter and next year, frankly.

None of my clients are worried about this quarter. They are very long-term oriented, I'm sure.

I understand that.

All right. Last quick question here. What is your lead time for a brand new rig. If I want a rig right now what's your lead time to build a new rig right now?

We've been telling folks, sign something today and if the queue stays the way it has been, a year you will get it. There are one or two guys we've, with big project guys being customers, of course, we've said that where they are working on a specific project that involves a number of rigs, we've said we will be able to make a delivery, frankly, in size quicker than that. But even for ordinary customers who are good customers who are deciding what to do we will say it's a year.

Thank you. Our next question is coming from Robert McKenzie of Friedman Billings.

Good afternoon, guys. At least here. My question for Eugene was if you don't see the new builds overwhelming the market any time soon, why do you forecast in your or in your potential results slide have the pricing improvement coming down as much as you do?

Well, the pricing improvement, when you go from 3,000 to 7,000 in a year, you are not going to get much of that. We are now at close to 8,000 a year. And the new builds, I think I said, range from 11,5 to 12. So that can go up and we have it going up for the next few years. Whatever price improvement we will have will be in the form of term contracts with new builds, which may, in the future, have higher prices than we are bidding today.

But I'm struggling with the concept of a deceleration of the incremental dollar contribution from price improvements in a market where you have additional rigs coming in that aren't overwhelming demand.

I don't understand the problem. I'm sure there is one but I don't --

We will take that one up off-line.

Okay.

Something that hasn't been commented on yet is your expansion in the well-servicing business. Looks like you are adding about, from start to finish, 100 rigs or units to a 500 unit fleet.

Probably. I hope it's at least that.

And I was wondering where would you plan to allocate those? Is it pretty much mostly California?

No, it's the whole place. California has kind of a little special, slightly different kind of rig. And basically this is an industry, with all due respect to the guys running it here, for a couple, three decades, if not generations, hasn't dramatically improved the way the rest of the oil and gas service industry has. And we would like to break that trend. We've talked a number of times about the millennium rig and we've recently exercised an option to double that. And what we are trying to do is kind of beg national oil well to accelerate deliveries. Because if we had all of them in the next six months or four months we could put them to work. It's going to take us a year and a half instead of a quarter and a half to get that many here. And we are using the quality of those rigs as a vehicle to get both term contracts and 24/7 operations. The traditional stuff in this business, not universally, but for most part is daylight hours and we need you we will call you kind of thing.

In this space it almost seems there's more capacity adds on a percentage basis than on the drilling side the next couple of years with your sells of Key, with a couple other ones that are coming public. Do you have any concern about having too many well-service units in the market?

We always have concern about that, but I mean the point -- there's got to be a nicer way to put it than this. If we see what's good for us, it's not our job to monitor the supply and demand for the whole industry, frankly. As a nicer way to put that. But it's a competitive industry. There's people can do what they want to do. I would say that on the drilling side not as many people, who are in the industry, are building new rigs with the aggressiveness that we are and maybe one other guy. And I think in terms of workover, if you look at what Key's announced and what we've announced, they are twice as big as we are, roughly, and we have two or three times the new builds on order that they do.

Going back to the drilling and actually Company-wide, what are you seeing in terms of cost escalation, be it wages, insurance and the like? How do you expect that to impact your results going forward? Are you having problems with losing people, people poaching people and wage inflation associated with that?

Yes, we have all those problems. But we get paid well to handle them and so far we are handling them. One manifestation of that is the safety statistics, which aren't as low as what we want, but considering the number of increased manhours we are doing, I think are pretty good. And we have escalation for wages in all these contracts. Some of them have escalation for insurance and cost of living. So, yes, there will always be competition. Yes, there will always be -- when we are expanding this staff, people are always going to be tough and we are adapting to that and I think so far pretty successfully.

Okay. My final question going back to pricing, with the potential results of 180 to 215 million in incremental revenues from pricing in '06, combined with your comment of you're just starting to see pricing power internationally, how much of that would you expect to come from overseas.

I can't give you a number but a lot.

Okay. Thank you. I will turn it back.

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

First comment is, Gene, I think the slides are a great idea. Secondly, can you just touch -- .

They were probably yours, weren't they?

No, I wish they were. You talked about all the thing that are going well and the things that you really -- all the good things you guys are doing. Talk to me about what you think your biggest challenges are and the things that aren't going well for you right now that require your most urgent attention.

I don't know about most urgent, but urgent attention is when you look at this slide on safety. Even if we have good statistics, and the statistics are pretty good, when you have a zillion manhours, the way we do, even a relatively small number of reportable incidents adds up to a large number of guys being hurt. And it's a triangle, the number of guys that are hurt go up the triangle, there are going to be more serious injuries, and there are going to be fatalities. So I would say that's the worse part of our business. And we all focus on that and we worry about that. I don't get a call that we had a price increase. But if there is a serious jury, we get the call. What was the other question, I forgot. What else do we worry about?

Or what's not going well?

I don't know. Everything is -- with us, frankly, the issue is not what's going well but what are we doing that could be doing much better, frankly. Almost everybody is doing pretty well and the trick is how much could we do better on everything. One of the things we are worried about is are we going to get delivery of the rigs that we are committed to and committing from. And I would say those are the main concerns and we are doing everything we can to ensure that we have the mud pumps, the drill pipes, whatever else we need to go with the rigs. We have, I don't know how many guys we have at the places making rigs, how many we think we have, ten, 12. We are spending a lot of time, money and effort to ensure that the things we see as problems don't manifest themselves as problems but they are risks.

All right. But my next question is that you actually have, within the captive subsidiaries that manufacture rigs and top drives, et cetera, you actually intercompany eliminate a lot of earnings. Can you talk about that and whether or not that you might change that situation and try and monetize that?

One of the things I should have said is that, if we were talking in detail, that Canrig operation is running now at almost the rate of 150 per annum and next year, I think, we are looking to do 160 top guys, half, 60%, 65% of those are internal use and we have no profit on those. And we have the profit over the long-term, yes. A lower capital expense and depreciation over five, seven, ten years. But, yes, that asset, I don't know what it's worth. What do you think it would be worth if it could make 40 million plus operating income? And the same thing is true for our information technology that we are peddling. So we don't have any plans, but we are aware of the fact that $40 million of earnings, not EBITDA just earnings, after GAAP taxes -- or no, that's pretax, operating income is worth more money than we are getting credit for by a little lower depreciation per year. But you don't have any plans to change that right now? No. We haven't been approached by bankers on anything. No, I'm kidding. We are aware of it but we don't have specific plans, Jamie.

I'll let someone else get on.

Thank you. Our next question is coming from Ann McPherson of Simmon's & Company.

Good morning, Gene, this is Scott Gill. Gene, you've kind of talked about this capital expansion program. Can you talk a little bit about how you plan to crew up all these rigs, the training programs that will be involved so that you can maintain the safety record and what those challenges are going to be surrounding crewing up the rigs?

Go ahead, Ziggy.

We have -- we are looking at the different labor at the moment, different companies. Gene already mentioned personnel from China and for that purpose we had established several training schools in the Middle East and the Far East that we are sending regional personnel through the system and getting used to our way of operating.

What about for the lower 48?

I was going to just volunteer Joe Hudson to tell you what he's doing.

Okay. We can tell you, which we actually started the summer of last year, we now have three drilling rigs rigged up in yards of Casper, Wyoming, Oklahoma City, and shared on with Nabors offshore down in Homa, Louisiana, in which we actually take starting crewmen through either a seven or ten-day process where we actually train rig hands. We've had an outstanding retention rate on those people. We are also bringing in, with new build operations AC simulators with which we will actually have a facility in Houston, Texas. Then in our two training areas of Casper and Oklahoma City. So we got started on this last year. We didn't wait until we got a new build program underway. We've actually had this underway for some time and we are going to build off of it. So it's been very advantageous for us and a rig up or a ramp up that we've already been in.

Ziggy has simulators, too, right? This is like training to fly a plane kind of thing.

That will be in place for -- [INAUDIBLE].

Any way, it's not easy but we and everybody else gets paid to do it and that's, I would say, part of that is the safety orientation. And frankly it's easier to get guys to work than to get the safety numbers where we want them.

And, Gene, as you look at your wage inflation budget for next year, what are you budgeting for labor cost increases and insurance cost increases.

It's not going to be trivial for labor. But we get pass-throughs and that's -- today it's -- a lot of times the wage increases come because the operators steal some of our rig management folks. So it's pretty -- we can give them a pretty convincing case, generally. But it's pretty high. People are scarce. One of the things we haven't had is we haven't had a robust non-energy market before now and we haven't had the competition we had in 2001 from offshore rigs. And the way things are going, I think we are going to have in the next couple, three years, four years, maybe, a lot of jackup demand and drill ship demand and semi demand. So we are anticipating and we will try to stay ahead of that curve and that's one of the reasons that we are a little concerned about Saudi Arabia where we don't have actual cost escalation provisions.

Lastly, Gene, can you give us some outlook on Canada as you look into the first quarter of '06. How strong that market may be both in terms of activity and cash margin?

I think it's going to be very good. I think it will probably a record, not probably, almost certainly be a record and I think one of the things that's kind of interesting, if you followed us for years, as we have, we used to say that the Canadian margins were kind of a leading indicator of what might happen here. But for the next quarter, for the first time, our average margin on land rigs is going to be higher in the lower 48 than in Canada. And in the lower 48 we are talking about 365 days a year generally. And in Canada we are talking about, say, 55 rigs over 78 rigs times 365. So it's going to be good. It's going to be very good. But while -- the return on capital employed in Canada is going to be below our Nabors average, because we have high tax rates that we haven't found any way to do anything about, really, and we haven't super succeeded in getting rigs assets working more than 300 days a year. Although we are working on that pretty diligently and if Dwayne is listening, he knows it.

Any thought to maybe moving some of those assets from Canada into the U.S. so that you can get better utilization in tax margin?

That's a little bit sensitive picture but, obviously, yes.

Thank you, Gene.

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

Good afternoon, guys. Gene, you spent some time talking about China and your plans to put some rigs together there. Can you explain a little bit more your business relationships over there? Do you own manufacturing companies? Do you have preferred vendor status? How are you doing this over in China?

Hopefully -- well, for sure we have preferred vendor status. We have exclusivity where we are building most of the rigs. We are looking down the road to do what's logical, preferably own some of it and, obviously, if you know us, we would like to own a lot of it.

But that has not happened at this point?

That hasn't happened yet. But the preferred status has. The exclusivity has.

And in terms of deliveries of these rigs, where do you stand? I wasn't sure if you've actually had deliveries yet or if those are under construction now.

From China I think we are delivering the first two currently?

The first two rig sales actually being delivered to the port at the moment, to put in commission and their on its way to the first destination.

Which is Venezuela. [INAUDIBLE] spread before the end of the year?

So you are delivering the first two now. They are going to Venezuela. And then you have another, I guess the slide said, something like 40 behind that?

Yes.

Okay. Thank you. And then you showed your capital spending budget for 2005. And I wasn't sure if I missed it, what your 2006 spending program best estimate at this point looks like.

We didn't give that. I think the comment we made is that there are going to be fewer refurbishments but the number of committed rigs already modestly exceeds the 25 we paid for last year. So at least that number is going to be greater than what it was last year, that number being 325 last year, so that's going to be higher. CapEx is probably going to be about the same, 300 million. So we are going to have a robust budget next year as well.

Okay.

As we said, if we can get a three, three and a quarter, three and a half year payout, we will do quite a few of them.

Okay. So you are going to be opportunistic on the spending and the baseline number is probably lower than the 2005 level but it will probably move up as we move through '06?

What I can tell you for sure now is the drilling is going to be a little bigger, the workover numbers are going to be probably bigger and modestly bigger will be the maintenance CapEx. But the aggregate right now that we are certain of is going to be less but that is not likely to diminish.

Okay. And then in terms of your kind of where we sit today in the lower 48, you showed us the average cash margins running at about $7,600 a day in third quarter average, where would that have exited the quarter, Gene?

Around 78.

Okay. And you indicated that you are starting to see some more significant offer demand. Can you refresh us on sort of what available capacity you might have there in terms of your workover jackup fleet opportunities that might present --

We have one workover jackup that's going to North Africa -- to West Africa on a five-year deal, seven-year deal, seven-year deal. It's a really good deal, particularly at the time we did it but a really good deal in terms of the rates now is not really good but that's essentially all we have on that subject. We are moving other assets like platte arm rigs, like we had a new one to India and, presumably, we will have others like that. The advantage there it's a workover thing domestically as workover doesn't work 365. And when it goes internationally it gets better rates and it works for every day of the year kind of thing.

Okay. So it sounds like the way you would characterize your demand for the offshore business in next year is really more international opportunities than maybe domestic opportunities.

Domestic, I think, we did pretty well. I was surprised this quarter at what we did compared to the hurricane hits. And the prices are really -- what are we getting for a workover jackup now, Jerry?

55.

I mean that's unbelievable. We would like a little more of them to work, but this is 55 and a year ago at 25 was good.

We would have been happy with 25.

And I guess that was the reason for the question, which is clearly the Gulf of Mexico is very tight and so are you seeing potentially more opportunities for your rigs to go to work there?

Not as many as he'd like but some.

All right. So '06 better than '05 bottom-line?

'06 better than '05 by a bunch, I think.

Great. Thank you, guys.

Right.

Thank you. Our next question is coming from Jeff Kieburtz of Citigroup. Please go ahead.

It is good afternoon now for you as well. Could I come back to page eight, just so I understand what you are showing here in the potential results. I got a little confused when you were commenting about '06 CapEx. These improvements that you are illustrating, I guess, in '06 and '07, presume what in regards to CapEx in '06?

I can't give you the exact number but we try to reflect that. It's a big range of things but what we put is the return on capital employed, Jeff, at the bottom of the darn thing to make sure that you understand that we are doing this -- in fact the big increase in terms of new and substantially new largely insofar as they are drilling rigs and they are largely going to be on term contracts at a full payout.

But it incorporates -- you have a slide earlier which talks about the rigs that are coming out as a consequence of the '05 CapEx program.

Well, that's half of what we've got committed already.

Right. And then you have a -- there's obviously further increase in '07. Conceptually, you don't need to give me a number, but it assumes that you continue this accelerated expansion program into '06 as well.

Yes.

Okay. All right. That was really all I was trying to get at.

And then also, again, let me emphasize the -- I said I would tell you this three times so I will say it. If we can get a 20%, 22% return on capital employed, that means we are doing something at 3.5, 3.3, 3.5, 3.6 EBITDA and we are getting a good return and we are getting per $1 billion that way, we are getting up $1.10 earnings per share, with every other metric being good.

Right. The second question that's been touched on already in terms of eight, I will ask it a differently. In terms of your moderation and the pace of price improvement contribution, can you characterize this as you being conservative? Is this -- I mean what's the error bar around this? Is it your thinking that you -- ?

Let me put it this way. If we raise prices 100% to what new builds are and -- I mean at some point there's going to be a limit to the dramatic price increase. In other words, for NDUSA we more than doubled the margin this quarter over last quarter.

Right.

And we are not going to double it by next year from seven, eight, at the end of this month, to 15, I can guarantee that. I will ask Joe to try, but I don't think so.

But in order to get a comparable contribution from pricing you only have to raise your margin -- only, I shouldn't say it that way. But you've raised your margin, it looks like, in '05 by about $4,000 per rig day.

Quarter to quarter, Yes.

Also, I mean, you will roughly be that much on a '05 versus '04.

What the 347 represents is you take the rig count at year-end '04 and you take the difference in pricing between the average for '04 and '05 and you multiply them. That's how we come up with that number. And the increase between '05 and '06 was big and the bigger you take it, unfortunately, the smaller the future percentage increase can be.

Okay. I have to think about the math.

No, I think maybe you are saying the metrics would look better to some folks if we averaged it out, if we didn't take some of the price increase this year and took some of it next year?

No, no, no.

I know you wouldn't say that. But I mean, the implication of some of the questions is that.

I will leave that subject for right now.

Okay.

Obviously you have got enormous confidence in the marketplace, the ability for the market to absorb the new capacity. How is your ability to adjust this program if something unforseen happens? What are the risks of running over the edge of a cliff?

I think that's a real good question. I think the chart also summarizes what we have as options beyond what we already have committed but those adjust for the rigs. We have similar issues on say drill pipe and components that are used. When we have 250 rigs in the States, 70 odd in Canada, 100 internationally, et cetera, if we have some extra drill pipes for new builds we can practically swallow that with a fewer number of drill pipes in our normal operation. That's true for almost everything that we are buying for these new rigs. So that it's a less of a risky bet for us in terms of hedging against adverse developments on new builds.

In other words, we can make sure that we can do, frankly, the 25 rig option without a big hit. And also even on the deals we have in workover, where we told you we have 40 rigs and another 40 committed, we have a fail-safe remedy if the world goes to heck in a hand basket there, too. So we have, I think -- frankly, I think we have good professional purchasing people, good professional managers and I think what is true is we are in a better position to take these risks without a big down side. Somebody building five rigs, what's he going to do in terms of going from five to two?

Right. Okay. And two smaller questions having to do with the quarter. First, you had mentioned that the well-servicing pricing had been quite strong in the quarter. We are roughly speaking gaining about 30% incremental margins on the increased revenue in well-servicing. Is that what we should expect going forward?

They tell me that they are going to be very aggressive next year and pricing will be aggressive. We will be deploying newer assets. We will be pushing for 7/24 operations. We will be even pushing for some 365 day operations that hadn't been that. And we are pushing for ancillary investment other than rigs.

Okay. So it should go up?

Yes. I mean there's a case where we've had a high return on capital employed but not enough incremental capital employed and they are trying to fix it.

Got you. And then last question, in the other operating segment a fairly significant -- actually it was a continuation of a strong performance that occurred in the second quarter. Is that sustainable? Is there something special going on there or -- ?

I think the boat business has been given a shot in the arm by the hurricanes. Unfortunately that's the hard way to get it but we are getting it. And we discussed earlier that we have modest increases in top drives and instrumentation. But the real increases, if it were third party, would be humongous. I think I was talking to Pete, I think we actually have a higher projected top drive sales next year than he does. He offered to buy it, though.

So you did get a bid?

Not a bid.

Okay. Thanks very much.

Are were almost finished?

Thank you. Our next question is coming from James Halloran of National Citibank.

Yes, gentlemen, good afternoon. Good quarter, Gene. Good year so far. Just a question, in talking to a couple of the customers out there, the E&P companies using drilling services, I sense some resistance to three-year contracts still going forward a little bit. I wondered if you would comment further on that? And also, looking at your starting to forecast out 2006, 2007, sort of looking out over the horizon, any thought to even going longer with the form of giving options to E&P companies out there to maybe the form of what would be viewed today as a bargain option to sort of even extend the horizon out even a little further?

No, I think that's a good point. We are having, I would say, modest push back on the term. One is pretty hot today. But I tell you the truth, that's a good suggestion. The other suggestion that we've been -- suggestions we've been mulling ourselves is the 250 rigs we have in the lower 48 are of value besides the day rate. So we are saying, basically, you want a rig today, what we would like is consideration beyond the consideration for that rig. What we would like is a term contract for three years, a high price now and in some cases we are saying you really need a rig for E&P project, why don't you let us in on the ground floor. Even in one case slightly better than the ground floor.

An equity position?

Yes. We would like to -- I mean it won't happen to us but we would like to promote the guy who needs the rig a little bit.

You were in that position, something to do with the El Paso thing at one point, too?

No, the original El Paso thing was -- the overall environment has changed so dramatically that we say we will do El Paso and we want to be sure we get a decent return on the E&P, but deep in our hearts we would like to get the rig employed at decent rates. Now we don't need that to get the rig employed, it's the other way around. In other words, an E&P company needs the rig more than we need the rig to be employed by that guy.

I hear you. Things do turnaround. Just thought [INAUDIBLE] and giving them more of a longer term horizon might lock things in a little better and then put you in a position to keep even longer term relationships than you have now.

I agree with that totally, Jim. We started out, we did one or two deals at two years, did we Joe? Or we did one deal at two years and then we quickly said we will go to three years and now we are saying we are tying in the availability of existing rigs to the new builds so that, in essence, saying 4, 4.5 years including availability of existing rigs. And maybe we could -- I willing, I don't deal with the customers all the time. I am willing for us to go to four years.

Thanks, Gene.

Operator, we are a little past the time we normally allow so we will entertain one more question and then we'll terminate the call.

Thank you. Our final question will be coming from Aaron Jeram of Credit Suisse First Boston. Please go ahead.

Gene, real quick, it looks like some of the major oils are getting re-engaged in North America onshore. You probably saw BP's announcement in the Wamsutter field, Shell buying some acreage in the Barnett and Exxon farming in some acreage in South Texas. Are you seeing any of that apparent demand from the major oils in terms of some of the term contracts you signed?

Yes.

Could you perhaps quantify -- ?

I would quantify, we have a piece of BP's, frankly not the major piece. We have the kind of piece we like with Shell, like 100%. And we have a smaller piece with Exxon. We have a bigger piece with worldwide, any way, with Oxy. It varies. But I think our overall position with the majors is bigger than our overall position in the industry. I would say our overall position in our market area is 23%, 24%. That excludes Appalachia, Michigan and Alaska. And I think our position with the majors is bigger than that. But it varies from not too much with Exxon and 100% with Shell. Shell is going to expand pretty dramatically and we've known about Wamsutter, which is the BP expansion, potential area, for quite awhile and we've done most of the drilling there up till now. Okay, that's helpful.

Last question, Gene. If you look at the balance sheet long-term investments declined by $310 million sequentially -- .

That's bluntly that's reclassification. It all should be cash or equivalent.

Okay. All right. Thanks a lot, guys.

Let me make one other point. We are going to do these major capital investments, but we still are generating more cash from operations and even a little from stock option exercise so that we can buyback stock and do some other stuff if we desire to do it. Thanks.

Ladies and gentlemen, thank you very much and that will end the call for today. If we didn't get to a question you might have had, feel free to call us and we will get back to you as soon as possible. Thank you very much for attending and we look forward to talking to you in the future.

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