Nabors Industries Ltd (NBR) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Nabors Industries Ltd. fourth quarter 2011 earnings conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today Wednesday, February 22, 2012. I would now like to turn the conference over to Denny Smith, Director of Corporate Development. Please go ahead, sir.

Good morning everyone and thank you for joining us again. In addition to myself this morning, Tony Petrello is with us, our President and new CEO, and he will be conducting the call today. Also in attendance is Laura Doerre, our General Counsel, Clark Wood, our Principal Accounting Officer; and essentially all the heads of all of our various business units. Today's call we're going to take a lot of extra time to not only review the quarter and the forward outlook but talk about a lot of more specific information and a little bit of our plans that are in motion. And as such in support of that we put some slides on the website, that's on our website you can find them if you want to follow along, Tony will be referring to them too as he goes. It is at nabors.com under Investor Information and then under the submenu under Events Calendar you'll find where the conference call is listed for discussion.

As I said we will limit the call as we usually do to about an hour. The remarks will probably be more like 45 minutes today so we'll have a limited time for questions and answers but we'll try to get to as many as we can. And with that, I want to just remind everybody that obviously a lot of what we're talking about is forward-looking and subject to change as the market goes. We encourage you to read our 10-K and 10-Q filings for all the risk factors that are involved in that. And with that, I will turn it over to Tony to get started this morning.

Good morning, everyone, welcome to the conference call, and I want to thank everyone for participating. As Denny said, we have posted to the Nabors website the slides. Please refer to them and as he also said, I expect to be going on a bit longer, hopefully I intend to address much of what is on your mind and if I don't get it right I apologize. Before we begin a review of our fourth quarter and recent developments, I would like to share with you some of the reasons why I am so excited about the opportunities that are available to Nabors.

This quarter every player in the sector is focused on explaining their liquids rich market position given the respective gas and oil commodity prices. Think back just four years ago how everyone was explaining their operating leverage to US gas. Things change, often. Today, everyone is also focused explaining their competitive advantage because of new equipment, whether that is new spec rigs or frac spreads. But as we know, commodity prices change and ramp-ups eventually ease. Today when you look at where the operators' investment is directed on a large-scale basis, whether that is in deep-water or in the shales, there is a common denominator. The desire and ability to invest in projects that can provide a reasonable return with duration. Successful execution of these projects require that they be done in a safe, predictable and consistent manner.

While access to new fit for purpose equipment is often optimal or even necessary in certain applications, they are in the end just tools. The real need is to have organizations that have resources, powers, processes and know how that can deliver reliable and safe solutions that address the real risk factors economically and in today's world on scale. And the challenge is to do this in an industry that is talent starved and keenly aware that everything it does is subject to increasing public scrutiny.

Nabors today in my view is in a unique position to grow in this role. We have a large footprint in many of the development markets, we have quality assets, financial resources and human capital all on a global scale that is really unique in our space. We have built an infrastructure that can provide the operator of today and tomorrow with a level of support and risk mitigation that assures their projects require. And we now have a record which I will elaborate on in the unit reports of technological leadership that increasingly is being noted by our customers. We are committed to expand and build upon that expertise.

We will focus on operational excellence and using our considerable asset base and know have to drive operational performance. We hope to use the technology tools that we now have available and are committed to develop further to enhance the value proposition for our customers. Provide challenging opportunities for our employees, and create superior returns for our shareholders. Now this focus requires us as an organization to address some of the misstep's which I think we've been pretty candid about that we have to respond to in the forward to get where we want to be.

If you turn to slide 3 that speaks to our priorities. Accordingly, we have first, commenced steps to monetize our E&P assets on a prudent basis. We are obviously focusing on the oily assets, as you all know we have an Eagle Ford asset, that process is under way. We have an asset in Alaska, that also is under way because our joint venture partner is looking to monetize as well. Second, we've initiated a review of ancillary businesses and assets that are not meaningful contributors. Here the objective is a straightforward one. To focus the Company's effort where our effort is worthwhile, and where results are meaningful. Slide 6 identifies the common sense factors we will use to evaluate each of these ancillary businesses and I think you're all familiar with them, they range from instruction to rig moving, and an assortment of other things.

Third, Titan Capital. One of the things that hasn't changed in 20 years and that will change is that our view that the Company should only invest in transactions that would make sense to us personally. Respect the Company's money like your own, invest for real returns, that is the goal. We've gotten some wrong along the way butt the philosophy continues. We believe that the size we are now we can high grade those choice and demand greater selectivity. This need for capital discipline will apply to both new additions as well as sustaining capital. Moreover we need to develop some further internal systems to support and bring accountability for all these decisions.

Fourth, starting a review of simplifying how we deal with our customers. Broadly, our scope of services consists of two primary lines of businesses shown on slide 7. Drilling and rig related services, which involves all activities involved in well construction. And second completion of production services. This line is composed of pressure pumping, work over in well services and fluid management, services that complete and maintain the well. We are looking at ways to reorganize our operations along these lines to allow for operational cost saving synergies and a better interface to our clients. Many of our large customers of course are organized in this way and we think that will facilitate the interface. During the remainder of this year I hope you'll see the benefits of some of these changes I'm talking about.

Now, let me turn to the fourth quarter financial results. Nabors had a solid fourth quarter driven primarily by good results in our US and Canadian drilling operations, in our pressure pumping operations in Canrig, and to a lesser extent in our Alaska and US offshore operations. These results more than offset the seasonal decline in our Alaska logistics and trucking entities and the anticipated drop-off in our international operations. GAAP net income from continuing operations was $89.5 million, or about $0.30 a share in the fourth quarter, and $1.17 per share for the full year. Non-GAAP net income was $153 million, $0.68 a share in the fourth quarter, and $1.63 per diluted share for the full year. Adjusted income from operating activities was $272 million bringing the total for 2011 to $927 million. This compares to $224 million for the corresponding quarter of 2010 and $668 million for all of last year. And revenues for the Company were $1.7 billion for the quarter and $6.1 billion for the full year.

The quarter's GAAP income from continuing operations includes $100 million charge or $0.22 a share for the announced contingent liabilities that existed on December 31 relating to Gene's departure agreement, not withstanding that on February 6, 2012, we made the announcement that Gene elected to forego triggering a payment. Gene wanted to give it up, the accounting people didn't want to give it up basically and so that is the reason why that charge is there. Our Press Release, based on review of the early reports this morning may not be clear on the subject of the $100 million charge. Gene has waived that amount and it will not be paid to him. The reason for the charge is that we have been advised his entitlement to that amount on December 31, required us to take the charge in the fourth quarter even though he waved it in February of this year. We are not making $100 million gift to charity.

As we stated, we are contributing 1 million common shares of Nabors stock to a charitable foundation for the benefit of Nabors employees and other causes. The accounting consequences of Gene's waiver and of the contribution will both be made in the first quarter when they occurred. And as we have mentioned, a substantial part of these funds will be used for Nabors employees and their families for education as well as other issues, and one of the thinking behind this was since the employees are going to benefit funding this with non-cash Nabors stock gives incentive of everyone in the Company to help drive stock performance. So that's part of the thinking that's gone into this.

Now before getting into the specifics of the business unit let me address some preliminary matters, our balance sheet. As you can see on slides 4 and 5, our balance sheet is solid, with leverage at 2.2 times our annualized fourth quarter EBITDA, down from as much as 3.5 times in recent years. Total debt at December 31 was $4.6 billion, with $540 million in cash and investments. This reflects a slightly higher revolver balance than last quarter, as we are at a temporary peak in previously committed capital expenditures. This is obviously higher than where we want to be, and our goal is to eventually get below 25% on a debt to cap basis. The primary way we intend to reduce net debt in the short-term is to monetize the E&P assets as expeditiously as possible but in a prudent manner. More than 90% of our term debt maturities are 2018 or longer as shown on slide five. Monetization of other non-core assets is a possibility, but the best way, in our view, is to instill more stringent capital discipline in order to generate consistent free cash flow from operations.

Second general topic taxes, let me take a minute to talk about that. Our reported effective tax rate from continuing operations for the fourth quarter was 20.9%, with a rate of 29.3% for the year. This lower than expected tax rate for the quarter is a result of two drivers. First the $100 million charge for a payment that will not be made. And second also a favorable tax adjustment in certain venues. Without the net effect of the $100 million charge, the tax rate for the quarter would have been 28% and 30.4% for the year. This yields the $0.52 earnings per share for the quarter for continuing operations. In other words, the announced $0.52 earnings per share from continuing operations without those charges is a number normalizing away the $100 million charge.

In terms of 2012 here is some guidance. We expect the rate to be 33 % or 34% for continuing operations, even though we expect our international operations to grow significantly at a effective tax rate of 14% to 16%, this will be outweighed by the increase we expect in North American operations where the effective tax rate is 38% to 40%, and generally 27% to 30% in Canada.

Third topic, capital expenditures. Capital expenditures for 2011 totaled $2.25 billion roughly which includes acquisitions. Depreciation is about $925 million. For 2012, depreciation is scheduled to be about $1.070 billion. Capital expenditures currently planned for 2012 total about $1.5 billion. That number may go down with further scrutiny. It also may go up if we're fortunate enough to get an additional quality opportunity, but I think you'll notice when you go through the slides you'll see a couple rigs, spec rigs in the US has been dropped our schedule.

Two additional general points. Fleet quality and availability. Our fleet quality is very high. Slide 9 shows just our AC rig fleet. Many of these rigs are not in the US land drilling market and drive margins that are a multiple of US land rig. We also have the world largest fleet of upgraded SCR electric rigs. Many of which possess essentially the same functionality of AC rigs. That's in fact, one of the benefits of the Canrig technology of using a proprietary K-Box, adding it to an SCR rig that gives it equivalent functionality. And we have that on many of the SCR rigs, and in fact on some mechanical rigs.

Second general point, run rate. If you look slide10, it shows 2011 and fourth quarter operating cash flow annualized run rate compared to our highs of 28. The point here is that we're now getting back on track where we have a rate that exceeds our prior high and we still have a lot of room for further improvement. And, hopefully that will become clearer as we go through the business unit reviews. Slides 11 and 12 give you more detail on the quarterly results for each of the business units that we customarily provide to you in these calls.

Now let me go through some of the business units. Nabors USA, our US drilling operations reported operating income of $130 million, up from approximately $105 million in the prior quarter, and $85 million in the fourth quarter of 2010. This was the result of an increase of 15 rig years. Plus $746 in the average margin per rig day. The rig count increase consisted of 6.6 rig years from eight new built rigs we deployed in the quarter, plus 4 rig years from six deployments of recently refurbished rigs, as well as another 2.4 rig years from four start ups of idle, but ready to go rigs. Our average margins for the fleet averaged $10,922, which was a composite of about $12,500 for AC rigs and $9600 and change for our other rigs. The quarterly margin improvement reflects an increase in revenues of $812 per rig per day which was partially offset by higher operating costs of $66 a day.

First quarter margins will likely be flat as they are subject to a negative swing of roughly $500 per rig as you know for customary payroll taxes that we have kicking in the first quarter. And we reset our workers compensation accruals each year, we typically realize the benefit of that from a good experience returned in December. So that accounts for why there will be that swing. We are cognizant of the weakening natural gas market and we think it is reasonable to assume that the industry rig count will at best be flat and could well decline in 2012. There could be more downward pressure on spot rates. At present, leading-edge rig rates in the Rockies, the Bakken, and the Northeast are $27,000 to $30,000, while rates in Texas, the Mid-Continent, and the Gulf Coast are slightly lower at $24,000 to $25,000. Rates have recently been flat in most areas with the exception of the Haynesville Shale in East Texas and Louisiana, where we believe they are down about 5%. We are also seeing the average duration of terminals get shorter.

Nonetheless, our contract backlog continues to increase further mitigating the weak gas environment as you can see on slide 14. If you turn to slide 14, here you see the number of take or pay contracts that were enforced at the end of the year and those that will be enforced at the end of the next four quarters based upon what we know for certain today. If you compare this to the same site we posted at the end of the third quarter, the 144 contracts enforced at that time increased by 42 contract signing's to the 186 shown now. Replacing the 19 expiring contracts and adding another 23. In other words, each quarter, we are nevertheless signing more new contracts than those that are expiring, so our backlog continues to grow and now exceeds $1.2 billion in gross margin. And I would like to emphasize that those are real term contracts, these are not contracts that you can cancel with 90 day cancellation and incur no penalty. When we talk about a term contract, it's a term contract whether it's 6 months, a year or 3 years, they typically have provisions that protect your cash flow.

Even in a moderating market environment, operating income for this operations should therefore be up in 2012 compared to 2011 as average margins for the 25 new build rigs we expect to deploy in 2012 are much higher than those obtained from our gas vulnerable rigs. When you look at our portfolio of rigs we see approximately 35 that are drilling for dry gas and that are not subject to take or pay contracts. They are mostly in a few vulnerable markets including the Permian space in Colorado, the Haynesville Shale in Louisiana, and to a lesser extent, the Marcellus in Pennsylvania. Now at one point we had 58 rigs drilling in the Haynesville. And that number is now down to 26, 14 of which are drilling for dry gas without a term contract. A few of these rigs are already scheduled to move to oil directed regions, an ongoing trend that you see by us and everyone else.

Our result's sensitivity to changing gas rigs could be evaluated as follows. If you assume 20 of the rigs drilling for dry gas all cease operations at the beginning of the second quarter and do not resume for the remainder of the year, then the negative impact on Nabors would be on the order of $50 million. While this is a significant number, it represents less than 3% of our 2011 EBITDA and probably a smaller percentage of our 2012 EBITDA. Our market position is strong with a significant presence in all of the best markets. Slide 15 shows the regions where we operate and the number and type of rigs we have in each area.

Now we continue to see interest in new builds in this unit although the operators weaker cash flows resulting from low gas prices are delaying some plans. As shown on slide 16, we have 25 new builds planned for deployment in 2012, 21 of which are governed by long-term contracts. This will bring the total number of new builds in the US fleet to 144, and the global new build fleet to 215. As you can see from slide 16, our new build AC and upgraded SCR rigs will account for 71% of the US lower 48 rig fleet. Standard SCR rigs and competitive mechanical rigs now comprising only 29%. While new build AC rigs will continue to be preferred and may be required in many applications, the market for legacy rigs is not disappearing. Moreover with technology upgrades to legacy rigs like the proprietary K-Box I mentioned, AC top drives and upgraded pumps, that may well extend those legacy rigs and their value proposition for the customers.

I'd like to turn to Nabors Canada now. The operating income for this unit in the fourth quarter was about $37 million, up from about $22 million in the prior quarter and about $17 million in 2010. The quarterly increase is principally due to a sequential increase in margins of $1700 and change per rig day, as we moved into the winter season when results are typically supported by peak seasonal demand and additional content. The doubling of results compared to the fourth quarter of last year was attributable to additional six rigs working at margins that were almost $3000 a day higher, which is indicative of the ramp-up in this market. Obviously, we had a very strong quarter and prospects continue to look good, driven by the same dynamics that characterize the US market, namely the shift away from dry gas and towards oil and liquids.

As shown on slide 7, we have a concentrated asset base in the shale plays and in the conventional oil markets of Alberta and Saskatchewan. We estimate that 85% of our rigs are active in oil and liquids rich basins in Canada. We also have incremental work in the Cardium and are commencing work in Alberta and Saskatchewan, Bakken shales. In the fourth quarter two new slant service rigs were deployed in the oil sands and we expect to deploy another two in the first quarter of 2012 when we will also deploy five upgraded drilling rigs to other fields. We had a busy winter in the Horn River in anticipation of the sanction of NGL export capacity in the not-too-distant future, something that we also hope improves our marketability of our Horn River assets. That ramp-up has been dampened somewhat by weak gas prices which is also affecting activity in the Montney. Interest in new builds continues in this market but because contract terms in Canada have a shorter, typically a shorter work season they often do not yield the returns that are as attractive as we have attained elsewhere. So we have become increasingly selective in availing ourselves of these opportunities. Basically, as I will discuss later, in terms of capital, we are high grading capital plus the business units, and we want them all to seek the best opportunity across the business units. And so that is one of the issues in Canada in terms of incremental rigs.

Nabors International. As expected fourth quarter results in our International operations were down at $23 million and change compared to $29 million in the prior quarter and $72 million in the fourth quarter of 2010. Our rig count averaged 113 for the fourth quarter and stood at 116 at the end of the year. The exit rate represents an increase of 11 rigs compared to the third quarter and was 17 rigs higher than where we started the year. Margins were down sequentially at roughly $11,000 and should remain at that level through the first quarter. After which we expect to see improvement through the balance of the year. The lower margins of recent quarters are primarily a function of mix, that is onshore versus offshore, a more competitive environment and the extensive downtime associated with preparing many of our higher-margin rigs for new contracts. The full deployment of these higher spec rigs will improve our mix and should return us to the higher margins we achieved in 2008, when we averaged almost $15,000 per rig day.

Now among these high contribution projects are; the December commencement of long-term contracts for two jack-ups in Saudi that were in the shipyard for much of the prior year, the late second quarter commencement of a new long-term contract for another Saudi jack-up which ended the shipyard for regulatory check and upgrade at the end of the fourth quarter, the third quarter restart of four land rigs which are being upgraded for new long-term contracts in Saudi, the second quarter commencement of operations on a new platform rig in India that is currently being mobilized and rigged up, and the second half contribution of two high-performance environmentally efficient land rigs in Southeast Asia. And then there is an assortment of other miscellaneous rig startups and venues during the second half. All of this should bring our exit rate to 130 rigs by year-end and positively impact our average margins well into 2013.

I should add here that both our land and offshore markets internationally have become more competitive due to new entrants and speculative rig additions. We will respond by focusing on the type of projects that Nabors can uniquely do and that give us an edge. We believe that with increasing interest by operators, not only the large international companies, but also some of the NOCs, there'll be sufficiently opportunities to make good returns in invested capital and nevertheless grow. We have already tightened the hurdles for further capital investment, all CapEx in international is being throttled back, sustaining plus additional capital to 75% roughly of our depreciation for 2012. The benefit of this shift in focus should manifest itself in late 2012 and beyond.

Nabors Offshore. Our US Offshore operations reported operating income of $3.4 million, up from $2.5 million in the prior quarter and significantly up from the $5 million loss recorded in the fourth quarter of 2010. The Gulf of Mexico market is improving very gradually and we are putting back rigs back to work. We are encouraged by the number of jobs still waiting government permits and these are jobs which we think Nabors is in the well-positioned to garner. We continue to be the leader in proprietary and innovative offshore rig designs, our SUNDOWNER rig I think it is fair to say revolutionized the shallow water work-over sector, and we built on that technology to develop the first MASE rig and then the MODS rig designs that allowed us to rapidly expand into deep-water. Our experience in developing and deploying these rigs is why we were selected to construct two new state-of-the-art 4000 horsepower deep-water platform rigs, the largest ever constructed to work in the Gulf of Mexico for two super majors. Now when you all think of Nabors, you don't normally associate Nabors with deep-water, but the fact is we have eight deep-water platform rigs working in the Gulf of Mexico, by far the largest position.

Our market penetration will be further enhanced when we roll out these new rigs, and so it is safe to say this is a position we really want to build upon. And thanks to the offshore engineering talent, we think we can be competitive and maintain very attractive returns on capital, this is an example of the kinds of projects where Nabors has an edge. Results in 2012 should improve with the full-year contribution from the deep-water restarts in 2011, plus new projects that are likely to begin in 2012 as permitting eases, mostly in shallow water. We will also receive increasing larger payments from one of the two 4000 horsepower rigs we are constructing. All of this should have a positive impact as we go forward in 2012.

Nabors Alaska. This unit posted results of $5.3 million up from about $3 million in the prior quarter, but down from approximately $11 million recorded in the fourth quarter of 2010. Lower overall drilling activity impacted 2011. We believe a modest turnaround is in process and could be more meaningful with time. The modest improvement in results in the quarter were derived from increased activity. The first quarter is off to a good start as a result of Nabors being awarded the majority of the work for what is turning out to be a pretty busy winter exploration season. While we anticipate that the usual seasonal slowdown in activity in the second quarter, there are a number of pending projects both onshore and offshore, two on the North Slope and several in the Cook Inlet Basin where we are in a good position to participate.

Additionally, if the Alaska Legislature enacts some reductions in tax progressively before adjournment in mid-May, there is some pent up demand in large legacy fields on the North Slope that could materialize perhaps as early as late this year. This could also generate opportunities for our proprietary North Slope coil tubing drilling rig which has been very successful. And I would like to say that the Alaska administration seems to be very aggressive about wanting to bring additional players up to the Slope. They are really doing -- they've attracted a bunch of midsize companies up there and if this tax change does go in effect I think they will have a real good pitch book to attract some additional people up there which I think is really good for us given our position up there.

Superior Well Services. Results of about $77 million in our pressure pumping operations were up from $65 million in the prior quarter, and $55 million roughly in the fourth quarter of 2010. Operating income for the full year was $229 million, which cannot be meaningfully compared to 2010, since we owned Superior for one third of the year then. This quarter's nearly 10% improvement in sequential operating income margins represents good progress toward our goals. We expect further improvement as new crews become more efficient as we continue to improve our transportation, logistics systems in the face of a doubling of throughput in less than a year. While we believe there is further room for margin increases, it should be noted that there is a high degree of variance in this important measure across our various regions and also across our competitors numbers that you all analyze.

The variance stems from seasonal constraints, which markets people are in, labor availability, depreciation metrics and cost bases. This is illustrated by the fact that while we averaged less than 20% in operating income margins for the year across the board, our margins in the Eagle Ford were more than 45% on this metric. Similarly, like some other companies who primarily work in the Eagle Ford, we too enjoy revenue per stage in that market on average more than $200,000. This proves that the unit can deliver top-tier results as well. Three incremental spreads were deployed during the fourth quarter. One in the Marcellus and two in the Rockies Bakken Shale. This brings the total number of large crew spreads at year-end to 22, and total hydraulic fracking horsepower to 733,000. If you will turn to slide 19, you will see where this horsepower is located, and where is it yet to go.

Slide 20, gives you more details on our current contract position and where rates are trending today. The decision to operate on a 24 hour basis is typically basin specific. The Marcellus, Bakken, Eagle Ford and Granite Wash have the majority of the 24 hour operations. We currently have 40% on a 24 hour basis and plan to increase that percentage. Moreover if you return to slide 8, you will see we try to position each of our product lines together with in basins where they complement one another, and that's going to be consistently one of our strategies. In fact we will be building out our infrastructure in these locations to co-locate the various product lines together to achieve some cost efficiencies. Today our largest operation is in the Bakken Rockies with nine spreads working at year end. Spread 10 commenced operations in January and spread 11 is scheduled to arrive in May. When fully deployed, 73% of our equipment will be on term contracts in this area.

Eagle Ford represents the next largest position with 4 crews working. We have no plans to expand further in this area as it is rapidly becoming the most competitive of all of our markets. Fortunately, half of our equipment here is subject long-term agreements at attractive rates. The Marcellus has always been a core area for Superior, and we just deployed the fourth spread there in January, with three of these spreads working in the more liquids portion of the play and the lone gas directed spread committed under a long-term agreement. The balance of the fleet consists of three spreads in the Permian Basin, with one on long-term contracts and one each in the Barnett, Granite Wash and Haynesville Shales. The latter of which is the only dry gas directed work we currently have that is not subject to a long-term contract. These additions will bring the total hydraulic horsepower to 857,000, plus 100,000 horsepower for cementing, nitrogen and acidizing.

As slide 19 indicates we also have a decent position in cementing and coil tubing. We have no plans to add in 2012 hydraulic fracking capacity beyond current levels or to add other equipment beyond the additional coil tubing units and cementing units I have already mentioned. The primary issue faced in the industry today is the continuing deployment of what may prove to be excess capacity in the weakening margins. Potential shrinkage of demand for hydraulic fracking in gas directed markets is likely to exacerbate the situation. However, in the case of Nabors, I believe these factors will be mitigated at least through most of 2013 and allow us to continue to derive healthy returns on our investment in this business. The reasons for this are the following.

First, we have limited uncontracted exposure in most competitive areas. In total we have 14 long-term service agreements in place that have take or pay provisions and only one spread, the Haynesville, exposed to dry gas on a short-term contract. In the aggregate 72% of our expected 2012 operating cash flow from pressure pumping is secured by firm long-term contract commitments. Again, these are real contracts with real termination provisions with a very, very substantial amount of dollars. Another factor that works in our favor is the degree to which we can continue to improve efficiency in our operations.

In 2011 we spent roughly $120 million in transportation and logistics related costs, with nearly $20 million of that related to demurrage and incidental costs. That provides the ample opportunity to improve as we continue to incorporate the pumping operations into Nabors warehousing and transportation and purchasing systems. Longer term we believe we have good opportunities in multiple venues outside of today's markets. Argentina and Oman are examples. Once we demonstrate our ability to operate efficiently we expect to see further developments in the international markets.

Next I'd like to turn to Nabors Well Services. Our well servicing operation posted $24 million in operating income, a slight improvement over the $22 million we posted in the third quarter. This was contrary to the normal seasonal with holidays and shorter daylight patterns. Benign weather allowed this unit to generate an 11% increase in truck hours, a 3% increase in rig rates, and a 2% increase in truck rates. All contributing to this improvement. At the end of the fourth quarter our operating fleet consisted of 548 well service rigs, 921 fluid service trucks and 33,700 frac tanks. Slides 21 and 22 give you a more detailed view of the breadth of our services and market positions.

Going forward we expect the first quarter of 2012 to be down slightly due to customary seasonal issues, this will be mitigated somewhat by the continued rate improvement in both rigs and trucks. The second quarter should represent a sharp rebound as utilization and pricing improves for both bricks and trucks in oil markets, namely the Bakken, the Permian, Eagle Ford and California. By the end of the second quarter, all nine of the remaining advanced well servicing rigs will be deployed in California. In addition, 50 fluid service trucks and 900 frac tanks will also commence take or pay contracts throughout the second quarter that will be fully deployed throughout the second quarter. The positive effects will be dampened however by reduced contributions from our Northeast operations due to the soft gas market and weather related issues. We will continue to identify and exploit synergies in the logistics and fluid hauling within our pressure pumping operations. Additionally with the significant increase in oil related drilling in the lower 48, the future demand for well servicing rigs continues to increase. We believe we are strategically positioned in most of the oil rich areas to satisfy this demand.

On our other operating segments, this unit posted results of $13 million, down significantly from the $20 million reported in the third quarter, but up from the $9 million reported in the fourth quarter of last year. This was primarily attributable to seasonally low results in our Alaskan logistics and construction entities and weaker results in our directional drilling business. Which collectively more than offset record results in Canrig. Canrig's strong performances is attributable to higher rigs -- higher revenues in both its capital equipment and service and rental lines. And it was achieved in spite of $4 million in research and development expenses it incurred on a non-ordinary basis. Canrig's operation results actually increased 25% sequentially and 68% year-over-year when we exclude the $4 million R&D expense.

We continue to be optimistic about Canrig's potential going forward, with its potential for product sales and its technology initiatives. Some of these are outlined in slide 23. During the year we deployed our 1000 top-drive, I might add that top-drive number 1 is still in the field. We also doubled our production of top drives to 120 this year. The number of catwalks and wrenches had equally impressive doubling of production. Canrig also installed the 200 ROCKIT System which increases the rate of penetration and connection time during directional drilling. It commercialized our product which stabilizes rotational torque and installed that on 45 rigs.

It acquired a GE distributorship agreement for AC drive systems which will lower our costs and improve the reliability and technical capabilities of many of our products. It acquired world-class managed pressure drilling technology through a license agreement with MPO, which we will be looking at rolling out. And successfully managed an automatic driller that allows setting of drilling parameters remotely by an operator using proprietary algorithms to optimize performance. We also continued to successfully file and defend a broad range of patents that now stand at over 100 and we expanded our support and operations line to improve performance for ourselves and Canrig's customers at a 24/7 manned around-the-clock center. We believe there is another step change in drilling technology on the horizon in the form of more automation of the drilling process and increased remote monitoring and control. Canrig's AC top drive and rig controls and its IP we think will provide an advantage for Nabors as we move forward in that environment.

Briefly oil and gas, oil and gas was down $3.4 million, from the $7.7 million recorded in the third quarter when we exclude the $27 million of non-cash gains from NFR in the third quarter. This segment now consists of only NFR, as all other holdings have been reclassified as discontinued. As we stated in our press release we decided to take further impairment to reserves against these holdings, principally those in Canadian gas, in an effort to achieve what we believe is a conservative valuation under today's market conditions. We have initiated processes to sell our various properties as I've mentioned, obviously the current environment for the gas properties, this may take some time. One remaining issue is that we will likely in the next few quarters still face further sealing impairment tests from NFR as the 12 month rolling average gas price methodology is on a downward trend.

So in summary, I'd just like to say Nabors has a tremendous opportunity at hand, both to grow the business and command investor confidence. The priorities I outlined at the beginning of this call should result in a meaningful redirection of the Company and improved performance. We have the resources to make it happen, we have a great asset base that is global. We have great tangible assets as well as intellectual capital. We have sitting with us one of the deepest experienced management teams I think of any company and we have a 28,000 strong workforce that is enthusiastic and willing to embrace the changes. I apologize for the length of the remarks and now we will take your questions.

We are ready for the question-and-answer session, please.

Thank you, sir. Ladies and gentlemen at this time will now begin the question-and-answer session.

(Operator Instructions)

One moment please. Jim Rollyson, Raymond James.

Good morning, everyone. Tony, thanks for all the detail, that was certainly very informative and well done. You mentioned at some point getting back you are hoping to the 2008 level margins on the international front which were in the mid-teens. When you kind of look at where you stand today and getting to the 130 rigs that you were -- exit rate you were talking about, where does that put you on for margins if everything goes as planned, and kind of when do you think you might get back to that mid-teens level?

I think as I mentioned during, the first quarter of 2012 we're still at a plateau level. Then it starts -- it will start to ramp up second quarter and that should accelerate toward the end of 2012. By 2013, that's when I think we can hope to approach that level. I think one of the questions, one of the things that's hampering that number is obviously the jack ups, these numbers of course are all blended between land and offshore, which makes it a little difficult, but the jack ups have been locked in at numbers and they are on term contracts so we need to offset some of that. But, yes, by the beginning of 2013 I think that's where we should get in those ranges. And of course on new projects the discipline in terms of allocation of capital to anything new, we are going to try to be pushing to rates where we want to get to.

Sure, that's helpful. You mentioned in your prepared commentary operating cash flows this year will fund CapEx debt redemptions, and provide free cash flow. Is that including asset sales or would asset sales just basically be icing on the cake?

The aspiration is to do it before asset sales. So but like I said in the press release we have this number of $1.5 billion currently on the table for CapEx, it's still subject to some scrutiny. And if that holds and the plans I have mentioned hold as well, there should be some free cash flow away from asset sales.

Okay and the last question for me. When you think about capital investment right now and obviously you're taking a look at rationalizing your asset base starting with oil and gas and other things, are you focused on doing the rationalization first, does that preclude you from considering anything on the M&A front? Or are those functions kind of mutually exclusive?

I think with respect to the former we have a sense of urgency about it. But, it is not exclusive of the second category. So in other words, we will think in parallel terms and I think we have to in today's world.

Okay, great. Thank you.

Kevin Simpson, Miller Tabak.

Thanks and good morning.

Good morning, Kevin.

Tony, and maybe you can, I don't know if Joe is there, just swing it over, I'm just curious as to the current tone in the marketplace. With obviously, with gas prices down which you've already spent a fair amount of time on. But I am just wondering if you guys are now beginning to see a, companies back off from prior plans, rigs that you thought were going to get renewed, not renewed, or are you still able -- are you still able to find homes for everything that gets let go on the rig side? And I guess and also to some degree in terms of activity on the -- in the frac business?

Sure, Kevin, it's kind of an interesting world where we do have a $100 oil price and you have a bunch of companies, for example, that are looking to deploy capital and historically they deploy capital because they need to find places to spend large amounts of money and capitalize on that kind of oil price. They typically have gone international. So given that that is out there, that thinking, the fact that there is still $100 oil, you would think that the fact that the gas price is low doesn't abate in fact ought to cause people to continue to think of US as just another place to continue that process. But anyway, Joe will, is recently has had some talks with some people, so let him give you the color.

Thanks, Tony. Kevin I look back at the transcript from July and you asked me then what my vision was looking out, you said is it a 10, I said, no it's a 7, and I said 30 years of experience tells me things change. Now the term contracts we have in place are partially a result of that and you asked about the rollovers. So far we've been able to put most of the rigs to work coming off of the existing terms, whether it's an extension with current operator to a new operator et cetera. So we've been pretty fortunate with that. As Tony mentioned I attended a function Sunday night that a large independent of presentation. Their thoughts the rig count isn't going to change dramatically US, and the comment was, yes.

Is not he said.

Yes, is not going to change in the US. What they are doing, they're redeploying as Tony mentioned, dollars into oil and gas. And the comment was, by their CEO, as long as $100 oil is here, they're going to work. And he says that hopefully we don't drill ourselves out like we did with gas, with oil. But the bottom line is there's a lot of future ahead with oil. We are redeploying asset, as Tony mentioned, from different areas into the oil plays. We recently put our first rig in the Utica, which came out of the Marcellus. We put three rigs up in what they call the Mississippian Shale which is in Kansas. So we've seen deployments, most of those rigs came out or will come of the Haynesville, so there's a lot of opportunities still going forward, not saying, again I would say as I told you in July, a 7 out of 10 as far as vision, so.

Okay. That's great. And just one quick follow-up and the -- you did mention in the release, Tony that there were some new builds-- still new contract opportunities, could you, it sounded like that was the US, I think it was. Is that -- are there still -- are you far enough along that you can kind of project out that when you do the next call, the one after that, that you will have signed some new contracts up even in the environment we're in?

What I like to talk about is things that are done. When something is done, we'll talk about it. And we're hopeful and that is something we're pursuing daily with lots of people. But nothing to report right now.

Black and white, no projections. I get it.

Right.

Thank you. Okay. That's it for me.

Ole Slorer, Morgan Stanley.

Thank you very much. Yes, again, thanks for a very comprehensive presentation. I wish I had an extra hour to look through it so I could really ask some more intelligent questions. But one thing that struck me again going back to the 35 rigs that are not on take up pay, even rigs that are take up pay contracts will have customers trying to move them from gas to oil, so how many of those rigs do you have in gas do you think are capable of moving to oil?

The 35 rigs, there are all currently operating so they are all fungible assets that can.

1500.

No, and a majority of those can, because again, a majority of our rigs, as Tony mentioned earlier, they are 1000, 1500 horsepower rigs that are designed to work in almost any basin. So they're all fungible assets.

There's also this disproportionate slant towards these more vulnerable rigs in gas basins with lower quality assets that say could not be moved to?

Not all, not at all.

Okay so, the second question then would be how long time do you think it will take, if your mix is now 35 rigs, not under take up pay working in gas, let's say Haynesville, Marcellus, Barnett exposure of about 50 rigs. Or 20% of your fleet, I presume those are the most vulnerable areas for the rigs. How many of those do you think will migrate into oil basins through the year?

How many rigs do you think will migrate over to the oil basins?

Of the 35.

Of the 35, again it depends. We're still, we still want to compete in those markets, keep operations underway, but again, we're already today, we've deployed some rigs in the last two weeks, three weeks from East Texas to West Texas where very sizable operations underway there. And we've removed some rigs recently from the Haynesville down to the Eagle Ford and are moving either one or two up into the Mississippian Shale. We will continue to move as opportunities come up.

Bottom line, he doesn't want to get pinned down, but right now he's got three or four that are repositioning right now over the next few months.

So how few rigs do you think will be required to drill for gas, I suppose there is some sort of a minimum level because of obligations? So is there -- I'm just trying to figure out at what point does -- do you reach a level from which it is difficult to drop your gas rig count below?

Well, I think it would depend on what's the base number for activity for gas drilling depending on the commodity price. There's certainly a number at which the whole thing goes through the floor. But, I don't know what that number is, whether we're a portion of that number that sets the floor for maintenance as well as holding leases et cetera. I don't know what that number is.

The reason why I'm trying to get into this is that you made a statement I think that you thought the gas, the overall rig counts have been flat to slightly down and I presume that you believe the oil rig counts will continue to rise, which assumes that you presumably had a pretty negative view on that net effect of that decline in gas rig count. That's what I'm trying to understand.

Well, I think I said it with -- I'd say it was flat with potential to going down. I think on a cautious basis that the deployment of the oil -- of rigs to oil should -- I'm not going to say it's going to overtake the decline, but I think it reduces the rate of decline of the overall count. So, that's the best we could say right now.

You also highlighted that Eagle Ford was the weakest area, where you saw the most competition on pressure pumping.

Yes.

That was maybe a little surprising to some of us. Could you -- when did this become the most competitive market in your view? The recent phenomenon?

I think Eagle Ford is a market that everybody has been focused on because again been a lot of activity. I think what we are seeing is crews from the Haynesville, even some from Oklahoma Barnett, have kind of focused on that area because it stayed active. So there's just a lot of people bidding on future projects and now there's some new entrants into that play and their goal is to keep the crews busy so with that, they're just trying to find a way to get a foothold in that market. So for us, we've been there for a while. We've had some -- got some good contracts in that market and I think we just see that anything future that we're going to be bidding on that there's going to be a lot of margin drop in those situations.

Okay finally, Tony, what's the book value now of the assets that you're holding for sale?

Clark's got that.

That's one hold on one second.

You're talking about --

The old E&P properties, it took some impairment charges (multiple speakers)

Net of all the impairments and everything.

Yes, (multiple speakers) for sale is $275 million and then NFR is around $300 million.

So $600 million altogether.

Okay. And you said that you don't rely on that in order for your roughly $1.5 billion debt reduction target?

We understand that. Cash is cash, cash matters.

Okay. Thank you very much, Tony, and thanks for a very comprehensive presentation.

Thank you.

John Daniel, Simmons & Co.

Hey, guys, good quarter and I echo Jim's earlier comments about the color being extremely helpful. You mentioned in, and this is for the lower 48, you mentioned that flat cash margins in Q1 because of the call it $500 a day impact from payroll taxes and workers comp. All else being equal, Tony, would you expect margins to jump $500 a day as you get to Q2?

Well, there's going to be an improvement and, Joe?

As you mentioned the $500, we call it headwind, we go into the quarter with is there. We think the second quarter, it's mentioned is going to be flat, it's really going to be determined on the pressure we see. We know we still have 21 new builds to deploy this year. All of those rigs are going to be at better margins. So it really is going to be determined by what happens with the overall fallout and the gas count, which we don't know at this point. We know where the term contracts were, very well protected on the margin side. New builds coming in are going to improve. So, again, we think --.

I think the short answer is we think a substantial amount that will be offset. Yes.

Fair enough. Just a couple of pressure pumping and I'll turn it back over. 14 long-term service arrangements today, is it safe to assume that some of those service agreements incorporate more than one frac spread given that you've got 27 spreads? (multiple speakers) I'm trying to get to the 72% that's contracted.

The 27, first of all, those 27 includes Canada so there's 25, so there's two up there. There's 25 in the US.

Okay.

And then, of the 25, the long-term service agreements are on 14, I don't have the exact number if you -- that's by number, I don't have the exact number if you break it by horsepower related to the contracts, if the numerical 14 divided by 25, it's disproportionate in horsepower but it is 72% of the margin.

Got it. And then, just last one from me on the potential for margin improvement in pressure pumping, as you think about that, does that forecast incorporate any pricing reductions on the non-contracted work and at this point given that the market is getting a bit more competitive, have any customers come to you that asked for you to amend contracts and do you expect that to happen?

The 14 contracts, definitely we have some inflationary language in there where if we have inflation we can pass that through.

Yes.

Some of the other spot market contracts, again I think at this point we're kind of looking where to -- if they are in the right spots, do we need to shift them around. There's still some markets holding up and as we said earlier, we have a very high percentage between our contracts and oil basins that we feel like has a little better pricing than some of the dry gas areas. So, a little early to tell. I think we're seeing E&Ps at this point still evaluating where they want to be, but I think we have a pretty high confidence in our position where we stand today.

All right, thanks, guys. Thanks for taking my call.

Thank you.

Operator, unfortunately we are out of time. I'm afraid we're going to have to suspend the questions there. If anybody didn't get their questions answered, feel free to call us and we'll wind up the call, please.

Thank you.

Thank you, sir. Ladies and gentlemen, that concludes today's Nabors Industries Limited fourth quarter 2011 earnings conference call. Thank you for your participation, you may now disconnect.