Welcome to the Nabors Industries' Second Quarter 2008 Earnings Call. At this time all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions. (Operator Instructions). As a reminder, this call is being recorded today, Wednesday, July 23, 2008. I'd now like to turn the conference over to Mr. Dennis Smith. Please go ahead, sir.

Good morning, everyone and welcome to our conference call this quarter. With us today are the usual participants we have, myself and Gene Isenberg, our Chairman and CEO, Tony Petrello, our President and COO, Bruce Koch, our CFO, who has taken our general counsel and all presidents of our major business divisions. We'll follow the same format we always do, where Gene will give some opening remarks about the quarter as well as how we see the outlook for 20 or 30 minutes, and we'll open it up to question-and-answers and limit the call to one hour. So I want to remind everybody that obviously we're talking about the forward-looking statements under the SEC Securities and Exchange Act, and as such there's a lot of uncertainty going forward and we encourage you to look at our filings in the 10-Ks, and Qs. Gene, if you want to go ahead and get started?

Sure. Welcome again to the conference call for the second quarter. As usual, we have posted to the Nabors' website a series of slides that contain details about the performance of the various segments of the company for your reference and we'll try to hit the highlights of the quarter and our current outlook. Let me begin by saying that operating income, which we have always considered to be the most relevant metric of the performance of the company improved sequentially in virtually all of the units over the first quarter. The only exceptions were Canada and Alaska which were predictably were down due to seasonal effects, although both performed better than we had expected them to. As a result, operating income for the quarter was $266 million, but in my opinion, it should be adjusted upwards for the $8 million non-cash pre-tax charge we incurred from the reduction in value of forward hedges in our first reserved E&P joint-ventures, and we'll discuss E&P a little later. The company's overall operational performance was ahead of expectations; however for the earnings per share did not fully reflect the strength of our performance for three reasons, which I'll go over very quickly. First, we incurred a significant increase in our effective tax rate, and the way this happens is as follows. We project every quarter what we think that the income and tax rate will be for the rest of the year, and because of the increase in domestic and Canadian income compared to previous expectations, the forecast becomes approximately 25% instead of approximately 23%., so the accounting rules require that we make an adjustment for the second, third and fourth quarters in this quarter. So, our tax rate goes to 27% for the quarter, compared to an expectation for the year…

Patty, we're now ready for questions, please?

Thank you, sir. (Operator Instructions). Our first question comes from the line of John Fitzgerald from Raymond James. Please go ahead.

Good morning, guys.

Hi.

It’s a question on the US offshore and I guess, correct me if I'm wrong, but you had two previously stacked jackups that you guys deployed in the past month or so on one well contracts. What's the market looking like right now as far as keeping these rigs working after that and/or putting additional stacked capacity that you guys have to work in the Gulf?

I am going to turn it to Jerry Shanklin.

Well, the jackup market is getting better. It's still, like you said, 1Z, 2Z type wells and we're trying to do our best to keep operators lined up so that we don't have gaps. We haven't succeeded in doing that in the past, but we're hopeful that with the additional work, we'll be able to move from operator to operator without any down time.

Okay, that helps. And internationally, could you guys give some color on, you were around 122 rigs at the end of the quarter. Give some color on where you are kind of sitting now and where you think you could exit the year at?

Go ahead, Jim.

I think as Gene mentioned we are seeing future activity, future rigs coming up in the Middle East, in North Africa, and of course in Russia. And also, there's indications that obviously, Mexico is putting more land rigs to work and we are going to have a play in that.

Okay, I guess that does it for me now. Thanks.

Yeah, thank you.

Thank you. And our next question comes from the line of Byron Pope from Tudor Pickering. Please go ahead.

Good morning, guys.

Hi, Byron.

For the 20 incremental term contracts that you just announced, say it sounded like most of those are for the US. Could you give us the split, US versus international, on those incremental 20?

Actually, we have over 20 and almost 20 of US and the difference is international which is pretty small at the moment. Actually signed.

Okay. And then just in the context of E&Ps continuing to ramp their CapEx spend. Give us a feel for order of magnitude, the number of new-built rigs that you guys could deliver to customers as we think about the next 12-18 months?

That's a good question. The number of inquiries and this is the US and Canada. Canada, my guess is that we're pretty confident that we'll do at least 10 incremental new builds and we don't have an enormous fleet size in Canada. And then in the lower 48, I personally think we've got 20 committed. I think we could get another 15 or 20 by the end of the year. These shale plays are really increasingly significant, both in terms of the attractiveness of the plays, the need for quality rigs, and ultimately the production of gas in the country.

Okay, and then just with regard to you mentioned you guys have the ability to use perhaps some of your older rigs as bridge rigs, so to speak for E&P customers, until you deliver new build rigs. Of your existing marketed but idle fleet, where are we now in terms of the rigs that are still marketed but idle in terms of its horsepower ranges? What types of rigs do you anticipate could come back to work out of your existing fleet?

I could take the rest of the conversation. Let me summarize quickly. now we are down to 65 stacked rigs, and we're slightly lower now and we think 20 of them are likely to go back to work and they are mostly in the thousand horsepower range. The real small ones, we're not sure, 500 horsepower mechanical, and rest we're not sure. They will ever work and if they do, it will be a lucky strike extra. But we have a fair number of rigs. But we also have a much more significant number relative to all our competitors who are typically competitors competing with us with quality new-builts.

Okay. And then last question for me. Just in terms of leading edge day rates, if you will for, let's call it, a 1,500 horsepower rig that wants to go to work and the Bakken, or maybe the Haynesville, what are you seeing in terms of movement on the spot market again for the larger rigs?

Same as the generalization, 25.

Okay, all right. Thank you.

Thank you. And our next question comes from the line of Kevin Simpson from Miller Tabak. Please go ahead.

Good morning, Gene.

Hi, Kevin.

Going from zero new-builds to 20 in one quarter is pretty impressive, but wonder what kind of margins you're getting on those new builds relative to what you had before. Did you have to cut price to get people to sign up?

Actually, it's been exactly the opposite. Number one, the prices are higher, I would say. The new prices 26.5 and CapEx on these new rigs is probably going up, so that may go up. But the important thing for us is that we can put these new rigs out and get 90-plus percent of the margin from virtually day one, compared to what happened last year. So let's assume 10 cost, is that good, 10 or 11 cost, so 26.5 you're talking about a way higher margin that we can expect. But these are the newest ones, these aren't going to hit the P&L until next year or so.

Right.

But they're been more interested three things. The quality of the rig, the delivery of the new build, and what we can give them as a bridge rate, maybe you can figure it, because even when gas prices is way down to like 10.25, these things are unbelievably attractive for the E&P companies.

Okay, better than I thought. Just another US question, it's kind of more macro, I don't know whether Joe is there, but in terms of interfacing directly with the customer, I think it was on the Baker call yesterday. There were too many calls to keep up with. There was a comment that much of the activity is based off of much lower gas price economics, but that some kind of unspecified amount of incremental activity is really betting on $11, $12 gas. And I'm wondering, Joe, if you're there, whether you can see that in that kind of aggressive price in some of the work that you're getting incrementally.

Obviously it plays a part with the improvement, but I think also everybody is looking at the deliverability of the gas, or the opportunity for them to put the bid in the ground, if fact that there are not enough rigs and it goes from the Bakken up North to the Haynesville across. The new build rig is developing or delivering I would say very significant improvement in operational efficiency, so I think the operator sees this and he is moving forward with the contracts.

Kevin, we can give a qualified answer from our own viewpoint as an operator. We have stuff in almost all of the shales and almost all of the plays now. I mean we're tiny, but we have background in all these, I'd say we don't have anything that doesn't work at 8 bucks or less.

Okay. I would assume you'd be more prudent than some of the marginal operators, so I guess, Joe, of the rig count you have out there now and maybe with increment hopeful, do you see a lot of risk to the count if a year from now, gas is $9?

I wouldn't say $9. One, the issue is the new builds we have in place, that's kind of the balance that we bring. We currently have 150-plus rigs on turn. We're looking at adding incremental 20-plus long-term. So I don't really see a lot of exposure to us in the next year as a result of that, no.

Kevin, there's also the cash flow effective higher prices , so I mean, the economics can be really good at 9, 8, 7, 6, but they have more cash flow to do more stuff at the higher prices. So it's not that it's totally impaired, but the pure economics of any of the plays work at 9 bucks.

Yeah.

But the cash flow means you're constant planning on every single play you could have. It's the ample money to spend pretty obviously you [intended] to do it.

No doubt. I was just really focusing on issue of economics, I was surprised with your statement yesterday. Okay, that's it for me. Thanks.

Thanks.

Thank you. And our next question comes from the line of Dan Boyd from Goldman Sachs. Please go ahead.

Yeah, thanks. Taking a look at the international segment, of those 13 rigs that may start up in Q4, are they already contract? And if so, how do the margins compare to the segment average of I guess about 14.7?

The rigs that are starting up in 4Q, they're on the contract, or the contract is just being finalized. So they're going to go to work and what was your second question?

How do those margins compare to the quarterly average of 14.7?

We see the margins still going up.

Okay. Did you still see upside to pricing internationally and is that increasing over and above what you're seeing on the cost side?

I think it depends a bit on the area you're in, but in general, yes. There's still opportunity for better margins.

Okay. And then just one for Gene on Canada, you mentioned that the second half of this year is going to show a big improvement. How would you say that that improvement will compare relative to the second half of last year and I understand.

I think we'll be better.

Better than last years?

Yeah, but it's still lousy.

But that's still a pretty big improvement.

Yes, I think domestic has changed pretty dramatically with the gas price. I think Canada has changed pretty dramatically because it was unusually depressed. The prices were unusually bad. And in addition, they have the new shale plays which everybody up there including ourselves, are excited about.

So, 3Q could also be better than last years 3Q?

I think so.

All right. Great, thanks.

But it's still not good.

Thank you. And our next question comes from the line of Kevin Pollard from JPMorgan Chase. Please go ahead.

Hi, good morning, Gene.

Hi.

I wanted to touch on your comments on the international segment. You're sticking with the 40% year-over-year op income target for '08, and indicated that it might be greater than that in '09. A lot of the increase that we've been seeing in '08, I guess has been driven by re-pricing of some older contract rollovers. I was wondering with your view on '09 being up a similar amount, is that more of the same continued re-pricing of contracts or is that driven more by new rig commitments, additional rigs you'll be deploying in that segment?

I think it's rigs that work a partial year this year and had hiccups, and number one they're going to work. A full year next year and presumably have fewer hiccups because they already have fewer hiccups, then there will be improved pricing on rollovers and there will be new builds. A whole bunch of stuff, but I think the improvements on existing rigs is still significant part internationally, although the new builds are not trivial.

Right.

New contracts.

Well, I know your bidding activity in your bid list, you regularly show us is fairly lengthy in terms of the number of rigs. I'm wondering, how much of that are you counting on in your 40% target there? Is it fairly minimal at this point?

I would say yeah. I would say that we've frankly currently overestimate our international earnings and we're trying to be a little bit more conservative.

Okay. Thanks and if I could switch over to some questions on the new builds for the US real quick. In terms of the 20 or so rigs that you have in hand, when will those begin to deploy and actually start contributing to the P&L, the first 1 to 5 or so for example?

The first part or second part?

Of '09?

Late first or second.

Okay.

To start.

And in terms of lead times for additional, you mentioned you might be able to get another 15 or 20 new-built commitments this year. If I committed to you today, when could I have that rig in terms of when you could get it out?

I'd say a year.

Okay. So on the first 20, we're looking at for the most part a first half of '09 contribution with.

Commencing domestic.

Right, on the domestic rigs and then if you're successful on the additional 15 or 20 that would be kind of a second half of '09?

Commencement.

Okay. All right, thanks, that's all I had Gene.

Thanks.

Thank you. And our next question comes from the line of Doug Becker from Banc of America. Please go ahead.

Thanks. Just want to touch base on Well Servicing a little bit. You mentioned that price competition has been very stiff there. Has that settled down and is there any region that's particularly still weak?

Yes, it's settled down and we've increased prices in some of the regions which are obviously not the hottest reasons. Nick, you want to tell them about what you think?

In some of our Markets, we were able to move rates as Gene talked about, particularly in California and West Texas. South Texas is still very competitive, East Texas and the mid-continent region is still very competitive. We see some opportunities later, but not at the present time.

And in regions we are able to increase pricing, are those exceeding the higher labor and fuel costs?

Yes. We basically increased our rates such that we're getting some of the margin that we lost back through our cost increases since our last rate increase.

Okay. And just in terms of the new capacity, how much of that would be replacement versus just, I guess adding incrementally to your fleet?

So far our prospective.

When the 18 rigs were deployed initially out of 18, 19 were basically replacements and the rest went to new markets primarily in the Rocky Mountains into Louisiana, into Mississippi, markets that we were growing in. Some of that has changed the supply and demand that other rigs entering the market the last six or eight months, but initially 19 rigs were replacement and the rest were basically enhancement rigs.

Okay. And when you do retire rigs, are those actually cutup, or are they sold into other markets?

They're destroyed. We actually witness the destruction, take photographs, and nothing is sold. Not one component is sold.

I have tried to sneak some sales and they won't let me.

We destroy the rigs and we keep what we can use for our own use.

Okay. And then just a clarification, Gene, did you say that the new rigs are costing $26.5 million?

No.

Okay.

Not even for international.

That's why. How much of those new rigs costing?

I would say drilling rigs domestically, Canada maybe 18, or maybe a little less than that paradox domestically and in international, I think the round number is 25 26, 27.

Okay. Perfect. Thank you very much.

Thank you. And our next question comes from the line of Roger Read from Natixis Bleichroeder. Please go ahead.

Yeah. Good morning, gentlemen.

Hi.

Gene, just real quick. On the comments you made on international, how it should grow here in the second half or what the numbers ought to be in the second half to reach just about 40% growth rate '08 versus '07? I mean it looks like you'd be talking about or at least as I'm figuring the numbers about $0.10 incremental improvement Q3 versus Q2. And then as you look at Canada, obviously up seasonally in the other businesses generally improving, is that the level of magnitude you're talking about in terms of, this is probably the bottom here of these last four quarters where the numbers have been relatively consistent around $0.70?

I don’t know. I haven't translated to numbers per share. But yeah, this will be the worst quarter both cyclically and seasonally, and maybe even turn wise, I don't know. But certainly cyclically and seasonally this will be the low quarter, and I don't think we'll break all of the records this year, but we'll probably do better than we did last year considering that we started off way worse in important areas and I'm looking for sizeable improvements beyond that. Although we haven't quantified that at all, But if we have the kind of progress even implementing the stuff that we told you that we committed to today if we have price for the year for some of that stuff and next year it's going to be a better year, and our ingredients that make for 2010 better than 2009.

Okay. And then my other question, you talked about potentially adding rigs in Canada.

Yes.

The pricing up there, obviously Q2 was a very tough quarter. Pricing up there has been some of the worst in the world over the last couple of years, pricing trends anyway. What are you seeing in terms of rates up there or cash margins up there and returns that would say you'd be considering building rigs there at roughly the same timeframe that we're talking about the US seeing much better scenario and obviously international.

In the first place, a lot of the rigs are available to come to domestic market or to the international market. Secondly, there are developments there that make it likely that some of the rigs will have 365-day utilizations compared to 300. Even though the projection is the economics are done on $300 a day. Anyway they won't get approved and they certainly won't go to Canada if we don't get at least the 15% plus return on total capital employed including working capital. And I think they've been pretty pessimistic out there because they've been beaten down pretty badly. But I would say I think there's reason. And for example, we have 100% of Shell's business. Shell made an acquisition up there where a competitor has eight or nine rigs or seven or eight rigs. Safe to say it's plus or minus, working for Shell and we're going to replace those with better quality rigs, as soon as those expire. And there are other things like that including our own activities in the Horn River and Bakken Shale and our process activities and our own include our joint-venture with First Reserve.

Okay, thank you.

Thank you. And our next question comes from the line of Rob McKenzie from FBR Capital Markets. Please go ahead.

Thank you. Gene, I'd like you to try and put your E&P hat on for a second here again. And I don't disagree with you that long-term there may not be too much gas but I'd be interested your perspective shorter term with the rapid development of some of these reserves plays. How you view the risk of near-term oversupply before demand catches up?

It could easily be. And I don't know and I respect some of our sell side friends who think there is more serious risk than short-term. But to me, it's my personal view it's an oxymoron to say that you're going to have too much natural gas, which is the best hydrocarbon fuel around. And there's no reason it shouldn't be used. Not just in generating electricity but there's no real reason it shouldn't be used in transportation. I mean, even Venezuela is making 35% of their cars operating on compressed gas. So I can't see it short-term and whatever else it is, we have to operate long-term and so long as our important customers like, you know who they are, they're ordering rigs and they're seeing economics, so some of those are so big they don't hedge, for example. So I don't really see, number one, I don't have an opinion on short-term.

Okay.

Number two, I don't think the short-term is going to be material in the overall big picture.

Sure. But in that environment, would you then expect to see perhaps more of a bifurcate of the land rig market wherein this case, it looks like some of the bigger rigs, 1,200 horsepower on up continue to be fully utilized while there's considerable risk to the older 7,000 horsepower rigs?

I would say not 7,000 thousand. I would say sub 7,500 horsepower. Because some of our state-of-the-art rigs that are setting all kinds of records including the one I quoted in Wamsutter is 750 horsepower. That's probably our best single rig. They're all very good, that's probably our best single new-built.

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

Thank you. And our next question comes from the line of Kurt Hallead from Royal Bank of Canada. Please go ahead.

Hi, good morning.

Good morning, Kurt.

On Alaska, Gene, you referenced prospect of 40% increase in operating income '09 versus '08. I'm just curious as to is that a combination of rig years and margin, or is it purely margin or is it purely rig years?

It's both. We have, I don't remember, did we had the heli-rigs working full year last year?

No. They didn't start until December and February.

Okay, so we have those rigs working full time. We have the bulk of the year, I don't know whether it's going to be 9, 10, or 11 months and I think it's 11 months of this hybrid 15,000 coil tubing and stem drilling rig I told you about. And also, we're going to get improvements the extent of which I can't tell you on the legacy rigs, when I said that we have three or four rigs, three in particular that are going to be working and we're going to make them as efficient as the best new build, you can build today and the capital investment will be maybe even 25% as much. We're not going to do that for free So we'll have new builds, new rigs, new deployments of old rigs, and increased margins and the only problem is that Alaska isn't 10 times as big as it is for us.

Okay. And you referenced the fact that you got 100 rigs I think available in the spot market right now, 156 are still on contract, that contract number going up when these new deliveries come in. What's your best guess on the flow through of margin as we get through the back half of the year given that split between spot and contract, what kind of increments and margins do you expect back half of the year?

Well, bare in mind that three, four months ago, we were looking for $1,000 drop in margins between the first quarter and the fourth quarter. Now, the second quarter was essentially same as first quarter. I think the third quarter will be pretty close. In other words, it will be a tiny bit better and then I think we start getting better in the fourth quarter and thereafter.

And then is there any way to calibrate this $0.25 impact from this FASB change on your convert? Do you know if that's already in the consensus number or not?

I have no idea, sir. All I know is it means absolutely nothing in reality.

Yeah, I understand that.

10% is our new sales, right?

All right, that's good. Thanks, appreciate it.

Thank you. Operator, we are approaching the one-hour limit here, why don't we just take one more call, please?

Absolutely. Our final question will come from the line of Alan Laws from Merrill Lynch. Please go ahead.

Good morning. I've got a couple of here. You mentioned as sort of a follow-up to Kurt's question, you mentioned better than expected rollover rates in the US market in Q2. What margins are they rolling off at, and what margins are you getting on the rigs coming off the fence?

I know the rates have been probably 1000, 1,500 higher than we expected, but I don't know. Joe, can you help with the absolute numbers?

Well, the term contract rollover rates actually in the second quarter were down a 200, 300, bucks for those rollovers, we anticipate those in the third quarter to be of a significant change upside.

But the contracts we did in 2006 compared to what they rolled over to.

How did they compare to the average though? You're at about 8,900. Are they above that?

I'm sorry, I didn't get that?

Some of those were as high as 18,000, it was a big mix. But they were probably coming down. The long-term contracts, probably coming down on average $3,000 to $4,000.

Yeah, the average rate actually went down $300.

But they're renewing, Allen, I'd say $1,500 better than we expected, yeah, but still below the old average.

Okay. But below the old average for those contracts, but are they above the 8,900 you have for the whole fleet?

No. They are below.

Okay. And that's the same type of rate that you're reactivating like rigs off the fence at?

It's getting higher, because reactivating on a today basis and these were second quarter basis, so I'd say the re activations I've seen are around 23 or 24.

Okay.

It's pretty good.

Sure, okay, because they're in the sweet spot thousand horsepower sweet spot I guess right?

1,500 has become the sweet spot with Haynesville side.

Okay, that leads to my next question and the shale plays in Canada. In Canada, can you talk maybe a little bit about rig specification for those emerging shale plays and how you stack up with your higher horsepower and specialty rig fleet in that market? You'd mentioned heli-portable rigs as one differentiator.

What we're doing and for example, the Horn River, we're getting ready to deploy a heli-rig here, on pad and in Canada, we have a helicopter company, construction company and we're going to actually construct the pad with no road access in places generally flooded with our, it's called airborne isn't it?

Yes.

We have a division there that can do it and frankly needs the business and it's not, I don't know if it's just 750 horsepower rig there?

Yes.

750 horsepower rig. Typical of 1,000 horsepower rig was 500,000 kind of work load is what they're building generally and it would be in that ballpark for that operation, and it will be a pad type rig, so it will have probably a walking system or some description. And I think as far as I know, none of these are going to be really deep. They're all going to be relatively shallow, and we don't really have any great knowledge that as to how the total measured depth is going to be in terms of what the fracing is going to look like.

Okay, thanks. One last one on international, how much re-pricing upside is included in your expectations for the international growth from where we are today, or is it growth entirely based on rig count increase and deployments?

How much margin increase are you kind of expecting year-on-year?

Year-on-year?

'09 versus '08?

I think in our forecast, we're very conservative, but we pretty much just forecast the cost increases and we put that in our revenue at this point from the forecast side.

I think I would define, Alan. there is an increase in margins year-on-year, but a thousand bucks a day.

Maybe a thousand, maybe 1,500, 2,000.

A lot of us are still waiting for the jackups for the starting up.

I think that's a monster thing, if you have a jackup working for six months, making the gross rate of 135 and netting probably 80 or something 85.

Sure, we've seen a step up for average day rate when you back it out from Q1 to Q2 with the one jackup getting.

At least two jackups and increases almost everything and new build, new rigs, it's pretty complicated because we have really an interesting accrued sale internationally and day rate from 185 down to 25.

When you look at where you exited 2007 versus where you expect to exit 2008, what do you think the number of rig increase is going to be?

Internationally?

Yes.

I think we're close to 130 rigs, 130 plus rigs at the end of '08, and I think in '09, I think about 10, 15 rigs that go on top of that.

Okay, perfect. '07?

115?

Average, yeah.

So we're going from 115 to 130 and then maybe 140 to 145?

About 10, 15 rigs a year, that's basically the gross we've had on rig numbers.

Great, that's all I had. Thank you very much.

Anyway, I want to thank you all for joining us and if you have detailed questions you can get the answers offline and [Denny] and volunteers to stay here until midnight to help you and we're pretty optimistic despite the stocks performance today, because I think here we have for the first time in quite a while a confluence of really attractive opportunities both price-wise and drilling opportunity-wise for both gas in North America and oil internationally and kind of a unique situation which should be right down our alley. Anyway thank you for joining us.

Thank you, ladies and gentlemen. That concludes our call.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.