Nabors Industries Ltd. Q3 2008 Earnings Call Transcript

Oct.22.08 | About: Nabors Industries (NBR)

Nabors Industries Ltd. (NYSE:NBR)

Q3 2008 Earnings Call

October 21, 2008 11:00 am ET

Executives

Dennis Smith – Director of Corporate Development

Eugene M. Isenberg – Chairman, Chief Executive Officer

Anthony G. Petrello – Deputy Chairman, President and Chief Operating Officer

Bruce P. Koch – Chief Financial Officer

Dennis Smith – Director of Corporate Development

Joe Hudson - President, U.S. Land Drilling Business

Analysts

Douglas Becker – Banc of America Securities

Kurt Hallead – RBC Capital Markets

Kevin Simpson – Miller Tabak & Co.

Arun Jayaram – Credit Suisse

Daniel Boyd – Goldman Sachs

Roger Reid - Natixis Bleichroeder

Geoff Kieburtz -[Author ID1: at Wed Oct 22 01:44:00 2008

]--[Author ID1: at Wed Oct 22 01:44:00 2008

] Weeden & Co.

Operator

Welcome to the Nabors Industries Ltd. Third Quarter 2008 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Dennis Smith, Director of Corporate Development. Please go ahead, sir.

Dennis Smith

Good morning, everyone and thank you for joining us once again. We will follow the customary format we have. We’ll limit the call to approximately one hour. Gene will give about a 20 to 30 minute overview of the quarter’s results and how we see the outlook, followed by questions and answers.

With us today besides Gene and myself Tony Petrello, our President and COO; Laura Doerre our Associate General Counsel; Bruce Koch, our CFO; and various representatives of our major business units.

We’ve also posted some slides to the website as we usually do that you may want to follow along with, giving details on the operations and rig status and that kind of stuff. Those slides can be found on our website at www.nabors.com under Investor Relations and under the Events Calendar section.

I want to remind everybody of course that what we’re going to be talking about is the outlook as we see the business. Things are certainly a little bit fluid and uncertain at the moment and as such they’re generally covered under the Safe Harbor Act of the SEC.

With that I’ll turn it over to Gene.

Eugene Isenberg

Welcome everybody to the conference call for the third quarter of 2008. Again I want to thank you for joining us this morning and I want to also suggest again that you look at the tables that we presented along with the results.

Let me really begin by saying that I can’t predict with any degree of certainty what the short term outlook is either for the economy, the industry or for Nabors specifically. However, I’ll give you my views regarding the longer term, which contain a fairly high degree of optimism in the face of what I know is a pretty uncertain and troubling macro environment.

First and I think the ultimate sine qua non is that our rigs are performing very well, a fact that is becoming increasingly evident to the industry and our customers. The most salient evidence of this is the 36 new rigs we have received contracts for over the last two quarters, including 11 this quarter. Slide 3 outlines in tabular form the make up and positioning of the aggregate 190 new rigs we have added to our fleet over the last three years.

In 2007 we had well-publicized quality issues associated with vendor manufacturing processes, and these have been remedied in states and I’ll get into that when I talk about the USA. However in summary at this point, I think we’re equal or superior to any competitor when it comes to high end, state of the art rigs. This is true not only for international which has been true for some time, but I firmly believe that it’s true and the market is telling us it’s true domestically. This puts us in a very good position to successfully compete for long-term business, not only in the international market but also in the primarily gas-driven North American markets.

As you all know, there have been many prominent shale discoveries in the U.S. and Canada over the last few years. The Barnett, Fayetteville, Woodford and Haynesville shales are some of the notable ones in the U.S. and some of the Canadian discoveries, particularly the Montney Horn River shales promise to beat least as good. I think this has not been generally recognized for its impact, but this has resulted in a step change in the current and prospective supply of natural gas in the United States. As a result, we’re in the anomalous position where the market is telling us now that we have too much natural gas in North America and therefore the price -- people say volatile, but it’s lousy.

It’s hard for me to imagine frankly that this situation will continue given the fact that natural gas is without question the best carbon-containing BTU in the world in literally every respect, especially in terms of emissions. It is also all-American, one we don’t have to import from Iran, Iraq. BTUs are the ones that we don’t have to import. The world LNG market is already seeing a convergence in BTU pricing between oil and natural gas and I think eventually this will happen in the U.S.

In any event, I see Nabors extremely well-positioned to provide the fit-for-purpose rigs necessary to produce this resource in increasing quantities, especially in the relatively, recently important, shales.

Internationally we have been and continue to be the contractor of choice with leading positions in every fast-growing market: South America, North Africa, the Middle East and notably Saudi Arabia. We currently have approximately $1.1 billion in cash and investments which reflects expenditures during the quarter of $200 million to reduce debt, as well as stock repurchases of $120 million and capital expenditures and affiliates due around $450 million.

Last summer we embarked on a program to enhance our liquidity and we are taking even more stringent measures in anticipation of a somewhat protracted period of higher cost of capital and constrained availability of capital. We believe we will reduce our working capital by at least $400 million over the next 18 months. In addition, we are curtailing discretionary capital expenditures with an expectation that both measures will generate substantial free cash flow beginning next year.

Strictly in connection with liquidity issues, I’ll comment a little bit about our E&P program. This has been very successful even though the current market is not ideal. In a short time we have built an impressive portfolio producing properties and more significant acreage positions in a number of permanent and emerging gas plays, primarily in the U.S., somewhat in Canada and even to an even lesser extent internationally.

More than half of the value of these positions is with our First Reserve joint venture. By its very nature, the First Reserve modus operandi requires a finite and relatively early monetization strategy. Therefore, I think it’s reasonable that in the next three years we’ll have monetization or the ability to sell some of these assets. I think it’s not unreasonable to assume that we have well over $2 billion in sales value against an aggregate $1 billion investment, including our own direct investments as well as the investments with First Reserve.

In terms of liquidity we’ve again demonstrated our ability to mis-time, inappropriately time, the equity markets in something way less than perfection. We purchased 3.9 million shares of our stock during this period at an average price of modestly over $30.00 and during the quarter, in addition to all this week, sold a put on 1 billion shares of $25.00 and selected a $2.50 premium, roughly. What this likely means is we’ll buy the stock at a net price of $22.50, but the way it will be reflected accounting-wise is the price of the stock at the time of the maturity of the put will be considered the purchase price, and the difference will go through our P&L statement.

Let me now just quickly turn to the units. ND USA is the first one you have the detail statistics in your attached notes. This unit is performing significantly better than we expected and although as I said I can't predict with any precision when the low gas prices will improve, as I’ve said before and I'll say again this morning, I do think they will.

What I do know is this business, our business, is better positioned than it ever has been to weather any downturn. Currently 274 rigs are operating which is 11 rigs higher than last quarter’s record-tying number. The rig count has potentially been at this level for the month of October and even though we are beginning to see competitors rigs back, we haven't had any or at least very many yet. We are prepared, however, as we enter 2009 to see a drop in rig count, however we don't expect it to be more than 40 rigs for us.

If we assume this level of decline -- and everything is a probability -- I think that is a significant probability of what's going to happen, although it could be better and it could be worse. The impact of this on our results will not be as great as what happened in 2007 because most of the rigs that will be impacted are those that are less capable and generating lower margins. Any negative impact of any rig loss or price impact on non- new build rigs will be offset by the incremental deployment of rigs later in the year.

The current margins on those rigs both because of better execution and more value added on the rig, we’ll end up with probably almost twice the margin that we have on our older rigs. Even more importantly from our viewpoint, about 49% to 50% of the 2009 projected income in the lower 48 is already covered by take or pay contracts with creditworthy customers and this is true even if not one single rig is rolled over one month and I guarantee you this is tempting as we speak.

I’ll preempt a question that’s going to come up, are we interested in volume or pricing? We’re certainly interested in both, but we take this opportunity to assure our competitors and more importantly our customers that we will help them be competitive as the market dictates.

During the quarter we received 11 new build commitments and I am particularly pleased at two tranches of these. One is for a major customer for use in a high profile project in the Oklahoma, Louisiana, Texas region. These rigs were basically awarded based on our performance record in a warm, sunny area which will give you a clue as to who the competitor and customers were. In this particular award, the last time contracts were awarded we essentially got nothing and we ended up with a handful of rigs. Those rigs performed so well compared to our competitors that we got essentially all of the new rig awards. I think there are one or two examples beyond that but I think that's kind of an example that's illustrative of the turnaround in quality and performance of our domestic rigs.

Internationally we did significantly better in this unit in the third quarter than we thought we would do when we pre-announced. When we pre-announced we thought we had hits on the mark-to-market of our H&H stock and also on the hurricane and also on our tax rate. Those all occurred. All the units did better, including international, and I guess we were hyper-conservative in that case, but we will do better. We did better. We’ll do better for this year.

We did $332 million last year in operating income. We will be over $100 million more than that this year; my guess is about 420. I’ll tell you now for next year we will do probably more than $100 million more than we do this year.

There are rigs commencing, a number of rigs in the fourth quarter: Russia, Romania, South America and we have an interesting offshore project in the Congo. This is a Murphy rig. This is a rig where we have a unique application of putting a conventional rig, more or less like a platform rig, adapted to a tanker with a hole in it so the tanker can drill and store.

If this works out there will be lots of application for it but this is not only a decent contract but it's also a measure of the innovation that we are capable of doing. We also anticipate the 12 rigs to deploy in the first quarter of next year, half of which, frankly, had been scheduled for the fourth quarter this year. Six of these rigs are scheduled for Russia, four will go to Mexico, one to Kuwait and one for Argentina.

While I told you that we are expecting a substantial increase for next year which will represent at least a 25% increase in operating income, I would say we are tempering our optimism, our forecast somewhat and I think that's to be fairer to our business unit.

Our standards are still the same, so our internal forecast are going to reflect what we expect to be done with essentially 99-plus performance. But the real world is such that for example Rig 66, this was our first really big jack-up and we deployed it in Saudi Arabia and frankly it was the right thing, we had downtime which we shouldn't have. But frankly we haven't had a ton of experience in that and I don’t like this as a standard but if you compare our performance in Saudi with that rig compared to almost all of our competitors, we did better than the average. The one competitor that did better consistently is the one that gets zero credit, Ensco. None of the other guys did as well as we did on that rig, which was below our standards, which we’ll increase.

Similarly in Russia, everybody's been delayed in Russia. Some of our competitors who have promised two or three times as much they also have been delayed. Anyway, the outlook is really good. We have done really good, we will do really good and we won't again have an issue of expectations exceeding what we deliver.

Nabors Well Servicing is doing better. We've got new management in the business. We are looking at our investments more carefully, utilization of our assets more carefully and things are improving. A lot of this, for example in California is largely oil driven and it's also subject to rig supply limitations because of the emissions issues in California. Fortunately, we have a real good position there, it's about a third of our activities and about half our profits and I think we are doing well there including well with really the important customers there. The rest of the market I think will improve generally, but a lot of it is gas driven and I expect that we'll have less than ideal sledding there as well. But in any event, I think we'll do near as well in 2008 as we did last year, better than we had previously indicated and I think the future outlook is solid.

Nabors Offshore, this unit is doing very well, although it's small and achieving a small sequential increase to $18.5 million in the quarter even with two back-to-back hurricanes dampening our quarterly results. Our rig count increased, as you will see in the charts, Gustav caused significant damage to Rig 100 which we already talked about on our pre-announcement, and the strength is partly related to the fact that much of the work in the Gulf that we are doing is oil-related resin gas.

Our problem right now is we have more opportunities for capital expenditures that have good returns but not necessarily 100% assured full payout return. So we are contemplating how we do this in the light of on the one hand meeting the opportunities with customers and on the other hand not spending ourselves beyond where we could and we should.

Alaska is another one of the relatively small stories but a really good story. Last year we did $37 million in operating income. This is just from the drill. And this year I think we'll do 20,000 more than that which is a pretty good dollar increase and a pretty good percentage increase. Next year I can tell you that the dollar increase is going to be bigger, quite a bit bigger, and the percentage increase will be bigger. This market has really a long-term outlook. I think the contract is going to be long-term and they are not likely to be impacted in a major way by capital market constraints.

We've had a management change there as a lot of you guys know Dennis Smith is now not only doing his investor relations job but he is running Alaska. Since he's moved to Alaska we've gone up a tremendous percentage in our operating results in Alaska. We have dropped down an even greater percentage in our stock performance. So Denny’s future is being discussed.

Nabors Canada, Canada experienced a sequential increase of nearly $28 million but that's over the worst quarter we ever had. The near-term outlook is relatively good, although winter looks pretty good. We are just commencing with the drilling in the Montney and Horn River shales in British Columbia. This is just a beginning of what's going to be major activity, including not only the gas sales but the Bakken shale.

Even in this pretty poor outlook we got two new builder [inaudible] in Canada and we have prospects for four to six more. We have our own operation, which I'll discuss later in the Bakken through the Horn River shale, which gives us a real edge on knowledge. But this operation, I think, will do worse than last year but not as bad as we had originally thought and will improve in 2009, although not as much as we had thought it could.

Our other operating segments are all doing pretty well and I won't go into those but technology is really good and is not only making money on it's own but enhancing the value of our drilling operations in terms of technical acceptance on the part of the customers.

Our Alaskan joint ventures are profitable but at their seasonal lows and our Canadian non-rig entities reported profitability. So that operation is generally pretty good and last year we did about $35 million operating income and we will not quite double it but we'll do north of $60 million this year in operating.

Let me spend some time with the oil and gas operations apart from the liquidity aspects of this operation. We had an excellent quarter. The quarter was augmented frankly by non-cash hedging gains. I didn’t like them when they were against us. I’m not in love them when they’re in our favor, but they’re in there now. We expect this operation to definitely increase in contribution through next year as production levels increase, and a lot of this stuff is hedged -- not at $13 -- but hedged to ensure pretty decent profits.

For mid-year, roughly by mid-year we will have a little more than a couple dozen Nabors oil rigs working in our E&P operation and this does three things. Firstly, we want to make money in the E&P regardless of the rig. Secondly, we want to make [inaudible] rig operations regardless of the E&P profits. Third, there is a significant percentages between them because number one we’ve learned a little bit, or more than a little bit, we have significant input on a lot of operations from our relationship with First Reserve and some of these joint ventures.

But more particularly when we are drilling in an area, we know what the customer needs and wants better than if we weren't so we have some pretty good operations people so we can talk to a customer for example in Horn River about the 12-month operation and how we can do it with the facilities we have, with helicopters we’ve got using affiliates and how we can operate 12 months a year and hopefully come into plays with much larger acreage positions because they will at least look at what we’re doing if we do it well and we might get a [inaudible] Net-net this operation, there are two things we can say about it. One it’s good. Two, we have zero credit any which way on our balance sheet or income statement for it and it’s serving us pretty well.

Let me talk a little bit about the convertible. We have this $2.75 billion convertible which accounts for that change, the way we account for it next year. In essence they’re going to separate the interest rate components from the optionality component and we’re going to get hit with a non-cash charge on the income part of it. I guess the other part goes directly to the net worth, but in any event, we’re going to have the paper loss and non cash loss of around $25 million.

And not only that, but on top of this, the FASB rules require us to restate the past couple of years for that, so since the capitalists caused us to do a restatement, I think we’re going to try to clawback the fees.

Anyway, let me just close quickly. I believe that the long-term challenges with the world’s oil fields and eventually even with North American and world gas give us a strong outlook for our business and our ability to perform in that environment.

Even given the short term people say volatile, but I will tell you, but let me tell you they are lousy. Volatile is the subject of lousy prices. Whatever the extent of the current demand diminution is, I think we have three things working for us. One is the decline rates for these oil and gas verticals. The other one is the supply side. We have population and growing worldwide GNP particularly in developing countries working on the oil side and that’s an awful lot of money that the demand for natural gas in the United States is going to increase whether it is because we use more gas in transportation as some of our good friends have been touting on TV, or whether on the next President enacts a carbon tax, something is going to happen to make the economics more reflective of what the reality is in terms of those BTU values.

If we continue to position ourselves well then I think we’ll do okay regardless of market conditions and I think we’re prepared to relatively comfortably -- not painlessly, but relatively comfortably -- endure whatever the market shows us.

That concludes my prepared comments.

Dennis Smith

Operator, we’re ready to start the Q&A section.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Douglas Becker – Banc of America Securities.

Douglas Becker - Banc of America Securities

Gene, I just want to get a little more color on that 40 rig decline you were talking about for Nabors.

Eugene Isenberg

I don’t know if it’ll be. I’m just telling you that a number of people are suggesting and the price of gas suggest that, I guess, that the rig counts particularly gas in North America won’t be as robust as we previously projected or even as robust as what we are doing now.

So we’re prepared for the possibility of our share of the drop to be no more than 40 or 50 rigs. And that’s a probability, that’s not a certainty. That implies an industry drop of say 300 rigs, or 300 plus rigs. I’m saying that we’re prepared to cope with that because we think that might happen. Our E&P guy doesn’t think it is going to happen.

Douglas Becker – Banc of America Securities

Fair enough, but as we sit here today it doesn’t sound like you’re seeing any of even your legacy rigs being laid down.

Eugene Isenberg

Well we laid down a significant number of legacy rigs already. Joe is checking -- a couple dozen-ish. How many are you thinking, 18 now out of the marketing category. Eighteen?

Joe Hudson

It’s either 16 or 17.

Eugene Isenberg

Okay we have 16 or 17 rigs that are inventoried as marketed rigs that we are going to take out of the marketing category. We will continue to cannibalize them and scrap them. There are cases, there are a few cases so far where a good customer has come to us and said your competitor is doing this or that or the other thing. We’re never the bad guy. We’re always the good guy. You know there have been price adjustments that have been, so far, very modestly downward and so far a very few cases. But, you know, it’s silly to think that isn’t a significant possibility. No certainty, I just picked a number to say that I think won’t be worse than that, but it could be worse and it could be not as bad.

Douglas Becker – Banc of America Securities

That’s helpful. On the new builds, are the majority going to the U.S. or International of this latest round that you announced?

Joe Hudson

The 11 is all U.S.

Eugene Isenberg

Yes, we have 11 in the U.S. We have a couple in Canada, but more in Canada, and we have prospects. But what we talked about is mostly U.S., which is especially gratifying.

Douglas Becker – Banc of America Securities

Now, is there still interest even in the current environment for U.S. new builds?

Eugene Isenberg

Yes. The point we made many times in the past, if you have a build for purpose rig that does what the operator wants it to do, we’ve demonstrated we can do that, i.e., with drilling quicker safely and moving quicker and also with the ability to have mobility on a pad, which even makes the drilling quicker and the moving even quicker. You can take some of those legacy rigs and put them in for zero and they won’t compete, unfortunately, including a few of our own.

Operator

And our next question comes from the line of Kurt Hallead – RBC Capital Markets.

Kurt Hallead – RBC Capital Markets

Eugene a question with respect to your exposure with to the shale plays in the U.S. How would you characterize that as a percent of your total working fleet right now? Can you give us some rough guesstimate on that?

Eugene Isenberg

I’m going to ask Joe Hudson to give me an estimate.

Joe Hudson

Okay, we currently about 25% or 30% of our rigs are in the shale.

Eugene Isenberg

And a big percentage of the new builds, of course.

Joe Hudson

Of the new builds, all of them are in the shale.

Kurt Hallead – RBC Capital Markets

25% to 30% of your total rig count and virtually all your new rigs?

Eugene Isenberg

He said 30% of the existing fleet is working in shales and essentially 100% of the new builds that haven’t’ been delivered are for the shale plays.

Kurt Hallead - RBC Capital Markets

Okay, and then how about your exposure in Canada to the shale play?

Eugene Isenberg

The exposure in Canada I think is just beginning to be in the shale plays. I don’t think it’s a real heavy [yet. First it is a much smaller operation in Canada, but maybe four or five, six rigs there in the shale plays, but I think that's going to be big time enhanced. As we told you, one of the very best run majors uses us exclusively in Canada and the U.S., so that’s a big sizable chunk of our business in Canada too. And they recently bought into the shale, so we don’t have any rigs working for them yet

Kurt Hallead - RBC Capital Markets

What do you think the risk is of potentially some of the Canadian-based drillers trying to increase their market share, whether for the new builds or existing rigs down here in the States if things soften up a bit?

Eugene Isenberg

I think we get competition from every place in the world. We get it from operators. I think some of the operators don’t have too much cash or the ability to finance. The guy who would buy rigs don’t have easy capital to finance rig acquisitions and people like the big majors generally don’t own rigs. But we have competition from operators, we have competition from newcomers, we have competition from established guys. The main competition doesn’t matter whether it’s from Canada or Chesapeake or somebody else.

Kurt Hallead - RBC Capital Markets

Do the economics right now continue to favor a build versus buy?

Eugene Isenberg

Build versus buy in terms of…

Kurt Hallead - RBC Capital Markets

Land rates in the US.

Eugene Isenberg

Yes, because what generally is available is not the state of the art rigs that are going to work three or four years from now, ten years from now; even now. So yes, I mean we have a strategy, right or wrong, reflecting that for some time now. That’s why we’ve been spending a lot on new builds and that’s why we haven’t done a bunch of acquisitions in drilling. In work over, unfortunately, the appetite just wasn’t there for the technology for a variety of reasons.

Operator

And our next question comes from the line Kevin Simpson with Miller, Tabak & Co.

Kevin Simpson - Miller, Tabak & Co

First I wanted just to confirm the legacy rigs that you lay down are rigs that have been down for awhile. So you’re not laying anything new down right now?

Eugene Isenberg

The 16, 17 and 18, yes and they’ve been partially cannibalized, probably, but that is not new right now. Not new. And we’re not cutting them up to help the industry reduce its supply. It’s just our own economics that it’s better to cut them up then try to fix them to work..

Kevin Simpson - Miller, Tabak & Co

But these are older rigs that haven’t worked for several years?

Eugene Isenberg

Yes.

Kevin Simpson - Miller, Tabak & Co

Second is Gene when do you expect to start generating cash? I’m assuming not in 4Q. But in you know, 1Q, 2Q?

Eugene Isenberg

You’re talking generating net cash?

Kevin Simpson - Miller, Tabak & Co

Yes, you know, or on the benefit of beginning to work down working capital and then reducing your CapEx. Is there a lead time here where you are worried you have already got commitments or is it going to be a while?

Eugene Isenberg

I think what we have an opportunity to do is whatever cash we can generate we can effectively use to buy debt at discount if we chose to. So we are prepared , liquidity doesn’t hurt because I think we have a big advantage now versus a lot of our competitors because while we’re cutting back on CapEx in a lot cases for is it’s a discretionary thing. I think for a number of our competitors, you know, some of our competitors I don’t see how they can finance two or three $80 million rigs, for example each. And I think well if that’s the factor and that’s to be the case we’ll try to use it to our advantage.

But generally I think we’ll cut back. We’ve had one pass and two passes and I guarantee you we’re going to have a couple three more passes of cutting back and we’re going to generate free cash flow because the returns that we can get from cash flow doing a number of things is pretty great. And we have a competitive edge and cash and increasing cash and that’s what we’re going to try to get.

Kevin Simpson - Miller, Tabak & Co

So, net liquidity then, so, you know, net debt or whatever. Would that start to fall in the first quarter?

Eugene Isenberg

Probably. I don’t know when it will break. It’ll fall next year. We have a debt payment next year anyway don’t we? It’ll fall, next year it will fall next year, by no less than 250 or 220. By no less than a couple, probably no less than $300 million maybe more.

Kevin Simpson - Miller, Tabak & Co

Okay, and then lastly the, are you going to raise your return criteria for new capital projects?

Eugene Isenberg

Yes, if these taxes go up quickly. This is a return of a certainty of the return. In other words if we have two prospects for a rig. And if we have one year for shore and it needs two and a half to three years for a payout we don’t have it. In the past, it gets the output looked was more likely than the, you know, significant possibility of getting 2nd and 3rd beginning with full payout. We would do it now. We have two like that we’d probably have to do with one.

Kevin Simpson - Miller, Tabak & Co

Okay, and then one?

Eugene Isenberg

It’s going to have the higher return and/or more certainty of a full payout.

Kevin Simpson - Miller, Tabak & Co

Okay and one last one for Joe, you’ve been through the reduction thing several times now. You should be pretty good at it, I guess. The customers, I mean…

Eugene Isenberg

They’re not going to get any better at it.

Kevin Simpson - Miller, Tabak & Co

Are they now, you know, I mean are you at a place yet where they still don’t, you know, know what they’re going to be doing next year, or are you beginning to get real signals that, you know, that you’re going to be losing –

Joe Hudson

The customer has the position where they don’t know what they’re doing this year or just getting negative signals –

Eugene Isenberg

We’re getting mixed signals. We’re seeing some majors that are looking at some distressed properties in areas that I think, again, as you mentioned earlier, we have a high percentage of the work that’s going to improve our market position. We have a few independent and the smaller companies that are stepping back; and that, I think, works great. We’re talking about we could see some things brewing from the first quarter.

But overall, I think people are being cautious, but we don’t see a wholesale bail out of the marketplace either. We feel very comfortable with what you’ve presented.

Eugene Isenberg

For example, if there had been rumors around then it’s the logical possibility that somebody will buy Chesapeake; and if it's two of the three main – the two likely majors to buy then we’re in great shape. Not that I wish Chesapeake to lose their independence, even though they have their own rig fleets.

Kevin Simpson – Miller Tabak & Co.

I just wanted to press it a little farther, Joe. In the normal progression, two months ago your customer base was figuring they were going to be adding rigs. They’re probably in their budget process now. I guess Gene’s 40 plus rigs downtime is a guesstimate is, I guess I assume that reflects your thinking. Do you think you’ll know how – is this one of these things where you’re going to have much better information in two months and enough to be able to get a good comfort level or are we going to just chase it down all year?

Joe Hudson

Yes, I – everyone, just like ourselves, they’re in the budget process. Our guys are in the offices today and have been trying to, like I say, going through their budgeting process. They’re not confirmed to what monies they have and so it’s going to be a month, probably 45 days before we know the full extent of any budget reduction that will affect us. But in the interim, all we see, any real down time at this point in time is from the smaller fleets.

Operator

And our next question comes from the Arun Jayaram – Credit Suisse.

Arun Jayaram – Credit Suisse

Do you know, in order to be a comment on the new build execution you touched upon just a little bit, in particular, I just wanted to see how the fully loaded costs are doing today versus earlier in the process?

Eugene Isenberg

They’re higher than earlier in the process, but CEO of one of the majors pointed out in our conference call yesterday that steel prices are down 20%, cement prices go down significantly, so you guys I’m talking to our guys as well as to the audience, this B.S. about continually rising prices isn’t always true.

And for example, fuel price, raw material is down 20% and that’s true for casing and tubing and probably the fact that there’s been a shortage of casing and tubing and that’s probably true for building cost. Even with the national oil refineries, like I just said, anyway net-net they're still higher.

Arun Jayaram – Credit Suisse

It’s still – what does a fully loaded cost today for a pace rig with type and collars?

Eugene Isenberg

I don’t know it’s a little bit from price carry, but under $20 million.

Arun Jayaram – Credit Suisse

$120 million?

Eugene Isenberg

Under $20 million.

Arun Jayaram – Credit Suisse

Under $20 million, okay. Second, Gene, I was wondering if you could comment on what you’re seeing in the credit market as an investment grade company and perhaps compare this to stuff you’ve seen in history.

Eugene Isenberg

All I know is we got a quote on our last six and 6.15 issue and was yielding over nine is it?

Joe Hudson

9.3.

Eugene Isenberg

9.3, so our financial guys did a good time on that to. The other thing is LIBOR is down again today, did you say that? Down 20 days at this point, so LIBOR makes the experts say that’s an indication of things loosening a bit, but it went from 475 to I think, last Wednesday, to what was it, 380 or something now, $380 and small change. So it’s loosening up but fortunately, we’re not in the ability – we’re not in any need to finance.

I’ve been telling you forever that we like to borrow when you can borrow and we like to spend it when it's good to spend it. Those times aren’t identical and we would like to have the money before we've got to spend it. So, so far that’s worked out and –

Arun Jayaram – Credit Suisse

Just to be clear, Gene, in terms of the balance sheet, the 2.75 billion of converts, those are not due until 2011, is that correct?

Eugene Isenberg

That’s correct.

Arun Jayaram – Credit Suisse

So those can’t be put back to you earlier than 2011?

Eugene Isenberg

And probably the stock will be $45 or $60 and it will get converted. Is that the price roughly?

Joe Hudson

45 to 50.

Eugene Isenberg

That’s not a projection.

Arun Jayaram – Credit Suisse

And my last question, Gene, was Trans Ocean recently announced their intention to re-domesticate their headquarters to Switzerland from the Caymans and citing more favorable tax treaties, etc. I was wondering if you’ve thought about that or give us some comments related to neighbors?

Eugene Isenberg

Yes, I think we have a better base situation than they did and in terms of the treaties where we’re – that are relevant to our operation compared to what they had in the Caymans. And we have guys who look at it, we have professional advisors who look at it on a continual basis. So far I don’t see that we need to do what they did for the regions they did, yes.

Operator

Our next question comes from the line of Daniel Boyd – Goldman Sachs.

Daniel Boyd – Goldman Sachs

Question on your – going back to your projection for a 40% to 50% decline in recount of your rigs, assuming an overall –

Eugene Isenberg

There are 40 or 50 rigs, not percent.

Daniel Boyd – Goldman Sachs

Yes, I’m sorry, yes, for 40 or 50 rigs on an overall rig count decline of something like 350. So that kind of assumes that your markets here would stay pretty much the same as it is today. But given the fact that there are probably 100 or so new builds that could enter the market between now and that decline mid-year, is it possible that you could actually see your market share decline for a while until your new builds start to be delivered in the second half of ’09?

Eugene Isenberg

Well, most of the new builds, to my knowledge, are people with actual contracts for them and in our case, we have contracts and almost invariably we have a bridge rig in there that’s going to be there at least until the new rig arrives. So there may be a number of rigs, but I would be surprised if there are a hell of lot of speculative rigs out there.

Daniel Boyd – Goldman Sachs

You've got to agree with that. And then there’s one on pricing, it looks like new bill pricing and fit for purpose pricing is basically back up to the peak that we saw in ’06 of $26,000, $27,000 a day. When the market softened in a flat rig count environment, I think those prices fell about 10% 15% or so, on average, at least those rigs exposed to the stock market. In a declining rig count environment, is there any reason we to think that the decline would be less than that this time?

Eugene Isenberg

I don’t know. Everything has some probability associated with it and 10% or 15% on average the $4,000 plus max.

Joe Hudson

Yeah, that would be my opinion.

Eugene Isenberg

So, yes, is there a significant probability that if those numbers of rigs, the stock goes down, the day rates of the non-state-of-the-art rigs will be about $3,000 or $4,000, sure.

Daniel Boyd – Goldman Sachs

You think they’ll – for the state-of-the-art rigs, even the ones rolling the spot will still maintain sort of their current level?

Eugene Isenberg

Yes. To finish up on the last question, not many of them roll for spots. Real simple.

Operator

Our next question comes from the line of Roger Reid - Natixis Bleichroeder

Roger Reid - Natixis Bleichroeder

I guess kind of following up on the overall outlook in well-services didn’t really get talked about all, just kind of wondering what you’re seeing in the U.S. for that, is that both a pricing and a utilization contraction that we’re going to be looking at here?

Eugene Isenberg

I think that there really a little bit of a split market as far as we're concerned, maybe they were organized that way, but nevertheless, I stated pretty firmly that way California looks relatively strong and that’s – most of that is oil-related. And also the supply in California has been inhibited by extra exhaust and engine standards de facto, so we've had to take a dozen rigs from the west, from the east and move – or from Texas and move them to California.

And also the structure of things, in California we talked to the pretty senior management and the rest of the country generally. It’s in the production department and it’s pretty localized. So if you have an organized supply chain that has its pros and cons, the cons are pretty obvious. The pros I will just, I may be speaking for the whole company and we don’t have to worry about whether our sales guy is coaching the little league team in wherever.

But so as I say, the outlook to me is going to – likely to stay strong in California and it’s likely to be decent every place else, not as strong. I think we have some of the guys who were causing the most commotion by coming – moving into the market. Now they're public companies. They’re worried about profitability. They’re worried about financing. There are a whole bunch of considerations that are going to inhibit competition.

On the other hand, it’s conceivable that there’s going to be reduction in overall rig count particularly east of California. So what we’re saying is we’re seeing improvement. I think I also said there seems to be no appetite to pay a nickel for technology in that business, and we’re cutting back on CapEx and we’re improving.

Now how fast we’ll get back to our peak in 2006, I can’t tell you. We used to think it’d be 2010, now I – all I can tell you is we’re doing better than we thought we would do and in my view we’ll do better next year than we did this year.

Roger Reid - Natixis Bleichroeder

And then as you look at the international segment you talked about on the intro a number of places you’re looking to put new rigs, but if you look at the growth that you expect to see 2009 and presumably in 2010 there, do you look at it as a mix issue? Is it a volume growth issue with some pricing and the margin improvements?

Historically, I think about you’re talking about a jack up rig being moved here, coming out of the yard there and having an outsize impact on the cash margins that that segment reports, is there anything like that over the next several quarters, or is it more just general?

Eugene Isenberg

There is still some pure price that’s still incremental upgrades to go from oil to gas with a very high incremental margin. But I think proportionately down the road it’s more redeployment of existing rigs than new rigs; then we’ve more or less caught up with much of the pricing. The pricing isn’t as big as it was a year ago or two years ago.

Operator

Our next question comes from the line of Geoff Kieburtz – Weeden & Co.

Geoff Kieburtz – Weeden & Co.

CapEx, could you elaborate a little bit on your comment in the terms of cutting CapEx, should we figure the –

Eugene Isenberg

Well, we have two or three or four categories of CapEx, we have beta categories where we have a three year take or pay or four year take or pay contract that pays out the deal with very little question. The only question is our is our execution and those kind of things generally represent a return on several capitals for you in the high teens. And we’ll do that probably – well, that’ll have the highest priority on a capital.

And in my 20 years here, plus here, there’s never been a time that we didn’t have money for those kind of projects, and I don’t anticipate that we will. Hence, there are the projects where we don’t have the whole payout, but we have an additional contract and a significant probability of getting it. And those we’re going to not do as readily as what we used to, but we will do some of them.

Then there are deals like for example in work over in our particular offshore capacity platform rigs where it is not susceptible to term contracts and we’re cutting the sugar out of those there. Then we have maintenance CapEx and maintenance flat safety we've got to do and we will.

But the definition gets a little tight too if you might like pipe handling and it isn’t crucial and you’re not going to get paid for it, you'd like it, but you’re not going to get it this time. That’s that sort of thing, so it’s just a higher prospect because we’ve gone from a transformational strategy in the company of going from buying existing rigs to sort of upgrading our fleet.

And now we’re saying okay, all the good stuff we’re doing to upgrade we got to make sure we get paid, otherwise we don’t have enough money to do the things that a super crew – I think we will have, but we got to be prepared to – the cash flow is going to be diminished.

I don’t know if that explains it, but we still work through it every day, every [AFE] it comes up as an issue; and every word from a big customer can influence that on a daily basis.

Geoff Kieburtz -- Weeden & Co.

What would you estimate the maintenance capital requirement is on an annual basis today?

Eugene Isenberg

I would say somewhat around or less than depreciation, which is what, 600 this year?

Geoff Kieburtz -- Weeden & Co.

And then with the 36 new builds that you’ve already committed to, did that – be around $700 million in total?

Eugene Isenberg

If I am consistent with my presentation today, I would say no more than $20 – but I mean if it’s – all of those are like 1,500, 2,000 properties per 1,000, correct? Okay, yes, I would say no more than that.

Geoff Kieburtz -- Weeden & Co.

You kind of have a base commitment at this point of around $1.3 billion in CapEx working over the next 12 months?

Eugene Isenberg

You’re probably right. And also some of that you have progress payments on it; some of them won’t be delivered until 2010. That may be what you just said over 15 months or 16 months.

Geoff Kieburtz -- Weeden & Co.

Fair enough. The put option that you mentioned, Gene, what’s the expiration on that?

Eugene Isenberg

Payment required some time in December, do you have the date, anybody? Whatever the December settlement is.

Geoff Kieburtz -- Weeden & Co.

And a question for Joe, I don’t know if you can answer this, but as you’re talking to the customers in the lower 48 market, do you get a sense that they’re more concerned and focused on the ramifications of lower gas prices or the credit market, or are there any way to generalize it?

Joe Hudson

We don’t think they have it figured out either. No, it’s – again, most operators are obviously looking at the prospects they have to drill and it obviously comes do they have the money? And for the smaller operator he’s got basically credit issues that the larger operator that has a continuing cash flow to drill. So it’s really a mix. But the smaller independent obviously has more of a difficult time in this process.

Eugene Isenberg

And even – somebody like Devon, they don’t have to worry about cash –

Joe Hudson

No.

Eugene Isenberg

All the majors have plenty of cash.

Joe Hudson

Correct. Small one is trying to buy between his credit position, does he have the cash flow and what his acreage position –

Eugene Isenberg

I think by reading the newspaper you guys know which guys are relatively constrained with capital.

Geoff Kieburtz -- Weeden & Co.

You did mention earlier that if some instances in which larger companies are stepping up and looking at distressed properties, is this –

Eugene Isenberg

The seller thinks they're distressed.

Geoff Kieburtz -- Weeden & Co.

Yes, well, exactly. But my question is do you think this is an environment over the 12 months where we could see significant property transactions that might additionally impact the drilling programs until deals are completed?

Eugene Isenberg

Geoff, nobody knows, but I think if you ask me my personal opinion, the logic is such that if somebody with money pays $30,000 an acre for Haynesville, or significant number for Fayetteville then they could buy the whole acreage for a fraction of that now. It’s not impossible that that’ll happen. And I think it’s likely, depending on who sells what to whom, that we could end up with the best position. Frankly, I think that’s likely, if not certain, likely.

Also, I don’t think guys are going to spend these kind of dollars and fuss around about converting them to cash.

Geoff Kieburtz -- Weeden & Co.

And I guess last question, you have kind of articulated a view on the international markets that's similar to others that we have heard in the last week or so. And I don’t know that we can find any really relevant historical analogue here. But if we go back to late nineties when you had a macro economic fear and falling oil prices and so on the international markets didn’t fall as much as North America, but we did see a pretty significant cut back. Why are you so confident that the international is going to hold up in this environment?

Eugene Isenberg

My opinion is gosh, I don’t know, but I’m pretty sure nobody else knows. I think there probably will be less emphasis on creating a surplus and there might be a couple of million barrels a day surplus that wasn’t anticipated because of the economic slowdown.

But when I look at market buy markets I can’t see – the areas that are strong in production have to do more. You know, that’s pretty fair, it's in their interests. At $70 which I think is, the average price I personally think it’s something well above $70. I think my view is, I don’t know whatever it’s worth I think $70 – $90 is more likely than $70. How these guys make money so far on that stuff.

I think the Russians clearly need to increase production. I think Bolivians, everybody has spent a decent amount of money to get in there, they want to produce. South Africa and that situation and Venezuela is certainly in that situation; Iraq's in that situation, and every single major will do what they can. I mean you would think off hand that the tar sands are going to be impacted.

But I’m not even sure that’s likely to happen. For one thing I think the reduction in construction costs and cement and steel kind of mitigates the two to three fold increase in that. Anyway, I just think it’s going to stay pretty decent. So far the level of increase and the demand confirms that.

Operator I think since we’re past our time limit, we’ll wrap up and terminate the call at this point in time.

Operator

Ladies and gentlemen this concludes the Nabors Industry’s Limited third quarter 2008 earnings conference call, thank you for your participation.

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