Nabors Industries Limited Q1 2009 Earnings Call Transcript

Apr.22.09 | About: Nabors Industries (NBR)

Nabors Industries Limited (NYSE:NBR)

Q1 2009 Earnings Call

April 22, 2009 11:00 am ET

Executives

Gene Isenberg - Chairman and Chief Executive Officer

Tony Petrello – President and Chief Operating Officer

Laura Doerre – General Counsel

Clark Woods – Chief Accounting Officer

Ziggy Meisner - President

Dennis Smith - Director of Corporate Development

Analysts

Ole Slorer - Morgan Stanley

Marshall Adkins - Raymond James

Kevin Simpson - Miller Tabak

Roger Read - Natixis

Dan Boyd - Goldman Sachs

Arun Jayaram - Credit Suisse

Dan Pickering - Tudor Pickering Holt

Angie Sedita - Macquarie Securities

Operator

Thank you for standing by ladies and gentlemen and welcome to the Nabors Industries Limited first quarter 2009 earnings conference call on the 22 April 2009. Throughout today’s presentation all participants will be in a listen only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Dennis Smith.

Dennis Smith

Good morning everyone and thank you for joining our call this morning. We will stick to the customary format and limit the call to an hour or less depending upon the question flow.

In addition to Gene and myself here we have the usual participants Tony Petrello, our President and Chief Operating Officer; Laura Doerre, our General Counsel; Clark Woods with us today who’s our Chief Accounting Officer, and the various presidents of our business units today.

We have posted some slides on the website, you can find them under www.nabors.com under Investor Relations or under investor information and under that, under events calendar, as they are in a pdf format if you want to look at those for reference.

I want to remind everybody that, well obviously we are going to be talking about what happened in the quarter but more importantly how we see the future shaping up and such those are forward-looking statements and certainly subject to changes and risks and uncertainties as we disclose in our filings and encourage you to review those.

And with that I will get started and turn things over to Gene.

Gene Isenberg

Thanks and welcome to the conference call for the first quarter of 2009. I want to thank everybody for participating and I will be any suggestion that you might want to look at the tables and slides that we present it as we chat.

The results in my view were very respectable in the first quarter and better than expected generally. However, there was a fair amount of unavoidable noise in the quarter and I would like to go through the noises, the pluses and minuses of these noises and hopefully want to finish the whole, reach the conclusion that are real operational results. We are pretty close to the $0.65 per share which we are chatting about, which excludes the non-cash pre-tax ceiling test charges associated mostly with our joint venture domestic E&P operations which amounted to $75 million.

Firstly on the negative side, the quarters results were represented an approximately $25 million hit and a non-cash interest charge associated with the implementation of the accounting rules which require the convertible to be separated into a true market interest rate and an optionality. So this, instead of having a 0.94 interest charge we have roughly a 6% charge. You all knew about this for a while.

We also incurred a glitch in accounting which may or may not be a little less than this but we’re, our feel now is it might be as much as $16 million. This was the payroll glitch which was collected in this quarter which represented charges that appropriately should have been in another quarter. So, these two items amounted to $38 million and prices during the quarter which we feel were not appropriately allocate able to those, in that quarter.

Potentially offsetting this were two positive items, which was essentially non-recurring. First was the, essentially a $16 million gain on the debt repurchases we accomplished during the year. We’ll chat about this later and we had approximately $26 million of income associated with prepaid cancelled domestic rigs. So that’s a little bit of a complicated situation which we’ll discuss later, but net-net when you take the positives and negatives they work out within a penny, so I think this yields the conclusion that our 65% reported is about the so called clean number.

Basic operating results for the quarter were buoyed by our international operations and by term contracts, but most of our so many based on our US planned rigs, particularly new builds. Once again, validating the investments we made in upgrading our fleet. We expect the second quarter to be down seasonally with a modest seasonal rebound in the third quarter, and generally we see a pretty stable second quarter. Our long-term outlook has remained bullish which we’ll chat about further as we go.

Turning to the Nabors Drilling USA, this unit was significantly impacted by the rapid and sharp decline in industry rig counts, which was associated with the rapid and sharp decline in commodity prices, particularly natural gas. However, we feel better than the industry during this time and we should continue to do so for the balance of the year and beyond. The performance can be attributed to the quality of our fleet and the number of term contracts in effect for both on new C, AC rigs and our premium SCR rigs.

For the quarter we averaged 193 rigs employed with an average margin of 11,200 a day. The average margin was 9,700 and a small change per day if you adjust for the previously mentioned extra P&L impact on the quarter associated with cancelled contract with the income, with normal income in subsequent quarters. In this case total amount book to P&L was $26 million excluding the $5.5 million that we would have had in the quarter anyway.

Our new rigs continue to perform exceptionally well as evidenced by the drilling records. We are setting particularly in the shales. This has resulted in improved market share and just as important here namely the shale, in particular the Haynesville Shale. We currently have more than 30 rigs working, which is more than three times our major domestic competitors H&P or Patterson-UTI.

We have also during this period increased our market share with the major operators. So I would say including and maybe particularly BP and places like the Woodward, Haynesville then among certain areas. These factors will be increasingly important as we emerge from this downturn.

We have seen a number of indications that the client in our rig count is beginning to bottom out. We’re not certain, but that’s the way it looks like at the moment and we expect our, this week actually we have got an unusual phenomenon where we’re actually going to have an increase in our rig count.

The number of new rigs signed up compared to the rigs going down is more, coming up than going down, which we haven’t seen for quite a while. I think what we’re seeing even in that case and what we’ll see for the rest of the year is the increasing stratification in industry rigs with the efficient rigs returning to work sooner and at a much higher day rate and much higher margins than the less capable older rigs.

International, our international operations improved materially year-over-year, although our results were somewhat negatively impacted by a number of projects that we postponed, combined by a significant weakness in Argentina and Columbia. However, our largest positions internationally, in Saudi Arabia and Mexico, are proving to be very resilient and less vulnerable to the softness that seems to be plaguing other markets.

In Saudi for example approximately 30 total rigs have been or will be released countrywide. The only loss as to Nabors, were three small joint venture rigs and probably one deep rig. The big deep rig has already been redeployed in the region. In appears likely we would keep all nine Algerian rigs operating by year and we are adding incremental rigs in other areas.

We also deployed a new platform drilling rig on a floating drilling and production storage and offload vessel which is the kind of the first application of this kind with Murphy Oil in Congo. We expect decent margins on this over the next approximately a year or a little longer and there might be broader applications for this kind of technology events.

Net-net bottom-line we expect operating income in international to increase by more than 20% year-over-year as higher margins and deployments more than offset the loss of rig activity and aforementioned marginal areas.

In brief we have 87% of 2009’s anticipated gross margins in this operation subject to firm contracts and I could go through a litany of why we have a big competitive advantage. I would say the bottom line is that we are projecting committing to close to $0.5 billion in operating income this year with $700 million EBITDA. I challenge you guys to tell us which of our so far domestic peers have anything remotely like that.

Picture is not so great in Canada. The outlook in this unit continues to weaken. And this year we could eventually be uncomfortably close to break even. This is an industry situation I think we’re doing a little better than the industry. Despite this weak near-term outlook Nabors is positioned I think again to benefit disproportionately. We remain the driller choice in the shales particularly in the Horn River and Montney where we enjoyed probably 50% of the still small beginning market but this is going to get bigger.

We are also recognized as the leader in pad drilling which is increasingly important in Canada. We also have increasing relationships with important customers. Probably the most significant of which is Shell, as our position with Shell is very good, essentially all their rigs and they are entering the more ambitious joint program.

We also have interesting new applications that we are working with. We have a Reverse Circulation Center Discharge rig which we’re experimenting with and which might have applications down the road. That will absolutely, however take a higher than 350 gas price to work.

Nabors Well Servicing, down as we had forecast in last quarter’s conference call. The biggest impact is rig powers going down dramatically year-over-year. Recently pricing has continued to deteriorate, particularly in Western South Texas. The impact on our Well Service business is substantial but it’s partially mitigated by a good performance or relatively decent performance in other areas particularly, California.

We’re taking significant steps to further reduce costs which incidentally we’re doing in every division, but we now expect this year to be approximately one-third of the 2008 levels, still positive.

Nabors Offshore. It’s a relatively small but relatively bright spot. This business is supported by ongoing fully utilized and solid rates for our MASE and MODS platform drilling rig which have mostly, I guess, geared with oil and deep water projects.

In January, we deployed our newly constructed MODS 202 to a term contract, further augmenting this strong class of rigs, which I think will stay strong. The weakest and least visible least visible of this business continues to be our barge business and our workover jack-up business. Beyond that, we are also seeing really a historical weak utilization of our SuperSundowner class of rigs.

We expect utilization of these rigs to recover in the fourth quarter following the hurricane season. All-in-all, we expect results to be flat in 2008 which is a pretty good situation considering the outlook, and we think these high quality rigs, including the very high quality barge rigs will pay dividends in the future.

Other operating segments, this unit which includes Canrig and Alaska joint venture companies, Peak Oilfield et cetera had a super successful quarter, but the results for this year should be down probably around 40% in operating income, which still is better than I think the market has credited us with. Canrig’s down results is supposed to be mitigated somewhat by new product line offerings which is really getting a solid acceptance.

Oil and gas we’ve discussed a lot. This unit again was negatively impacted by previously mentioned ceiling test adjustment. This chart as you undoubtedly know by know is currently based on what the quarter ending NYMEX gas price was compared to what it was at the end of the previous quarter.

It’s almost $0.02 lower which resulted in this hit as you know. I pretty strongly feel that this gas price is not in a long term sustainable position. Again, on the oil and gas, when we take into account our hedges and even the futures curve, we’re in the block, not as much as we’d like to be, but we’re in the block and hopefully, from my view point, when the gas price increases, quickly accelerate the contribution and the value existing in these operations.

Our cash position is strong. We’re taking steps necessary to maintain a high degree of liquidity. In January, we issued one $1.125 billion in 10 year notes, and utilized a portion of the proceeds as well as excess cash flow from operations, repurchased $770 million of our convertible debentures due in May of 2011. The average price of this repurchase in the open market was approximately $0.86. We also repurchased almost $60 million of our debt due in August.

Assuming no debt repurchases this year, we’ll increase our cash flow between now and the end of the year, and we’ll end it with a pretty high cash position. The situation with respect to purchasing debt is a little complicated because we have unusual tax situations associated with the way we did the convertibles, so it is uncertain whether we can buy more debt back, but whether we buy it back or have cash available to redeem it, same difference. We’re in good shape vis-à-vis liquidity.

Our taxes will be lower. They are lower this year and they’ll be lower for the rest of the year. The good reason for the tax being lower is we’re increasing our international operation, which has a lower tax rate, but a not so great reason is that our US taxable income and our Canadian taxable income, which are the highest tax regimes, are going down absolutely and proportionally.

So, we will have a lower tax rate. It’s 21% this quarter. It could even be lower in subsequent quarters depending on how these relatively differential income tax rate business units make out.

The costs will come down and are coming down pretty dramatically in every part of the business, and I’ll save that for questions later, but the total aggregate reduction in cost, not only direct cost associated with reduced activity but the indirect cost, the GSA, and essentially, all costs are coming down.

I think in summary, there is really a paradigm shift in the way the future production of hydrocarbons from land is going to occur. The rigs that are required to efficiently -- particularly the shale’s and the growing importance of the shale’s are materially different from what has historically been the case.

The investments we’ve made over the last few years to upgrade our fleet and expand our market position gives me confidence that we’re going to be in great shape for the future. So, I look at this quarter as broader-risk quarter, the environment is terrible.

We’ve done a little better than we thought in the aggregate, a little worse in some of the areas, but to me the most important thing is, what’s happened in this quarter that gives us leading indications to what might happen in the future. I will repeat what I said earlier. International business is strong and growing, and you can compare that with anybody’s international business, and I think we compare not only well but best.

On the domestic front, I think if you believe as we do that the shale operations are indicative of kind of rigs you indeed in the future. The biggest quantitative rig user or the rig grower, the most important one in the Lower 48 is the Haynesville shale and we have pretty close to half rigs there, well over 40% and many more.

The only one that’s even close to us is Aubrey’s owned, company owned rigs, but compared to the normal comparison peer group, we have three-four times as many rigs as each of them. Similarly, in Canada I think Longridge it’s in an earlier stage, but the British Columbia shales are going to be indicative of kind of drilling that’s going to be taken in Canada, and we have an even greater position there.

So you look at those two things, how are our rigs performing, and that’s looks pretty good and pretty promising for post recession operations. Then you look at not what I say but what the customers are saying, how are we doing with the big customers on all these scores? We’re doing better than anybody else. I think we have with the big three majors, I think we already have a leading position and with all five of the majors as defined we’ll have more rigs than anybody else in the not-too-distant future.

So altogether I think we are in pretty good shape and I’ll also move into but you have heard me say this before, I don’t think the 350 natural gas prices longer-term equilibrium. With that I’ll finish now we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ole Slorer - Morgan Stanley.

Ole Slorer - Morgan Stanley

You mentioned that you saw some signs that we might be hitting a trough fare in the domestic rig count in the second quarter. I wonder whether you could share some of the data points some of the conversations you are having that might suggest that and also maybe a little bit you know the very kind of steep acceleration and a decline in the domestic rig count as of late, and whether you see a continued acceleration right into the trough or what do you think the trough will look like. Will it be an undershoot or will it be an ease out? What do you see there?

Gene Isenberg

I think we are methodically approaching it. I think we’re, you know, I don’t know you don’t know, nobody knows, but basically, the signs we see most of the customers or at least many of them have adapted sort of cut and slash approach.

The cash flow is going to be this, the budget has to go down by that and go cut the rigs. If you have to pay premiums to do it, do it and do it. So all of that was done let me say front-loaded. My vision is or my understanding is that that was kind of front-loaded by many if not most of our customers and therefore what’s happening is likely to be at a much slower decline rate than before.

Frankly, I think your analysis of the second derivative moving in a favorable direction is right on if you want to describe it that way. I mean, one week doesn’t make a future, but this is the first week we have ever had more rigs up and down. To elaborate on that a tiny bit the rates are lower, but there is distinct differential between the quality of the rigs, which we expect to be more pronounced in the future.

Ole Slorer - Morgan Stanley

Could you elaborate on that type of differentiation that you highlighted and what are you seeing amongst your various customers and the various types of…

Gene Isenberg

So far as I have said Ole I think they have been cutting everything regardless of in other words for most of these guys if you went from 25 to 20, it wouldn’t affect anything they are cutting, because they don’t want capital expenditures to go down. But I would say the ones that have picked up are decidedly lower and I won’t get into them. It is probably at least a $6,000 a day difference between quality rig and sort of a non-quality or an older rig.

Ole Slorer - Morgan Stanley

Any difference between some of the majors, Shell, BP and some of the smaller ones; and talk a little bit about how you are positioned there?

Gene Isenberg

Well Shell was initially they we’re going to pause during this year and accelerate pretty dramatically and this is Shell for example in Lower 48 and Canada. Then prices have got to the point where they have had to cut back this year. I still think the plans are to when things recover to grow.

Exxon, we frankly do very little work for although that situation will improve, but in the Lower 48 we have operations within in Alaska and offshore. BP to my knowledge they are drilling more or less, they are not cutting back as dramatically. They have been cutting back and when they are cutting back it’s not Nabors, it’s somebody else. Anadarko cut back pretty sharply.

Devon cut back, but I think those cut backs already have occurred with the big customers.

Ole Slorer - Morgan Stanley

Then the well-servicing side, I mean a little surprised of the weakness there, I mean that’s more than oil related market. Can you talk a little about what caused that?

Gene Isenberg

I agree with you. Roughly 70% of the work is oil related and it’s not good. The whole industry is bad though we’re contrary to where I think we are internationally and domestically. I think even in Canada I don’t think we’re doing better than the industry and we’ve got work to do to do that.

I think the good we’re doing is we’re cutting cost probably at least as aggressively in that business units and any others and we are blessed compared to other people with having a pretty good California position, which is better then most of that. Our biggest single position is California. That map is bigger than the others and the one and that statement is Oxy has cut back pretty dramatically.

Ole Slorer - Morgan Stanley

Gene on the balance sheet, I mean you are generating very healthy clip of free cash flow here at the trough and you are taking down debt. Is there a point now that you actually want to have some leverage into this trough and you could do something maybe on the corporate side? I mean, every single downturn you have always done something. So what’s in your personal list than we are at?

Gene Isenberg

I think we are getting to the point where we will probably look at that. You can send your bankers over.

Ole Slorer - Morgan Stanley

Well I am doing my best. I will talk to you soon.

Operator

Your next question comes from Marshall Adkins - Raymond James.

Marshall Adkins - Raymond James

I think one of the things we are all trying to get our arms around are the effect of the flow through these lumps on contracts and also the rigs that are getting paid and not really working. So trying to get to that answer, can you help? What are the leading edge margins doing today and where do you see kind of say a year from today. Let’s say the rig count stabilizes and what not. Where are margins a year from today and I am just talking U.S. now.

Gene Isenberg

Firstly, let me tell you I don’t know.

Marshall Adkins - Raymond James

None of us do.

Gene Isenberg

I don’t think anybody else does either but that’s okay. I think the number of really quality rigs is probably smaller than most people think. I think it’s arguably between the total rig count at the peak for example; we had 270 odd rigs working. We have added a bunch of new bills. Number one the rigs that didn’t work then for us or anybody else I don’t think they are ever going to work.

I think there were a bunch of rigs that were taken out of the weeds then and I bet they’ll never work either. So, my guess is that for the industry maybe 700 or 800 of the rigs are the kind of rigs that will be quality rigs. Danny just gave me a note to help me on this. Well the kind of quality rigs that, are likely to work, around half of them, a little less than half, but AC and the rest, really high quality SCR rigs.

We’ve done stuff with the SCR rigs with the K-box and stuff like that that kind of makes them look functional equivalent of an AC rig. Anyway, so the supply of rigs is going to be really smaller when things come back than most people think and I think therefore the rates on those. So the number of good rigs smaller.

The number of total rigs is going to be smaller, therefore I don’t know, but I think that’s going to impact what happens. You got to tell me what the gas price is going to be. Particularly, if we have a normalized gas price which I consider to be probably $0.06 or $0.07 I think the rates will be pretty decent.

Marshall Adkins - Raymond James

Well let me approach it, for rigs that you’re pricing, that are going out to work today and I must here’s your higher end stuff. Are the daily margins kind of in the 3,000 odd range or are they in the 6,000 odd range?

Gene Isenberg

Assuming no customers are listening, probably the latter for the new ones.

Marshall Adkins - Raymond James

The 6000 really?

Gene Isenberg

Maybe we wouldn’t say that but yes.

Marshall Adkins - Raymond James

Last question from me; you guys got a lot of benefit this quarter from lower tax rates, lower depreciation, SG&A you brought down nicely. Can you give us some guidance on those metrics going forward just so we can plug that into our models because you have some significant savings?

Gene Isenberg

Yes, you got to really project what’s going to happen. The high tax regimes are the U.S. and Canada. And the low tax regime is international. And if you’ve got to figure what’s going to be what in those places to come up with an answer, and my guess is that it’s going to be lower but not by a ton than it was for the quarter. For the quarter I think it was 21%.

Marshall Adkins - Raymond James

Well, that’s low enough. So do you think maybe that will hold to even as lower?

Gene Isenberg

I think it holds and it conceivably could work lower.

Marshall Adkins - Raymond James

So there is more benefits there…

Gene Isenberg

I want to put this in this way, 100% international would be lower.

Marshall Adkins - Raymond James

Okay and SG&A depreciation?

Gene Isenberg

SG&A is coming down across the board virtually without exceptions. For the people sitting in this room, no I’m kidding. That will come down. Depreciation will come down. We’ve spent more. The capital expenditures are coming down. I think this year we started at 1.7, I think we’ll end up at around 1, maybe less than that.

And next year we’ll be pretty focused to maintenance CapEx, although if somebody comes in with a project like the project we talked about after Congo that takes new capital for a good return, we’re ready and willing to be able to do it.

But in terms of the ordinary CapEx, number one, the maintenance CapEx is going to be lower because we have so many stacked rigs from which demand for those rigs is less than it would have been. Also frankly, you’re going to cannibalize some of the older rigs. We’re pressuring to reduce the CapEx unless it’s absolutely necessary.

Operator

Your next question comes from Kevin Simpson - Miller Tabak.

Kevin Simpson - Miller Tabak

To start off with an international question, your Saudi position look strong, but I wonder what kind of rollover risk you have, say, for next year. We believe you have decent number of contracts rolling over next year?

Gene Isenberg

Next year is ‘09 or ‘10 or both?

Kevin Simpson - Miller Tabak

2010.

Gene Isenberg

Yes. Why don’t you finish your question, I’ll let Ziggy answer it.

Kevin Simpson - Miller Tabak

And then the second question would be is, there have been talk of contracts for gas drilling there for large rigs for gas drilling, and any update there on timing and how you think Nabors stands?

Ziggy Meisner

The rollover for 2010 is likely a lot of the contracts was the high margins, like the jack-ups, they were just signed in ‘08, and they just started in ‘08. So we’re pretty safe in 2010, but also there will be some rigs coming up over in Europe, but I think we can remove most of those rigs.

Kevin Simpson - Miller Tabak

How about the land rigs?

Ziggy Meisner

On land rigs and offshore, both. The offshore rigs are tied up anyway. The offshore rigs are all tied up in 2011 and 2012.

Kevin Simpson - Miller Tabak

If rollover risk is really a couple of years out?

Gene Isenberg

Land rigs.

Ziggy Meisner

And then I guess you mentioned the gas rigs; you’re talking about Saudi again?

Kevin Simpson - Miller Tabak

Yes.

Ziggy Meisner

The gas rigs, yes, they just opened the documents. They just opened them two three days ago, and I mean as usual, I think we have a shot at it, but there is obviously competition, but it is still in the opening process.

Kevin Simpson - Miller Tabak

One other international question, which is, obviously pricing pressure throughout the industry, I mean, are you seeing very significant pricing pressure. I guess, should we expect international margins to have the same kind of hit on rollovers that do occur, that may be not as bad as the US but something like, you know, down 30%, 40% range, or do you think that the competitive conditions are still relatively favorable enough that you ought to be able come close to what you have been getting.

Gene Isenberg

Let me augment that question. Can you break that between jack-ups, where we are not particularly vulnerable in the next two three years and the rest of the land rigs.

Ziggy Meisner

Yes. I think on the land rigs obviously, there is pressure. There is more competition and the customers want better rates, but what we experienced is, if we come down on rates that we trade it off with additional work or some other benefits, but also we have been quite successful reducing all cost on the rig level and in the overhead. So I think the net, net, I think we come out pretty much the same. We are not loosing out too much.

Kevin Simpson - Miller Tabak

A quick question for Joe; what kind of cost leverage do you have on reducing your personnel costs, and then I guess leverage also with your suppliers; what Gene had just talked about, to bring cost down as well.

Joe Hudson

Kevin we are obviously working with our corporate supply chain group to drive our cost down both in the field from a corporate a perspective, and also what we purchase in the field, and we’re seeing very good response from our vendors working with us to achieve this.

The G&A side, we made a very significant reduction just in three months of around to 25%. So that’s already taking place, and on the go forward basis, we’re going to continue to reduce according to the rigs working. As you see we have 137 that are on our payroll, 108, 110 that are working on are actually turning that right.

In terms of personnel, we are looking at the field labor cost, and that’s our two large components which are labors/R&M. Again, we have a large number of term contracts. Based on that reduction, we would pass in back to the operators.

So, we are looking at how we do this. How we most effectively impact P&L, labors and making any other reductions in field, both those standpoint.

Operator

The next question is from Roger Read - Natixis.

Roger Read - Natixis

Just following up on the US side, Gene, you said you are seeing the opportunity here for the rig count to bottom. Obviously, you’ve got the strength in the in the Haynesville. If you kind of walked around the regions of the US, is there anywhere that you don’t see the bottom in place or where more softness maybe likely just making more of a broader US rather than a specific Nabors approach?

Gene Isenberg

Yes. Let me describe that. I haven’t looked a lot day or two but last time I looked the delivery points in the Rockies and Mid-Continent were like $2.5 to $2.75 and that’s delivered. So that will go as per million and that’s the delever point. So if it takes the penny or whatever it takes to get from the well head to the delivery point, you got a pretty good indication of what is weak or will be weak or should be weak in the way of rig demand.

We have the B&P operations of our own. Aubrey has the biggest ones there and he has announced pretty big cut backs and he has got the sort of line in the sand prices for these various regions and I think that’s what’s going to happen, is happening or should happen and we have big position in the Rockies which is probably vulnerable like everybody else.

Roger Read - Natixis

Okay that’s kind of what we figured. The other question I had Latin America, hearing a lot of people and obviously the tough Q1 in a couple of nations down there, but overall could you give us sort of your view on Latin America, I guess including Mexico in that as well, just what you see in terms of opportunities to put more rigs to work or at least maintain the level that you have today out there?

Gene Isenberg

I would say Mexico looks strong. I think we are probably pretty strong there. I would say nothing is super sexy in the rest of Latin America. We have got maybe four rigs in Venezuela.

We were ahead of the curve; at one point we had 20 odd rigs and we went down to pretty nothing and our major competitor has I think 11 rigs there. We don’t, and I don’t see any other place super sexy. Argentina is particularly week. Columbia we have a good position but it’s not super strong either.

So I would say, what we’re doing internationally with sticking our necks out on a projection, includes the full knowledge that away from Mexico, Latin America is not going to be a source for a pleasant surprise with half a dozen rigs.

Roger Read - Natixis

Okay, and then the final question I had. Just following up on the comment you made earlier about acquisitions. Should we expect you to be focused on acquisitions domestically, internationally, broadly balanced between the two?

Gene Isenberg

I don’t know yet. Right now, I can assure there’s nothing on the front burner. We’re looking at stuff everywhere. I don’t think we’re looking at domestic or Canadian rigs per se or we might look at other stuff that we can buy, that we can roll out throughout our whole system and we might be looking at entry type rigs and international more than any place else.

Operator

Your next question comes from Dan Boyd - Goldman Sachs.

Dan Boyd - Goldman Sachs

I wanted to talk about the international business a little bit more. It looks like you’re going to have to get a ramp up here in operating income at some point through the year to hit those guidance numbers. Can you walk me through the timing of the new rig contracts or new startups and where they are exactly?

Gene Isenberg

Maybe the avoidance of hickeys. Go ahead Ziggy.

Ziggy Meisner

Yes. We have, we have rigs starting up this quarter. They only started this quarter so they’re going to be full in the third quarter and fourth quarter and we’re in discussion with other customers to put rigs to work third and fourth quarter, that’s where you want the upside is.

Dan Boyd - Goldman Sachs

Those third and fourth quarter startups, are those included in the guidance numbers you’re giving of more than 20% or are they on top of that?

Ziggy Meisner

No, they are included.

Dan Boyd - Goldman Sachs

Can you give me the same type of guidance on the offshore business? I was little surprised that how strong that came in this quarter. And quite frankly, your guidance for this year, can you help me figure out how much of that is currently under contract?

Ziggy Meisner

As Gene said, the MODS rigs and the MASE rigs are carrying up for the most part, and by and large those rigs are under contract, albeit some maybe one stack on location from time-to-time.

Gene Isenberg

So basically we have new investments really offsetting the weakness and other stuff to keep picture pretty decently.

Dan Boyd - Goldman Sachs

I will assume that also those are well contracted and on term?

Gene Isenberg

Yes, Sir.

Dan Boyd - Goldman Sachs

Okay, and then just lastly Gene, on the investment opportunities that you have, it sounds like international is more on the front burner, but you also mentioned in the press release the attractive opportunities in oil & gas. Can you expand on which ones you see as more attractive at this point? And what plays you’re interested in?

Gene Isenberg

Nothing is super attractive at these prices, but on the other hand the sales price are reflecting maybe something approximating the stress or at least where a guy has to choose between a couple of three opportunities to invest and can’t do all of them. We’re currently looking at in our joint venture. We’re currently looking at, it’s got nothing humongous but I would not be surprised if we had something involved like a $50 million chunk on our cut near-term.

Dan Boyd - Goldman Sachs

And would that be within your JV if you are doing a JV with a current operator in a play that needs the cash flow or would it be where the JV would be the operator?

Gene Isenberg

Mostly the latter. Our joint venture stuff we essentially operate.

Operator

The next question is from Arun Jayaram - Credit Suisse.

Arun Jayaram - Credit Suisse

Gene, two quick questions. One is you’ve paid down a pretty meaningful chunk of your 2011 debt maturities. Gene, what are your longer-term plans in terms of that debt? Do you plan to issue some more fixed debt to pay that down? What are your longer term thinking in terms of that debt?

Gene Isenberg

What we’re planning on is being in an environment where we have to very substantially deleverage. So what we’re planning on doing is seeing what we can do to pay that out without incremental. That’s the plan and we do that by reducing CapEx, reducing costs and even buying get back at a discount if we can do that, or if we can’t do that at an appropriate price. In fact it’s easier by having the money available to do it.

So we’re also looking at borrowing, that’s permitted under indentures on the debt that could supplement it if it’s attractive. We’re looking at for example borrowing in Saudi Arabia where they don’t have, what do you call it, poisoned toxic assets to worry about. Afraid they haven’t yet heard of the credit default swap.

Seriously, we can probably get something between $80 million and $100 million there at a reasonable, at a normal price relative to LIBOR, may be one and half over the LIBOR if we can. If we borrow in Saudi we still have some tax advantages and we are frankly also looking at a revolver which we haven’t had for a number of years.

So, there I think we are preparing for an environment where dramatic view or a substantial deleveraging will be required. We think we can get there without incremental long-term borrowing. We are preparing contingency plans on other borrowings that will enable us to cope with any hickeys.

Secondly, if we see our way clear, we will take advantage as we have in previous substantial downturns to buy stuff economically.

Arun Jayaram - Credit Suisse

Fair enough. Gene, second question, you’re seeing clearly a bottoming in terms of activity levels, including this week you said may be even a tick up in terms of your rig count.

Gene Isenberg

I don’t know if that’s the week phenomena or trends.

Arun Jayaram - Credit Suisse

Yes, I wondered as to get a sense as with the gas price is today at 3.50 or so. Prices are well below the marginal cost of produce in almost every region that we look at may be outside of the Haynesville, maybe the Marcela. Why do you think that some of the customers are in this case increasing activity over there?

Gene Isenberg

I think the reasons are if they have to drill to preserve or acquire leases or if the economics are really good like Petrohawk is in the Haynesville and elsewhere.

Also the point is that you have no choice, even if it’s a 3.50 price or a 2.75 price. You make money by producing it or not producing it, out of pocket lifting costs are generally lower than that. Particularly if are you committed for a term rigs and stuff like that. So, a number of people, if you are really pressed for cash flow, it’s more economical to drill and make a half adventure on a cash basis than not drill or a dollar.

Arun Jayaram - Credit Suisse

Do you think hedges are keeping perhaps activity higher than without them?

Gene Isenberg

They probably are but I never understood that. I don’t know why this concaves the hedges but they probably are.

Operator

Your next question comes from Dan Pickering - Tudor Pickering Holt.

Dan Pickering - Tudor Pickering Holt

I think I heard and read in the press release from the international side, essentially you identified six contracts that you expected to start, it sounds like some of them already started and some are in the second half. Are those generally the same day rate and margin mix as your present business or are they offshore and therefore higher margin, kind of what the mix looked like for the international side?

Gene Isenberg

It is nothing about the same.

Dan Pickering - Tudor Pickering Holt

Okay. So, we expect about the same. And then Gene, could you talk a little bit about, I think you mentioned you had 137 rigs being paid right now in the U.S. land business. You’ve obviously got 300 and something total rigs, can you talk a little bit about your sort of capacity management stacking philosophy. How many of the idle rigs are stacked, how many are one stacked?

Gene Isenberg

We don’t want that frankly. We’re stacking and we’re trying to figure out where we can put these rigs so that we don’t have losses of the rigs and damage so that we can start them up quickly and effectively, particularly the ones that are contingently available. Guys are still paying it for it on a day rate basis.

So, with our plant down south, Saint Angelo is one of the places where we have a lot of storage capability. We have a lot of paid stuff, we kind of play to even putting temporary overhead shelter on that. We have a plan to really make sure that we when we stack the rigs, the ones that are ready to go to work are, and the ones that are not ready go to work don’t get subject to damage build regions and stuff like that.

Dan Pickering - Tudor Pickering Holt

When you look at your handout that you provided in addition to the quarterly commentary indicated you have got term contracts in the US of 48, 93 for the rest of this year, 2010, it is 69 rigs. Of that delta, obviously we are going to see things roll off as we move through the rest of this year. Is that pretty ratable, does it all happen towards the end of the year. Is there any lumpiness to that kind of contract structure?

Gene Isenberg

Joe, do you know of that?

Joe Hudson

It’s pretty linear Dan. It’s like; it was 133 in first quarter declines.

Dan Pickering - Tudor Pickering Holt

So pretty much a straight line; and then a last question from me on the international side, like 114 rigs running in the first quarter. What would you guess the average contract duration for those rigs would be? Is it a six month? Is it a year? Is it more than that?

Ziggy Meisner

I mean all these rigs were signed up for mostly three years and two years. So, you know, two year, three year contract. That’s what they are working on.

Gene Isenberg

Rig jack-up, 4 years.

Ziggy Meisner

The jack-ups are on 4 years contract.

Dan Pickering - Tudor Pickering Holt

Okay and most of them were signed in ‘07 and ‘08?

Gene Isenberg

The jack-ups were all signed in ‘08, and most of the new rigs that were out there, they were all signed in late ‘07 and ‘08.

Dennis Smith

Vivian, I think we’ll make this the last question since we’re just approaching an hour time limit here.

Operator

Your final question comes from Angie Sedita - Macquarie Securities.

Angie Sedita - Macquarie Securities

First, Gene, last cycle 2001-2002, we saw the older commodity rigs essentially bottom about $9,000 to $10,000 a day on the day rate, $2,000 to $3,000 on margins against these commodity rigs. Is there any reason to believe given the push into shale that it could be worse for the commodity rigs this cycle?

Gene Isenberg

Yes. I think my feeling is that some of the old rigs will never go bad.

Angie Sedita - Macquarie Securities

Fair enough.

Gene Isenberg

If you’re talking about a shallow mechanical rig that isn’t in a specific environment where its economical, and they exist, they are not in the shale’s, but they exist where there is a lot of work and the crew is familiar with the work and the company men are familiar with the work, and there’s good relationships between those two, then the rig’s going to work.

Its probably going to be adversely affected by the number of rigs like it that are going to be available without work, but in general, I think its going to be worth. There’s going to be a bigger differentiation between quality rigs and non-quality rigs, and we’re seeing it a little bit now, and the reason we haven’t seen more of it is, when a guy says, “I want to cut my budget by blank dollars and 30 rigs,” they’re not going to differentiate. They’re going to do what the boss says, and as I said earlier, when they cut those, it isn’t like they’re cutting them at 25, and you could work them at 15, they don’t want them.

I think there is going to be a pretty dramatic shift, and that’s one of the reasons I personally think that, the state of the art rigs, the newer rigs performing in the areas, that’s likely to indicate what’s going to happen in the future, and I think we’re doing pretty good as I’ve said a couple or three times. I’ll be happy to say it once more if you want. I think that’s way more important than whether we made or missed this quarter by a penny, but that’s my view.

Angie Sedita - Macquarie Securities

That’s fair enough. So, I mean, in the past cycles, when shale again was a factor, you saw a premium of 20% to 25% for a quality rig versus a commodity rig. So, under that assumption, you would see that premium narrow modestly or fairly significantly?

Gene Isenberg

I would see the premium increase.

Angie Sedita - Macquarie Securities

Then following up on the rig count, you said in the press release, you have a 137 rigs working today, 31 are receiving revenue but not working. How long should we assume these 31 are receiving the revenues? Is it 6 months or a year?

Gene Isenberg

Basically, I think the total amount to date that we built or going to build on these things is like a $120 million. I think we’ve already build $93 million. For this particular quarter, there were three baskets, and I won’t make a federal case out of this, if you want you can call Dennis afterwards. But, I mean, there are three guys, cancel and pay the cancellation fee upfront, and we have the rig available to do what we want with.

There is another category where guys pay the standby without crew, and they control the rig, but they pay us and we don’t work the rig. Third and smaller category is guys who we’ve got contracts with, where the stand by with our crew rate is higher than the cancellation rate. That’s the smaller number, but so they canceled, but they have the right to use the rig. So they pay us the premium, but they have the right to use the rig.

So all those three things happened, and I don’t know what’s going to happen, but it’s conceivable that aggregate could get bigger. I think as we said, this quarter had 31 million of the first category I mentioned and we probably had 12 million in the P&L for the other two categories put together and if you want more than that, call Danny please.

Dennis Smith

Rather than the number of rigs because it varies all over the map, but that’s why on slide three we schedule out what the income effect of those categories are. We took the two latter categories because they are income is amortizing or being received so in forward periods and just lump them together.

Dan Pickering - Tudor Pickering Holt

Great guys. That’s all I had.

Dennis Smith

Ladies and gentlemen, that concludes our call today. Thank you for participating and if you have any further questions feel free to give us a call or email us. Thank you.

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