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Nabors Industries Ltd (NYSE:NBR)

Q3 2009 Earnings Call

October 21, 2009; 11:00 am ET

Executives

Dennis Smith - Director of Corporate Development

Eugene Isenberg - Chairman & Chief Executive Officer

Analysts

Jim Rollyson - Raymond James

Jim Crandell - Barclays

Ole Slorer - Morgan Stanley

Kurt Hallead - RBC Capital Markets

Kevin Simpson - Miller Tabak

Jeff Tillery - Tudor Pickering Holt Co.

Operator

Welcome to the Nabors Industries third quarter 2009 earnings conference call on the 21 of October, 2009. Throughout today’s recorded presentation all participants will be in a listen-only mode. After presentation there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Dennis Smith. Please go ahead, sir.

Dennis Smith

Thank you, Kevin and good morning everyone. Thank you for joining our call this morning. As usual we will start out with 20 minutes or 30 minutes of review of the quarters results and the outlook by Eugene and then open it up to Q-and-A and hold the call to about one hour timeframe.

In addition to Eugene and myself this morning is Tony Petrello our President and COO; Laura Doerre our General Counsel; Clark Wood our Principal Accounting Officer; Larry Heidt, Nabors Well Services Business; Jerry Shanklin, Offshore Business; Ziggy is out of the country today, so he is not with us and Joe is out as well, but Joe has Brice McConnell and Jimmy Vice President of Operations and CFO sitting in for him.

Just want to remind everybody that lot of what we are going to be discussing in this qualifies as forward-looking statements under the SEC and we encourage to you look at our filings for all of the risk factors and variables that go around with that.

With that, I will get the call started with Gene.

Eugene Isenberg

Thanks, again welcome to our conference call for the third quarter. I want to thank you again for participating this morning. As usual we have posted to our website a series of slides that contain details about the performance of the various segments of the company and you might want to refer to those as we proceed.

Let me first say that the probably the most significant number in our financials is the operating income, which was you $113 million which is right inline with the first call estimates although we got there in a somewhat rounds about fashion. There is a mixture of positives and negatives. The positive is being that we did better in U.S. and Alaska than we guided folks to a quarter ago and this was offset by reduces results and international Canada, Nabors offshore and well servicing.

One could view non-GAAP results to be $0.18 per share, but we put the facts down and this is a subjective thing and you folks in the market will decide how to interpret that the actual facts. However, there were a multitude of factors that caused net income and earnings per share to be obscured.

These include a foreign exchange credit of $0.03 per share and a $0.01 per share a loss due to value of our holdings in rock and our Chinese rig manufacturing company. These were partially offset by a $0.01 per share tax benefit that resulted from a catch up in our adjustment to our estimated full year tax rate, which is now estimated to be 10% on a non-GAAP basis and we had previously accrued 15% in the first two quarters and the rules are have to catch up in the third quarter.

Despite these less than ideal even frankly, let’s than expected results in the quarter, there are number of positive indicator that suggest a turnaround is reasonably near. These include the resiliency in our PACE rig margins in the spot market, which frankly are already starting to improve and the up tick has already been seen in our domestic rig count and also in offshore and international markets we’re seeing the probability of up ticks, frankly better than the forecast.

In addition more and more tangible evidence supports our long term contention that customers recognize and are willing to pay for the economic benefits derived from the efficiencies generated by our high specification, high performance rigs, particularly in exploitation of shale plays.

These rigs constitute approximately two thirds of our U.S. land drilling fleet and an even larger percentage of our global fleet. I think this will make us the primary beneficiary of the upturn, when it actually evolves and progresses. I will elaborate on our various businesses. As I do that I think some of these comments will become clear.

Let me briefly review our financial position. We currently have about $1.2 billion in cash and investments on hand and we actually expect to begin generating higher levels of cash in subsequent quarters as capital expenditures will be declining sharply over the next three quarters even in the face of not a robust return to our operating income.

Capital expenditures in 2010 are currently projected to be around $400 million, that’s down quite a bit from the $1.1 billion we project for this year to ‘07. We’re also curtailing maintenance CapEx, which we can easily do by utilizing as new components from stack rigs. This enhances our near term liquidity while i.e. defers these expenditures until such time as the rigs go to work in which case that will be a self correcting mechanism.

We are continuing to be extremely diligent in our cost controls, both operating and overhead, which was readily apparent in the third quarter when we reduced SG&A by over $80 million. Some of these costs reductions are decidedly not temporary. All of these measures provided additional liquidity and this year we’ll have an excess cash flow not accounting financing of $300 million and that’s helpful.

Our liquidity is further enhanced by our recently enhanced access to traditional debt markets, which we could access virtually at will in sizeable quantities, plus in addition to which we plan to establish a conventional line of credit revolver in the range of $400 million to $500 million, probably in the next quarter or two.

Collectively these put news a very comfortable position to retire the remaining $1.9 billion in convertible debt, which matures in May of 2011 and it also leaves us capital access to fund of virtually any size of investment opportunity that comes our way.

Now let’s turn to the units. Our North American land drilling unit performed better than we had guided you to last quarter. A third quarter rig count while it averaged 123 rigs down 20 rigs from the second quarter, but average today’s rig count stands at 137 with 115 working, 22 contracted and receiving revenue, but not working.

This represents a material improvement from our third quarter low market of 117 totaled with most of the rigs returning to work for large operators in the higher profile share account. This has been contrast to the industry, which reported a similar percentage increase in activity, but most of that or at least the bulk of that was directed to shallow oil drilling projects for smaller operators at narrow margins.

In fact some of those day rates in the West Texas shallow oil are not much better than the margins that we’re talk about on our higher quality rigs. Rig margins in the USA, actually improved during the quarter, when we back out the lump sum contract termination payments that were recognized in the second quarter.

This improvement was primarily due to stringent cost controls, which I think averaged, something in mid quarter of $1,300 a day per rig, pretty significant and some of those things will only be fully reflected in the next quarter and year after. This resulted in a third quarter increase in the average rig margin of $768 per day with PACE rigs margin up from 11 to 12,000 a day, while rig margins for the balance of our rigs define from 8200 change to 7400 per day.

We have seen a modest increase in the spot market for rigs, notably for rigs required in the more economically attractive areas like the Bakken and Haynesville with customers expressly a clear preference for our higher efficiency PACE and SCR rigs. Overall margins for our rigs are running between $1,500 per day in the really low, and we do participate in the low end to some degree, capacity rigs to 10,000 per day for the higher capacity rigs and the better economically attractive markets.

Since the end of the second quarter, we have deployed four new build rigs on term contracts with an additional trial rigs scheduled for deployment by the ends of the second quarter in 2010. In addition we continually, aggressively manage our costs, particularly SG&A operating costs, CapEx to be included in that category.

Going forward, we expect the fourth quarter to be modestly improved over the previous quarter as new rigs deploy and the benefit of our cost measures are fully manifested. We expect the first half of 2010 to show a steady, but modest improvement with more robust activity in the second quarter.

Although net effect of this will be dampen substantially by term contracts at higher rates that expire. Net-net we expect to be better than we used to think, but still lower next year compared to this year. In spite of all that, in spite of the lower forecast for next year, we’ll generate cash flow i.e., income versus all kinds of expenditures of $300 million next year. This units PACE rig count today stands at 86, but eight of them are either working receiving stand by revenue or commit to do commence operations in the next two quarters.

We have term contracts for deployment of 12 more PACE rigs, which will bring the number of PACE rigs at 98 by the end of the second quarter of next year and recent increase in customer bid increase further bolsters are optimism for the coming year and of course, we still have unmatched, unparalleled opportunities to transfer the rigs from the U.S. to any of several international markets, when the opportunity arises.

In essence, we have seven F rigs and one M rigs uncommitted now and the opportunities domestically and internationally make that not a monster problem. Nabors’ international profitability in this operation was lower, surprisingly lower, significantly lower, in the second half of this year than we had previously anticipated.

Approximately, 28 rigs that were told would be renewed or we had good reason to believe would be renewed have not or will not by now review or their startup renew or they startup date has been delayed. These include five rigs in Mexico, five rigs in Saudi Arabia and 11 rigs in all of the venues.

In Mexico, they’re going to need the rig, there’s no question about that. As you all know had financing issues that affected everybody working in Mexico. Saudi rigs were a bit of a surprise, but that’s kind of based on the fact that we started year off with $34 oil and there’s an issue of how many rigs they will need, but we have reasonably high hopes that those rigs.

In fact all the rigs will have a high probability of redeployment either in Saudi or elsewhere in the Middle East sometime rather quickly. However, we do expect and I guess our projections reflect a little bit of chastisement from not meeting expectations internationally. We expect a little bit of deterioration in international results in the fourth quarter, but that should essentially be the bottom.

I think I’d like to make two points, that longer term I still expect we’ll hit new high in activity in financial performance giving our competitive advantage and worldwide footprint and reputation and since this market is primarily an oil directed market with and now 2011 strip of $85 per barrel.

At one other point that in spite of everything that’s been somewhat disappointing in this market. If you look at the cash flow for this market, which is up $600 million for this year, which is virtually certain to increase some next year and even more longer term. This probably gives us or at least some people who are knowledgeable say this gives us a value for this unit alone which is lot more than the total market value the entire Nabors Canada.

Our Canadian operations posted a significant loss in the third quarter and weak market conditions persisted and the usual seasonal up tick after the spring failed to materialize in any significant degree the fourth quarter should reach however breakeven or better and as we enter drilling season. We expect to see a return to profitability in 2010 due to further cost reductions and moderate improvement activity.

The cost reduction we had elsewhere in the company has not yet for to the same degree in Canada, but they shale. While there is no immediate visibility of what’s the future is going to hold in Canada I still remain bullish and the optimism comes from a couple, three points.

First the 2011 strip for natural gas is over $7 now and people are acting and will act on this before 2011 and we’re seeing evidence of that slowly but there is evidence. Next, the enormous potential of the British Columbia shales we’ve only crack the surface in finding out what they are and I think that’s going to be enormous I think most people think it’s going to be enormous and the last and that’s going to effect the kind of drilling in Alaska.

I guess the last point I’d make is that our fleet, which is geared to the heavy drilling stuff and away from the shallow singles and that sort of stuff is going to be a much, much better fit of the kind of rigs that the Canadian markets going to require in the future. I think an anecdotal evidence of that is, in the British Columbia shales we have drilled about half of the worlds drilled last year will probably drill more than half of the wells drilled in 2010.

That’s a sizeable multiple of our overall market position in Canada. Nabors is well servicing get another story, no glory yet. We were down quarter-to-quarter achieving actually a breakeven result a sequential utilization was lower and hourly dayrates decline both results could have been significantly lower, but this unit did probably the one of the most aggressive cost cutting jobs in our portfolio and reducing annual operating and overall expenses, but more than $50 million on an annualized basis.

We frankly expect a further decline as rig hours are likely to continue to drop in a seasonably weak fourth quarter given the reduced day rate hours and the high number of quality days, I think there’s no imminent sign of improvement except perhaps in California, which is a very important market for us, but also there are a lot of pretty bright people who are projecting an increase in this market, this market is primarily geared to oil prices and oil prices today are in the high 70s.

The futures curve, which is not a guarantee but it’s a money market you can trade in that market show continual increases. So, I think outlook is good but we don’t have super evidence of that short term.

Nabors offshore of third quarter results in our offshore business were severely impacted by the sharp decline in oil prices that occurred in the first quarter, since virtually, all of our work in the last few years has been and continues to be oil related. This causes for us a rapid sensation in activity in the second quarter, which did not bound along with oil prices. That rebound coincided with the hurricane season, which knock on wood seems to have been pretty decent this year, i.e. nonexistent.

This left us with less than eight rig years in the third quarter, since the only rigs operating were deep water platforms on term contracts. Anyway, we’ve reported the first loss in history, but the good news is that we already have a firm backlog for next year, which is 20% higher than our total volume in 2009.

So that looks like things are going to get better. Also we continue to make progress on the front-end engineering design projects that I mentioned to you last quarter and on both of those there were significant progress with the probability of significant contracts, but not starting until 2012.

Nabors Alaska, this is Benny’s pet area. Nabors Alaska was down quarter to quarter due to seasonality and loss of two rigs, which were released at Prudhoe Bay in the second quarter. This was slightly offset by acceleration of the remaining contract payments for two [HELI] rigs, which is sort of a non-recurring thing. Going forward, 2010 is expected to be down by as much as 50% with two to four fewer rigs operating in a weaker day rate market.

However, we hope the long term outlook is more favorable for this number one oil driven market with a number of decent size projects to be awarded in soon for the next three years. I think probably the most important single factor however is, we have technologically superior state of the AC coiled tubing/stem drilling rig operating for ConocoPhillips and it’s sort of doing things that weren’t visualized at being capable due manage presses drilling, multilateral, sidetracking, etc., with no dark time and zero incidence, knock on wood, and really super performance.

Anyway, the hope is that this has a real good chance of being the tool of preference in the future and I think there is a decent chance we get two new builds in addition to the one we have operating, which will operate for five years with a five year option and the operators were static with it.

Other operating segments results were down modestly and I won’t go into that too much. I think, I’ll make one mention in Canrig, I saw the most encouraging letter I’ve seen in quite awhile for a directional driller, third party directional driller, who is using our rocket product in one of the world’s biggest markets and this is the best thing this guy saw in ten years now.

The question is, how we can exploit this and this not only makes a bit of money, but it also advances our technical competence image in the world. Oil and gas, I won’t talk too much about that except we actually expect to be making profit next year and frankly I still expect even though gas prices are now $4 in most of our stuff in the U.S. and Canada viscous, I still expect that we’ll realize more than the full value of these assets through production or selective sales when the market is more conducive to those things.

Let me close by saying that this was in my view and a pretty poor quarter, but I think the important thing is we think, this is the bottom. While we can’t project the trajectory recovery with any certainty we do expect to see at least moderant improvements for several quarters and rapid and robust improvements thereafter. We are confident that the upturn will soon be felt and all of our units.

I think this is based on for one thing the futures curve, which I understand is not guaranteed or anything, but it’s the best indication we have in many operators including ourselves when we operate could use it, $85 for crude and over $7 for gas in 2011, but even more important in the futures is the performance of our rigs and they growing acceptance of those rigs by pretty discriminating customers. I reviewed some of that in our last review and it’s been going even better than we had expected since then.

Anyway regardless of how the recovery place plays out and I’m sure it will we are in extraordinarily good position to prosper by the recovery. Every one of our businesses has the provide assets in the right place with most almost all of them would not only the right technology, but leading edge technology and the right people to fully exploit the new and changing markets. That does my comments and we will take questions.

Dennis Smith

Kevin we are ready for the question-and-answer portion of the call, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Rollyson - Raymond James.

Jim Rollyson - Raymond James

Wide range of margins on spot rigs depending on the different, categories of rigs, when you think about where your fleet matches up in the different categories of rigs you guys tends to breakout. How do you think about that weighted-average if the spot today ignoring the term contracts you have? Is that more in the mid to upper single digits as opposed to the 1500 or just kind of how do you think about that?

Eugene Isenberg

No, it certainly not single digits. I would say for the rigs we consider the quality rigs it’s in the mid teens and for the low end rigs it’s marginally above the costs or dayrates are marginally above our costs. It would be but we have on the low end I don’t think the averages the way we look at it anyway is that we have these rigs that are essentially paid for, the low end rigs.

We have the infrastructure to put them to work and some of our customers require those as well as the better rigs and if we can make some money compare to no money why not do it even though it adversely affects the average.

Jim Rollyson - Raymond James

I’m just thinking from kind of near term earnings standpoint do you think that fleet averages kind of the middle.

Eugene Isenberg

Most of the earnings don’t come from that something. I would say the most encouraging single indication is, number one, the rig counts is increased, number two there’s actually been an up tick in the leading edge rates for the leading for the high end rigs. Major and not anywhere near where the term contracts were put but there’s been an up ticks. So the direction is right in both those things.Net we are going to be down next year in operating income.

Jim Rollyson - Raymond James

If you look at the strips for next year, which you talked about earlier, what’s your gut feel, where is the rig count looks likely goes?

Eugene Isenberg

I don’t know the rig count, I think we’ll do better and I think we’ll gain market position. I think there’s going to be sooner or later and I think it’s going to be sooner rather than super later that this strip comes to pass. There’s not going to be a super surplus of the high end rigs.

Jim Rollyson - Raymond James

Given all the moving parts, the pluses and minuses you generally feel comfortable where consensus is right now products you’re the bug?

Eugene Isenberg

I hate to say I’m comfortable with any projection but, yeah, I would say I am.

Operator

Your next question comes from Jim Crandell - Barclays.

Jim Crandell - Barclays

The first part was really pricing you thought said you done great paying per shareholders with acquisitions in the past. Where are the opportunities and where are you focused?

Eugene Isenberg

I think there are two things to say about that compared to six months ago I think we now have the fire power to do anything we find attractive to do in terms of other than using equity to do something and we are looking at stuff, but I think it would have to be either increasing the range of opportunities that we present i.e. something that would broaden the scope beyond pure drilling or would have to provide an entree to a market that enable us to put the totality of everything that’s in Nabors into that market.

There’s nothing really on the front burner right now, but we are much more actively looking at this, because we have the capability and willingness to do it compared to a quarter or two ago.

Jim Crandell - Barclays

Gene, does your acquisition strategy play into your whole strategic study of what to do in the IPM integrated project management market?

Eugene Isenberg

We are keenly aware of where we’re at and where we are not at in that particular area and that’s under pretty intense scrutiny, for a variety of possibilities including acquisition, joint ventures, whatever.

Jim Crandell - Barclays

Second question, Gene, where do you see, where are you most optimistic internationally about activities in 2010 other than Mexico and I think Saudi, which you mentioned and where do you see potential IPM opportunities for Nabors within that?

Eugene Isenberg

I see activity possibilities elsewhere in the Middle East, where we’re not particularly big or not at all at the moment. In North Africa and I still see increasing opportunities in Mexico. I would say the biggest once right now, I would say are other Middle East other than Saudi and Yemen, which is where we’re pretty big and North Africa, they were big, but Japanese they’re could be even bigger. So I think that a long way to go and we’ll participate.

Jim Crandell - Barclays

If I could just ask one more question, what do you think of the chances maybe involving Nabors maybe not, but the chains of more, but the broad scale consolidation in the well service, rig business among the larger companies?

Eugene Isenberg

I think particularly in the well service business, I think it’s excluding Nabors with the short to intermediate term, I think it’s possible. A number of people have expressed an interest and desire to do that and the drilling, I think I’ve said this a lot of times, it’s in terms of what the quality of the rigs are and what the quality is going to be needed year two, three, four years from now and if an opportunity arises we’ll take advantage of it, but I can’t really see us participating in much.

Operator

Your next question comes from Ole Slorer - Morgan Stanley.

Ole Slorer - Morgan Stanley

You mentioned I mean any size investment opportunity, I mean you clearly got a very strong balance now, but…?

Eugene Isenberg

I’m saying before we were worried about $200 million. I’m not saying, we keep a half an eye on our credit rating and all that stuff and as you know we raised $1.1 billion in January. We used almost all of that to buyback pay down debt and now with the credit markets really wide open, including unbelievably attractive convertible markets, which we are not going to be tempted by.

The non-equity opportunities raised capital at pretty big service. If we have something that is kind of bigger than anything we had looked before, we’re open to it. I don’t have anything specifically in mind except make the point that we have the fire power now that we didn’t have before.

Ole Slorer - Morgan Stanley

Could you just talk a little bit about how the debt market has changed for you by comparing sort of…?

Eugene Isenberg

We were concerned in the fourth quarter of last year with the big maturity coming two years from that and if the fourth quarter ‘08 conditions have existed we wouldn’t be happy campers now. So we deliberately paid up to get not as much as expected, but we paid up to $1.1 trillion at nine and a quarter, that current market, I don’t know what it is exactly, but I think it’s more like $6.5 million, we could do it now.

So, we paid for insurance, but as I’ve said before if you high life insurance and you don’t die you don’t feel terrible about it and also we recouped a chunk of that by buying back our debt at discounts.

The market right now is that every single banks coming in and saying we could do more straight debt and we could do convertibles that are really surprising, low interest rates and high conversion prices, which we are not, we’ve had our fill of convertibles for a bit and also we’ve never had a revolver until recently and I think we can do 400, 500 rig I think we can do that and I think the only thing that’s keeping us from doing that quicker is the market is moving in our favor and we don’t need the money now.

What that is pay a little bit of money or some money upfront and so much annually for insurance for a call on the cash on the borrowing if you need it. We’ve also I think you mentioned this before we also found that we can borrowing places like Saudi Arabia which is through our joint venture at actually rates below 2% so, we have a bunch more firepower available we’ve had before.

Ole Slorer - Morgan Stanley

Do you find that in discussions that our companies out of there willing to sell for cash at this stage of the cycle? I just think you would have to use a large amount of shares if you were to make lets they medium-size acquisitions?

Eugene Isenberg

I would think, we could do a deal for shares from the viewpoint of the selling company and we can buyback the shares in the markets so, it can be a share deal from their view point and the cash deal from our view point. So if I, apart of the sales that would be that we are depressed and they are depressed and they take our shares, they will have a recovery that they would have had with their own shares.

That hasn’t actually come up yet that’s theoretical. The important thing is from our view point the tax laws, etc that we can do a deal that’s a stock deal from their view point that we can make the cash or as much cash as we want by buying stock.

Ole Slorer - Morgan Stanley

You didn’t mentioned Russia, you mentioned Middle East is there saying if you looking at national way you can by a sizeable market position?

Eugene Isenberg

As you probably no there’re stories about things like NKBP about and we are obviously interested.

Ole Slorer - Morgan Stanley

You would be interested in something like that at the right price?

Eugene Isenberg

Yes, sir.

Ole Slorer - Morgan Stanley

So, if we look at the market that seeing shales everybody accepts that it’s going to be an important play going forward, but what does it take to turn the dial for all of the let’s say the Army of smaller private EMPs that we don’t maybe at Wall Street have such a good handle on? Is there a level at which they would a gain become interested in doing some more drilling?

Eugene Isenberg

I think number one the futures curve is pretty decent and I understand that’s not guarantee that that would be the price at that time, but especially this small guys they can hedge it, they can sell it forward take crude price is really solid, again if you look at the futures curve you can actually sell crude in the futures at close to $90 per barrel; if you want, and I think a lot of these smaller guys are cash book drillers, they get the cash and they go. We are marketing a little bit more intensively to those guys.

First reaction frankly is in the low quality rigs that work the shallow oil plays, which we don’t do a ton; we do some but don’t do a ton of that. The dayrates there could be $7,000, $8,000, $9,000 a day and a lot of that tends to be footage and all that stuff. We do some of that, but that was the first positive impact and small guys and some bigger guys on the recovery and we got it on the high end and the Bakken say for oil or in some of the more attractive shales for the higher 10 rigs.

Ole Slorer - Morgan Stanley

So if you’re talking about the credit markets is it coming back, people can borrow money again on the private EMP side is it…

Eugene Isenberg

I don’t know how it works for those guys because those guys typically went to banks compared to the public market and the public market is still way better than the bank market. Banks just don’t want to lend right now.

Ole Slorer - Morgan Stanley

Is it a combination of the banks becoming active again or and if that happens what’s the gas price, is it $6 or is it $7, at what point do you expect kind of the market…?

Eugene Isenberg

The futures curve for ‘11, we checked is knocked to seven, ff that happens or comes close to it, I think we’ll be a lot healthier and as I mentioned that a lot of people can act now based on the $7 that works, for example, even in the British Columbia shales and if somebody wants to produce now and sell the $7 a 11 stuff that probably works.

Ole Slorer - Morgan Stanley

If this works, do you think that you can take out your 2007 EPS number over the next two to three years or is that just wishful dreaming?

Eugene Isenberg

I think eventually, we can whether it’s, I’ve said this for awhile, I think whether it’s a year and a half or it’s three years, I think we’ll do better than we ever have in the past. I think the Canrig is probably an example, because it’s doing absolutely horribly. We’re losing money there and yet, if you look at off week compared to what the drilling requirements are going to be two, three, years from now. In other words, the shallow single drilling is virtually dead or much, much less important down the road than it is now.

We not only have the rigs that work in British Columbia shales, but we’ve actually worked 50% of them to raise working and we’ll do better than that this year for every major operator expects our good friends at Apache and we own a ton of acreage there. The company is doing the worse now, I think has probably the best characteristics for benefiting from what’s going to happen in drilling requirements two, three years from that.

I think that applies to the lower 48, probably it applies in Eastern Europe too, but when we’re involved minute share in shale drilling in Europe. The big problem is the gas price and right now we have a surplus of gas and we have a surplus of domestic gas, we have the surplus of LNG, we have the surplus in Europe, etc., but I think longer term, we have a shortage of good hydrocarbons and longer term isn’t forever down the road.

Ole Slorer - Morgan Stanley

You don’t think this is the downgrade Nabors yet on.

Eugene Isenberg

No, you can downgrade us, what do you have us at 40?

Ole Slorer - Morgan Stanley

Something like that.

Eugene Isenberg

When we get to 43, 44 you can.

Operator

Your next question comes from Kurt Hallead - RBC Capital Markets.

Kurt Hallead - RBC Capital Markets

Just wanted to kind of gauge your perspective on how you think the overall the cycle progresses off the low, V, W, U,X, Y, whatever. What kind of recover do you see? Is it more you use the word at moderate and over several quarters in your comments, and I was looking for more color…?

Eugene Isenberg

You’re talking about the economy as a whole?

Kurt Hallead - RBC Capital Markets

No, your recovery in the...

Eugene Isenberg

I see it moderate. I won’t tell you anything different than that. My feeling is I don’t really know the short term. I’m not sure who I think really does know. It’s evolving better than we thought it would domestically and I think longer term, we’re in great position. When is longer term? I don’t know. I don’t think its next year. Next year I think we’ll do better but in terms of marginal rates on incremental non-contracted rigs that our profit is going to be down next year.

We’re going to run out of or rundown on high end. We had a whole bunch of rigs at 26,000, 27,000 per day making $15,000 a day, that day isn’t likely to come back very soon. One thing the rigs don’t cost as much to make any more, but I don’t know when, but it will be.

Kurt Hallead - RBC Capital Markets

Coming off that 2001, 2002 to the low point it took a couple of years before there was any real significant pricing power in client business. So I guess that’s what I was trying to gauge from your commentary about a moderate…?

Eugene Isenberg

I don’t disagree with anything you say. All are I’m saying is there’s at least a bifurcated rig market and I don’t see a super surplus in the high end rigs or not even a surplus compared to what the overall surplus is. We have rigs that in our 274 peak rig count will never work again probably, but I would be astound, if we don’t have new builds in the next couple of three years. We don’t have any today, but we might have. I think we will.

Kurt Hallead - RBC Capital Markets

Something you reference early on in your commentary, I think it was related to the international offshore. You said something about up tick being better than you forecast. Did I hear that right?

Eugene Isenberg

The domestic, yes. We do reviews periodically and frankly we do the reviews, we used to do them on a liquidity basis every couple of weeks, how do we stand against paying off a couple of billion dollars of debt less than two years from now and frankly, every time we looked at it, every projection was lower. This was the first time.

We had higher projections than before for ND USA and probably neighbors offshore. That was the first up tick and it was a bit of a surprise and also everybody has been cautious about overstating projections because most projections by most people not just Nabors haven’t been met. So when they say they think they’re going to do better, they have a higher degree of confidence in that than they used to have. That’s pretty significant; I think.

Kurt Hallead - RBC Capital Markets

What would be your guess as the market evolves as you said land rigs are now cheaper to build and they used to be? Maybe you can give us some benchmark as to how much cheaper they are now versus the peak?

Eugene Isenberg

We haven’t built too many rigs. We except on older contracts, which don’t reflect the current price, but I would say field prices, everybody knows are down a third to more, yards aren’t as full, shops aren’t as full. My guess is 15% less.

Kurt Hallead - RBC Capital Markets

You say something like between 350 to maybe 500 new rigs built over a four year period, three year period. Do you see more progression or my guess maybe…?

Eugene Isenberg

I have no idea. I just do think that the high end rigs are not in over supply and it’s entirely possible in my view, probable that the activity for example in the British Colombia shales, if that develops like we think it is, we are way short for scores of rigs for that one thing alone. I think if we get a workable gas price or a good gas price and most people that I respect think gas is going to be six to eight, not crazy high and not $2 again.

On that I think all these shales are going to be way more active and they’re going to use the kind of rigs that work. We made the point before and I think everybody agrees by now that some of these low end rigs couldn’t work for zero in these shales. They wouldn’t be economical, because if the state-of-the-art built for purpose rig can do 35 wells a year and something zero does 20 wells a year it doesn’t take.

Operator

Your next question comes from Kevin Simpson - Miller Tabak.

Kevin Simpson - Miller Tabak

So I guess first of all new rate, the new PACE rigs you’re putting to work as have the performance has been relative to expectations. I guess any recurrence of any of the teething issues that you had awhile ago?

Eugene Isenberg

No, I would say quite the opposite.

Kevin Simpson - Miller Tabak

Second, I just wanted to go back to the rates, which you’re putting or margins you’re putting rigs back to work at. I guess the 1500 I can understand, 10,000 sounded on the high side. Is that an outlier or is that…?

Eugene Isenberg

I think the other thing you have to consider is our operating costs are at least $1500 per day lower in most of these areas and when you throw in cash M&R, which if you do it that way what’s a $10,000 margin would be an $8,000 margin six months ago kind of thing. Yes, it’s the high end is, and our good customers don’t pay the high end any place, but in general high end is where it gets attractive to drill and they need high end rigs and there aren’t too many of them there.

Kevin Simpson - Miller Tabak

So some thing Haynesville potentially related something bigger and….

Eugene Isenberg

Say that again.

Kevin Simpson - Miller Tabak

Haynesville, would that be where we would get upper…

Eugene Isenberg

Yes, I would say is more, yes, Haynesville is one of them. The Bakken is probably top of the list, crude, obviously.

Kevin Simpson - Miller Tabak

You spoke about in cutting cash repair and maintenance so you’re cannibalizing. For the newer rigs you can cannibalize some parts all of those older equipment then and, pretty seamlessly.

Eugene Isenberg

In other words, if it’s a new build, we’re not going to take anything, but new build everything, but if it’s a redeployment, in other words, we have drill pipe that we bought that’s new. For a projection of rig activity, higher than it is and we obviously coordinate drill pipe among the business units. So I’m not saying, drill pipe is a good example, because we usually count that as a cost, but anything, fluid ends, almost anything, obviously top drives, but that’s not R&M, but even the R&M which I can’t enumerate for you right now.

We can take off rigs and that’s an ideal way of financing it, because safe cash when you need the money and when the activity goes up spend it when you can afford to spending.

Fortunately we have plenty of battle rigs to cannibalize.

Kevin Simpson - Miller Tabak

Yes and based on conversations with your larger customers, would you say that over the next three to six months that you could that the outlook would be for higher activity, I guess one, and then maybe quantifying can you do. Do you think you could do as much incremental in terms of rig activity then you’ve seen off that August bottom in the U.S.?

Eugene Isenberg

Guys, what do you think? I think the opportunity is definitely there. All depends on whether that futures gas price holds in there. Some of the bigger guys going and hedge out, I was surprised to hear that Anadarko actually has big as they are they hedge gas.

I would guess, my guess is that for example, shale is going to go much stronger both here and in Canada than they are now. Exxon has, they drill and we’re increasingly getting involved with Exxon, regardless of the short term prices and, I don’t know, the guys who are swaying like Anadarko, I don’t know what they are going to do.

Kevin Simpson - Miller Tabak

I just can’t have a call and not at least touch on international. I know, Siggi is not there to beat up. It sounds like you feel like the Mexican rigs are going to be back to work sometime early next year. I guess that’s the question in terms of confidence level of that, because it’s clearly we’re somewhat negatively surprised, had to be by the, by the shortfall on activity, but I mean...

Eugene Isenberg

Let me put it this way, Kevin. We think we’re going to be up next year, but instead of saying we’re going to be up 25% as we did last year incorrectly I think we are 5% to 10% and I think is I’d have a very high degree of confidence of out with a significant hope that we could do better.

Kevin Simpson - Miller Tabak

That would be EBIT, international EBIT 10 versus what you’re going to report for 2009?

Eugene Isenberg

Operator, I think we’ve about run out of time, so why don’t we take one more question, please.

Operator

Your final question comes from Jeff Tillery - Tudor Pickering Holt & Co.

Jeff Tillery - Tudor Pickering Holt Co.

I just want to ask on G&A, the fall or decline their sequential pretty significant. I just want some color on how sustainable that is?

Eugene Isenberg

Unfortunately for some of us it’s permanent. I would say unless to the extent that activity bottom line to us doesn’t get better it’s going to be sustainable and even when things get better. For example, my compensation is down by 65% times a lower number that it’s multiplied by and Tony is down pretty good and every single executive took a voluntary contract or otherwise notwithstanding took a 10% cut and if it doesn’t look good for next year we are going to ask everybody to do the same thing.

Jeff Tillery - Tudor Pickering Holt Co.

Then on the lower 48 operating costs obviously they are down a lot from where they were as any will we see a pick up in say Q1 or Q2 of next year on the daily operating cost basis as the stand by activity goes away and presumably those rigs start working again. Is that part of the influence of the client costs and if such?

Eugene Isenberg

Out of this obviously was the biggest single part was wages. So if the supply demand for rig labor gets tighter we will be competitive and prices will go up and we hope they will.

Jeff Tillery - Tudor Pickering Holt Co.

Just on the international business, could you characterize how pricing is, so the projects that have been delayed, are you giving up price whenever those projects resume or is the pricing more or less staying constant with what you thought it would be?

Eugene Isenberg

The pricing has not been impacted volume.

Dennis Smith

Operator, I guess that’s the wind up of the call for today. We want to thank everybody for participating and if you didn’t get your questions asked, feel free to give us a call. Thank you again.

Operator

Thank you. This concludes the Nabors Industries third quarter 2009 earnings conference call. Thank you for participating. You may now disconnect.

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