Nabors Industries Q2 2007 Earnings Call Transcript

Jul.25.07 | About: Nabors Industries (NBR)
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Nabors Industries Ltd., (NYSE:NBR)

Q2 2007 Earnings Call

July 25, 2007 11:00 am ET

Executives

Dennis Smith - Director of Corporate Development

Gene Isenberg - Chairman & CEO

Analysts

Arun Jayaram - Credit Suisse

Marshall Adkins - Raymond James

Angie Sedita - Lehman Brothers

Kevin Simpson - Miller Tabak

Geoff Kieburtz - Citigroup

Mike Urban - Deutsche Bank

Dan Pickering - Pickering Energy Partners

Roger Reid - Natexis

Benjamin Dell - Sanford Bernstein

Rob MacKenzie - FBR Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen. My name is Natasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nabors Industries’ Second Quarter 2007 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (Operator Instructions) Thank you.

It is now my pleasure to turn the floor over to your host, Dennis Smith, Director of Corporate Development. Sir, you may begin.

Dennis Smith

Good morning, everyone, and thank you for joining us again for our second quarter 2007 earnings conference call. We will conduct the call as usual. Gene will give about twenty minutes or thirty minutes of remarks over viewing the quarter and the outlook, and then we will entertain question and answers.

With us today is besides Gene and myself, is Tony Petrello our President, Chief Operating Officer, Bruce Koch, our Chief Financial Officer who stays in our general counsel and six of the heads of our major business units are with us as well.

In case you don't already know that or so as we have been doing in the past several quarters we've posted a group of slides to give you some supporting documentation, and metrics on the various businesses and the actual results of some of the margins obtained for the quarter. Those are under Nabors.com, under investor relations, under recent events if you want to pull those up and refer to it during the course of the call or for later use.

I want to remind everybody of the forward-looking statements, Safe Harbor and Securities and Exchange Act to try and give you our best perspective of how we see the market now, as well as, the overview of the current results and but we’ll never be sure that's exactly how it's going to play out obviously. So with that I will turn the call over to Gene to get started.

Gene Isenberg

Thank you. Welcome again to our conference call for the second quarter of 2007. Before we start on the other matters, let me first thank the shareholders on this call who’ve supported the board’s position on two union sponsored proposals relative to (inaudible) compensation. Both of these proposals occurred on many of the S&P backed -- other S&P backed companies. We did a whole bunch better in terms of support and management compared to these proposals and the other posted. I think this favorable result is largely due to the efforts of Dennis Smith who directs our investor relations activity, and to the credibility and reputation he works very hard to maintain with investments. Some little support, I hope, is also related to the fact that many of our longer term holders understand the incentive based nature of our compensation.

During our last conference call, I was unable to specify -- to be specific about the results of our option review, except to say that it would be discussed in our 10-Q, which it was, and I would like to take a couple of minutes to elaborate.

An independent review was conducted of our option granting practices going back 18 years. Every single option granted every person on the company during that time was reviewed, and credibly this was not a super cheap review. The review was conducted by an independent outside law firm which in turn subcontracts to a well known (inaudible) accounting firm. Their efforts were augmented by Nabors’ outside counsel, in-house counsel and accounting staff.

The review was also participated by PWC, and at the end of the review PWC was able to issue our financials and 10-K in a timely fashion, which was one of the monster hurdles in this whole process. The review resulted in no finding of profitability, some non-cash adjustments which were not material, and therefore did not require any restatements.

The investigation was completed and reviewed with the SEC. They subsequently received a letter from the SEC writing us that they would not recommend any enforcement action.

We feel both pleased and dedicate given the fairness of this review and the fact that we are glad to have this behind us. In the course of this we hope we adopted some failsafe procedures to ensure that our record keeping in our options would be almost perfect in the future.

Next, I would like to again address the occasional rumors that continue to drive speculation that Nabors will become a private company.

I just want to emphasize the Board regularly and periodically examine all opportunities to have the potential to increase or improve shareholder value including going private or LBO and all that stuff.

I just want to emphasize that there is something to announce. We will do so in a timely fashion as we are advised to do so.

Before I turn to the financials, let me address the few significant items in the quarter's results. You will notice that investment income in this quarter showed a loss of $9.3 million. This basically reflected $19 million loss on the portion of our portfolio that is comprised to equities and actively managed funds.

Rest of our portfolio was essentially AAA treasuries or LIBOR-based short-term investments. The lawsuits were almost slowly attributable to one manager and in this part of the portfolio.

The performance of these equities and managed investments even after the shift remains relatively good with a multi-year yield well in excess of 10%, inclusive of the losses reported this quarter.

This little extra on this portfolio enabled us to lose the overall portfolio year's yields, to a level that has been in excess of yielding and well in excess of what we could have earned in money markets or treasuries.

Now the company's results also contain many moving costs this quarter. The timing of which was probably beyond our control. One of the notable items is we completed the sale of three jack-up accommodation units, which required may be three years ago and which have been operating in the Persian Gulf. These units are basically mobile housing in support of offshore construction activity and are typically contracted by entities other than our traditional customers.

The $98 million proceeds on the sale resulted in a pre-tax gain of $38 million. These units averaged approximately $8.5 million operating income over the three years we had it, and however we found as I said before that the marketing was totally different from the way we market our rigs. Therefore, we concluded that these units were not core, therefore we sold them and we're giving up a return less than what we hope to make on average.

There are couple of other significant items which I want to highlight that occur since the end of the quarter, and which will be included in next quarter's result. One was the sale of some of our holdings in the Fayetteville shale which closed on July 3. This will result in the income of approximately $15 million, actually operating income in the third quarter.

We previously had expected this in the second quarter. We also expect the property sale in Barnett shale in the fourth quarter of this year, which hopefully will have a gain of approximately $100 million.

These transactions will monetize roughly one-half of our E&P's portfolio value and most of our future E&P operations will come through NFR, which is our joint venture with TGE First Reserve. And if you have questions on this, I will elaborate in the question-and-answer period.

You also will have noticed that in our earnings release, we've signed a definitive agreement covering the sale of 20 of our offshore platform supply vessels for $186 million.

The sale was necessitated by changes in the legislation affecting to transact, so that we really have no choice but to sell by early August. This will result in a gain in excess of $20 million which will be recognized in the third quarter. Again, even though we had no choice in this sale, we will loose approximately $17 million of operating income in the remainder of this year, but it’s with mixed emotions that we are forced to sell this. We have half (inaudible) which is really comprised of all those twenty plus years old and their future is decidedly mixed. And I think there are more synergies with the buyers, and gods bless them, we had a good profit and we moved on to more of our core business. I think the other point is of the billions, may be 5 or plus billion dollars we spent on our business over the last three years. We spent mainly 5 or 6 million in the boat business which indicates that it was not core for us.

Nabors Drilling, U.S.A. This also was covered in one of the tax tables. Operating income for this quarter was a 155 million. This unit averaged 229 rigs working during the quarter compared to 255 in the comparable quarter and 249 in the preceding quarter this year. Gross margin per day was pretty good, 9600 versus 10.8 last year, and 99 (inaudible).

Basically we preserved margin relatively speaking and gave up more volume, probably then was (inaudible) for us. For the rest of the year we anticipate continued, although, relatively speaking modest declines in margins probably down as much as a $1000 a year -- a $1000 dollars a day for rig by the end of the year.

And, however, we expect the rig count to do better than it has done in year to date, and this is a result of deployment of additional new build rigs, hopefully, the renewal of expiring contracts and other rigs and also hopefully our gradual reduction in significant cost that we have been incurring due to debugging new rig technology.

Most of the times its that in spite of the less then super operations in the lower 48. We have signed three new build our filter purpose contracts this quarter for the lower 48. We still are reluctant to (inaudible) in this market and still appears that the anticipated upturn for our industry is not imminent at this time, and we expect Nabors to be very much better positioned to take advantage of it when it the fact does occur. Nabors Well Servicing, you may want to turn to slide 8.

Same quarter was 40 million, was down from the prior quarter which is not the normal seasonal pattern. But this was finally due to couple of things. I can’t tell you how much each is.

We had fewer working hours, resultant weather issues in Texas and Oklahoma. We had our weakening market in Texas and Rocky Mountains. In Texas, West Texas, we believe, the introduction of new rigs by both our sales and our competitor has sort of fulfilled the backlog in demand and it will take some time to get the supply demand balanced where we would like it better. Problems in the Rocky appear to be more temporary.

Their budget things, they are including the fact that we didn’t execute, as well as, we should have, and hopefully will do. Coming quarters will show better results, new risks deployed, normal weather, etcetera, and despite of all that what’s happened to date will be down in operating income for the year probably around 10%.

Nabors Canada was pretty poor, was the weakest of our operations. This unit actually experienced the loss of $8 million this year compared with operating income of $20 million comparable quarter last year.

The loss was further exacerbated by the strength of the Canadian dollar, which will turn around on in the whole year. The bulk of the loss was generated by the well service business. I think prices were okay, but the utilization wrapped the margin. And that was basically true in lower 48 wells.

The nominal hourly rates were good but the margins were adversely affected by lack of good utilization. So in Canada, we expect a significant season rebound in the third quarter. Although, it will still likely be less than last year and for all the 2007, will be down probably more than 50% from operating income last year.

And we don't see actually some of our peers to see an up turn this year in Canada and I hope they are right, we don't really see anything until sometime in 2008. However, there were some notable achievements in Canada.

As you know this is where new-build program or build for purpose which is the better way to describe the start, and there is also a genesis of our PACE rig technology.

We also developed our AC coiled tubing/stem drilling in this market as well a new generation of heli-portable rigs. Two of these heli rigs are nearing completion it and are on to contract to be deployed in the last or multi-year contracts actually by the end of this year the June 2.

We are also prepared to build the 3000-metre coiled tubing/stem drilling which is deep than normal 3000 meters for use in Alaska and presumably those negotiations will be completed shortly. Is that right, Mr. Jim?

Oh, 15,000. I am sorry 5000 meters, sorry. Negotiations will be completed. We will finish it up in the next couple of weeks.

Also in Canada, we also a deployed a new build rigs to the Lower 48 which we had originally hoped would be absorbed in the Canadian market, so that's another help. And also Canadian crews have been used in other units during the break-up and continued this practice while manpower requirements in Canada came down.

Our Alaskan drilling operations posted operating income of $8 million. Our results reflect the usual second quarter seasonal climb, but we still did much than better we did last year. This unit is doing really well, is going to deploy the three rigs that we described earlier.

We also expect to get some of the new builds that we feel Alaska is about to contract. I am hoping we will get two or three of them, and we also expect to renew some of our existing term contracts at rigs that are more closely to the current market than the Nabors, so we will benefit from all that stuff.

The operations are good here except in relatively small compared to the other operations. Certainly the Nabors offshore, this is an operation did very well this quarter, big percentage increase.

Now we have three roughly state-of-the-art barge, shallow water barge operations, two drilling barges, one bay and one posted, and a light drilling and deep workover barge. These really are the three state-of-the-arts. Also we have very, very good rigs on this far side of it and we have the lowest end rigs in the workover part of the business and that part has been dragging on our results from this operations. So next time we will do well here, but unfortunately the base is not super big.

International, I think we are finally meeting our expectations in international. Operating income was up 30% over the previous quarter, up 70% over the comparable quarter last year. We had lots of long-term commitments in this quarter. So the stuff is real in terms of where we are at and I would say, in addition, I won't go through to the detail, but in addition the markets where we traditionally have had a good position. We continue to get expansion, and that would be Australia and North Africa, and parts of South America. Then the two markets that now probably have big growth and we have expected , Mexico in the short term, and we finally broken off something and can have a rig operating unit in Russia and the probability that one rig expanding mostly organically, but hopefully otherwise as well it's just very high. So, in summary I would say we are meeting our potential there, which we've talked about for a while and the market internationally is almost like it was in the lower 48 a year ago or 18 months ago.

Except the big difference is the demand for rigs cannot be satisfied with taking a lower mechanical rig out of the weeds, putting a few bucks in it, and putting a (inaudible). These companies internationally equipment, the national oil companies or other sizable companies, they have pretty high standards. So, basically it’s an 80 rig or the highest quality SDR where we have, and we are in a good position to do that. I think, when I am talking about international, and it’s a strong market, one of the few things that’s nice about this kind of a market for us is cooperation among the business units. For example, we have probably 10 rigs being rigged and that’s from the idle domestic rigs that are being prepared to go internationally. We have had at least one and expect three more rigs -- heavy duty workover rigs to go internationally. We have had rigs Cruise and Canrig go internationally. We’ve got rigs in Canada that were prepared to go. So, it’s nice to see this. Firstly, I think we need to position for a stat rig and come down and state something relatively little less that we can move it internationally whether its nearby Mexico, whether it’s elsewhere in the Middle East or South America, and its nice to see the guys working together to do that.

In terms of the other operating segments, a raise time will be down in the boat business, but will be up in Canrig so this doubles essentially watch it. Canrig, I think, in addition, everything else, and we discussed this before. We have technological developments which I think are significant among others. The K Box which will enable us to produce kind of a new passive rigs, sort of an SCR or fuse electric plus rigs, pretty close to an AC rig from a technology viewpoint.

Now we take a couple of minutes to review some of the items will help 26% – 26.2% tax rate for this quarter and for the year. Capital expenditures this quarter amounted to 540, and we expect them to drop this year in the fourth quarter somewhat, and we expect a major drop next year.

As of June 30, we had $1.3 billion in cash and marketable securities in the balance sheet and with diminishing capital this week, we expect totally break-even cash flow and fund a pretty sizeable program this year. Next year, we hope to have as much as $1 billion cash generated, $700 million will be used probably to pay down convertible note that just going to be due.

But we are starting to get to the point where we will generate cash and also it's important to know we will have to complete the primary objective of using these small-term contracts to upgrade our [fleet in a major way].

Long-term, however they are still opportunities for Nabors which might bring more capital. We expect significant growth in our international operations. And as I pointed out before we will spend probably $130 million on our jackup 660. If we get three incremental 3000 across our rigs which we have a shot of doing that will be $90 million.

And if June gets three new builds away from the three new builds has got now that probably will be $50 million each. So those kinds of investments I don't mind making, because if we have the worst case scenario we are looking for to pay back generally not on a scale for the pay back plus a nominal rate of interest in the term of contract.

However, it still looks like we are going to be, North America gas is still going to be challenge. I don’t know when it will turn, but I think a year from now it will seen very good quarter by quarter, year-over-year comparisons.

And as you are carefully aware stock markets evaluation of gas businesses North American companies, particularly around drilling because I think that's been frustrating and we see particularly here European lines of space. However, our profits remain strong.

Some of us, Tony and I recently have had the exploration of some of our offshore holdings. Tony had a figure number earlier. I had a smaller number. Today, we will have more and what we are doing is exercising the options, purchasing the stock and we have to slice price and the taxes and now anticipating the price will eventually reflect the growth that we expect. Clearly, management is confident in the long term to grow our business and we believe there is an every reason to believe profits that's a good decision.

Dennis Smith

Operator, I think that concludes Gene's remarks and we will be happy to open it up to question and answers at this point of time.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from Arun Jayaram of Credit Suisse.

Arun Jayaram - Credit Suisse

Yeah, good morning Gene. Last quarter you had mentioned about an international acquisition opportunity that you are evaluating. Can you give us some color where you are at on that?

Gene Isenberg

I think the probability is the one that I had referenced you is still the evidence kind of low and probably smaller acquisition or acquisitions in conjunction with supplying build for purpose, new rigs is more likely to be implemented. In the meantime, we have a good shot of growing organically, which is it is perfect everywhere except it takes longer way than the other way.

Arun Jayaram - Credit Suisse

Okay. Second question, Gene, there is a lot of moving pieces regarding your new build and rig upgrade program. You guys talked about spending close to $1.8 billion in 07 and you did about $2 billion last year. I was wondering if you could comment on how you think the capital efficiency is going? There has been some delays, I was just wondering if you could talk about how you are doing relative to budgets and may be what’s going on in China.

Eugene Isenberg

Okay. I would say you know that that's a real capital, I would say, clearly we are not doing as well as we had hoped. I think we have challenges, but we are addressing them and fixing them, and I think our numbers are adversely impacted by number one delays, number two higher costs, and I think over the period of remainder of the year will gradually eliminate the higher costs. What we are doing is taking in-house all the technology that we were relying on the third parties to provide, and sooner or later in the next two quarters will, I think, have that done. So, I think we had challenges that reflected them the numbers. Hopefully, the overcoming of these challenges which is the current will be reflected in the numbers down the road and that will be a positive impact.

I think we've been less then completely happy with what we've done with our primary suppliers in China. We have a second supplier from China which has been no problem whatsoever both domestically and internationally. And we are setting up programs to purchase in China. There is no way to avoid China, and there is no way to do anything other than personally in-house control the quality. So, kind of it's a long answer, I don’t have the answers what you wanted.

Arun Jayaram - Credit Suisse

That's true. It sounds like it's getting better, and finally Gene the last question. You know, looking at the Smith recount data, it looks like you guys have lost a bit of share domestically in 2007, which means, I think you are being more disciplined on the pricing front and your margins, they are pretty good this quarter. How do you think about share and how do you plan to respond in a being a market leader in the industry, and with a pretty meaningful number of rigs idle today?

Gene Isenberg

I don’t know. In a sense I think we don’t feel that we are going to be the Saudi Arabia of rig supplying in Lower 48. So we probably won’t lose market position.

Arun Jayaram - Credit Suisse

Okay. That’s all I’ve got, Gene. Thanks.

Gene Isenberg

Thank you.

Operator

Thank you. Your next question comes from Marshall Adkins of Raymond James

Marshall Adkins - Raymond James

Hi, Gene. We got gas under six bucks; today you gave some pretty good -- your best shot at it -- margins in US been down, may be 1,000 bucks by the end of the year, if I heard that correctly. Where are you looking at, kind of activity going, for the next couple of quarters, I mean, directionally do you think it’s a flat up or down?

Gene Isenberg

I think flat -- between flat and modestly up.

Marshall Adkins - Raymond James

Okay.

Gene Isenberg

And the modestly up refers to the previous question. Basically, what we are going to do with market position and how competitive we are going to be for the non-new rigs not first class rigs. Basically, we are going to have probably a couple of dozen new builds added to lower 48 before the end of the year. We’ll have a number of contracts expiring, however, and I hoping that we’ll get a significant number of those signed out, and what happened in the first half of the year is we had fewer rigs including the new builds at the end of the quarter than we had at the beginning of the half. That won't happen again.

Marshall Adkins - Raymond James

Alright couple of clarification, you mentioned Canada being down 50% kind of second half?

Gene Isenberg

I think more than…

Marshall Adkins - Raymond James

What I want to get is that in net income, are you talking down 50% in absolute activity and then there is….

Gene Isenberg

Not in operating income.

Marshall Adkins - Raymond James

So just operating income.

Gene Isenberg

For the year, yeah, well everything else is as that.

Marshall Adkins - Raymond James

Alright. And then last clarification, on the investment income loss you explained what that is all about. Do you see that is that probably going to carry over in the next quarter or the following quarter, or is that more or less behind us?

Gene Isenberg

I think that's more or less behind us. There are one or two outfits that we are getting out to getting outfit. We can't get out immediately. But I think that's finished. I think I tried to point out that we have roughly say it's 25% or 35% of our total portfolio in this kind of investment of actively managed or an equity portfolio where we manage. And that's done really well. I am not going to tell how, but it's been over 10%. And the rest of it which three quarters or two-thirds of three quarters of portfolio was in the traditional money market stuff, AAA equivalent, treasury related, or LIBOR related. And the fact that we've had such a good return on the small portion that's enabled us to get up an average return, that's been pretty good but we won't be using leveraged portfolios anymore. Anyway I don't think it's returned.

Marshall Adkins - Raymond James

Okay. That's helpful guys. Thank you.

Operator

Thank you. Your next question comes from Angie Sedita of Lehman Brothers.

Angie Sedita - Lehman Brothers

Thanks. Good morning, guys.

Gene Isenberg

Good morning.

Angie Sedita - Lehman Brothers

Gene, you mentioned the under pressure rigs seeing greater rate pressure than the other categories of rigs?

Gene Isenberg

Yeah.

Angie Sedita - Lehman Brothers

What are you seeing for your 1,000 horsepower, your 1,500, your SCR, have those remained strong and steady or some weakness there as well?

Gene Isenberg

I think there but less.

Angie Sedita - Lehman Brothers

Less

Gene Isenberg

Yeah, I would say the range overall between the peak and leading edge is probably for us 4,000 bucks to 4,000 bucks. And in the markets where we are strongest, it's less than the markets where there is much more competition at least. And we have categories which I think we put on these conference calls announced categories of rig. And the some old rigs have taken the biggest step, which you would expect. The category we have old and tired rigs is in a stack status, 55% of those rigs of stack right now and potential work. They have taken proportionally the biggest step. I hope that answers your question, Angie.

Angie Sedita - Lehman Brothers

Yeah, it does. And then kind of a follow-up here. As far as what you are seeing from the competitors both you smaller drilling contractors and larger drilling contractors discipline or some of the small guys being more aggressive on cutting and focusing on utilization?

Gene Isenberg

I don't know, but it seems to me we have enough problems with our own particularly about the other guys. But if one guy went up 11 rigs in a quarter, I am sure his quality didn't overnight create the increase in markets. So again there was some price. We look at the market without regard to, whether it's this guy, that guy or Joe blowing. We try to optimize the difference between maintaining a higher average price and utilization, and probably we overdid it on the higher pricing in the first half.

Angie Sedita - Lehman Brothers

Okay. And then finally on construction you have 81 rigs that you have under construction with 39 delivered so far, and you added three more to that list. What are your thoughts for the rest of this year then going into '08 as far as Nabors, I am not sure that 81 could grow?

Gene Isenberg

Just the U.S.A.?

Angie Sedita - Lehman Brothers

Right.

Gene Isenberg

Right now we have 24 scheduled for this half; 8 of those 81 scheduled for early next year. And as I said we’ve got three new builds for our purpose this quarter, and I am hoping we’ll get more.

Angie Sedita - Lehman Brothers

All right. Great. Thanks. That’s all I have.

Gene Isenberg

Thank you.

Operator

Thank you. Your next question comes from Kevin Simpson of Miller Tabak.

Kevin Simpson - Miller Tabak

Thanks. So, Gene I wanted to ask you about repurchases and you've been, you know, not really active in the market place. Over the last few quarters, it sounds like you are going to be generating a lot of free cash flow. You’ve got a big call on that with the convert? How do you see with the stock down like this, you are holding it yourself, I am just curious as to are you going to become a little more active here in the second half of the year and that you --

Gene Isenberg

We probably will, as you know we have something a little north of 400 million authorized, and as you probably know we could increase that number pretty quickly. I think it's like the that we’ll increase, we were pretty well occupied with the option business and other issues up till now and I think with that behind us we’ll probably buy more stock at these prices. We bought back billion dollars with a 35 in the quarter. So that looks good for we now have 32

Kevin Simpson - Miller Tabak

We will not really know $30.83. So it’s a real good buy now.

Gene Isenberg

I think you are right.

Kevin Simpson - Miller Tabak

I just wanted to go back to the portfolio, essentially how much more risky investments are still, and you talked about the 70% that’s treasuries or debit, but how much more risky investments are still in thee where there may be risk to other hedge fund meltdowns going forward?

Gene Isenberg

I think very little, I mean one thing, the portfolio I was personally managing has gone. So that risk is clearly gone, although we had done super well on that, I must say so.

Kevin Simpson - Miller Tabak

Of course.

Gene Isenberg

Kevin, I think, we’re eliminating what had leveraged. But one thing we got hit with, it sounds like it might evolve, but we looked at 51 months never had a down month, and how did what we lost was appreciation that we didn’t cash out. I mean we took it in the income, so it’s a debt now, but reasonable sizeable, part of the reasonable sizable because it grew. So, I think we are cutting back even on one of those that isn’t leveraged to emerging markets which we had grown like a big chunk. We are going to cut that at least in half, and we are pretty confident of the managers we have, but probably end up with a much smaller amount of dollars in this category and some fewer managers with pretty goods records and we know through all risk analysis, but that's the yes. That's before the back, not after back. I just don't think there is much risk of it. For one thing we don't want to be in the position of every quarter explaining a gain or loss on a portfolio.

Kevin Simpson - Miller Tabak

Okay. Hopefully any more quarters?

Gene Isenberg

There is only one so far Kevin. I don't think it several case out.

Kevin Simpson - Miller Tabak

Okay. I'm a shareholder now so I thinking differently. And then lastly, international it seems like a lot of opportunities potentially I kind of may be blanked out, why you are going over them? I mean do you one, you still think you have pricing opportunity internationally and were that kind of mostly in the P&L now? And then second…

Gene Isenberg

No, we got a ton of pricing account. I mean because we have multi-year contracts and the bad ones seem to turn out to be longer than we thought. And they are ending. So you have three year contracts, takes a year to do it and all the price increases that were incurred in those three, four years you don't get, when you get them on renewals. So we are getting the few jackups we have, there is monster improvement. We have one in Saudi Arabia already.

Kevin Simpson - Miller Tabak

When we go to from what to what?

Gene Isenberg

We will let make you aware of that.

Kevin Simpson - Miller Tabak

But the small jackup in Saudi Arabia went from what?

Gene Isenberg

It's doubled.

Kevin Simpson - Miller Tabak

From 35, 40 to 80.

Gene Isenberg

Mid 80s. That a small that we brought for $12 million. That was a risky thing when we brought it, Kevin. Anyway I think we are talking about probably $70 million of price improvement in international because of the land on the multi-year contracts and the few jackups. I mean we have a jackup working in the Caribbean for probably 65. May be 70 in that market is at least a 120 and if we get the low depth capability that this rig uniquely has if we get paid for that it could be 175. But in any event it will go from say 75 to 141ish. There are couple like that.

Kevin Simpson - Miller Tabak

And the 70 million.

Gene Isenberg

There is still problem on rigs in Saudi, everywhere and I mean a small example probably is Argentina. We went from a break-even operation to probably, would it make 20 million bucks or not, more than 20. And that's what may be we have one new rig there or two new rigs, but it was mostly price improve. That's the biggest thing of element or the juiciest element because that depth didn't investment, it just takes reading.

Kevin Simpson - Miller Tabak

And then would that be the period over which you would realize that over the next 18 months or, is that a good guess?

Gene Isenberg

It's really. A lot of it's going to be some this year, a more next year, and some thereafter.

Kevin Simpson - Miller Tabak

Okay. Great. That's it from me. Thanks.

Gene Isenberg

Thank you.

Operator

Thank you. Your next question comes from Geoff Kieburtz of Citigroup.

Geoff Kieburtz - Citigroup

Good morning, guys. I recognized you are reluctant to call [Baum]. But just to chart it help me understand how you are seeing the trends here. You talked about a roughly a $1,000 decline in the margins in lower 48 over the second half of '07. That's reasonably close to what we've seen over the first half of '07. Are you seeing, whatever the duration of this, does this kind of add a steady state decline or I mean how do you expect this to play out.?

Gene Isenberg

I don't really know. All I know is that our strategy is that we got a bunch of new rigs coming. We are looking to get more new rigs, and the new rigs are good. The new wells are -- they are better described as fit for purpose, and I have explained that in other conference calls and our guys have explained it better that taking all mechanical rig no matter what the price is, it cannot compete in the Barnett Shale and the Fayetteville shales and stuff like that. And they want a fixed purpose rigs. They wanted to work right away, but they wanted the purpose rigs. So we’ve got a bunch of those coming in at good prices, and some of the low end rigs we’ve taken a big hit on our lowest categories that’s in these conference calls notes. And basically, I don’t think we are going to lose market position, as in the second half as we did in the first half. So that probably means that, whatever it means, it probably means that prices would be more competitive, not to lose market position, certainly work a lot.

Geoff Kieburtz - Citigroup

Right. That’s yes.

Gene Isenberg

And we don't see any signs of -- I think we don't see -- hopefully there are signs out there that other people are better have better perception means when we do better. Frankly we don’t see anything that’s super exciting even in the lower 48 or in Canada and in the last month or so the scrip has gone down over five I think?

Geoff Kieburtz - Citigroup

Right.

Gene Isenberg

Gas scrips. So whatever it was a month ago, it is not yet any better this – today.

Geoff Kieburtz - Citigroup

And when -- your roster of new additions or your new bill per purpose rigs that are coming in, are all of those contracted already?

Gene Isenberg

Yes.

Geoff Kieburtz - Citigroup

Okay. And what are you doing, I mean, if you have any thoughts about the equipment that is idle and has remained idle for a while, are you just keeping it, are you considering actually cutting it up?

Gene Isenberg.

It ends where, it worked over – we’re actually cutting it out.

Geoff Kieburtz - Citigroup

Okay.

Gene Isenberg

I tried to sell it through a competitor, Jim would love to do, but domestically, we’ll start cannibalizing it for the worst end of it, and when you finish cannibalizing it then there is nothing much left for scrap.

But there is no active program domestically to cut up rigs just to make numbers, look that up for the industry.

Geoff Kieburtz - Citigroup

Okay.

Gene Isenberg

The fact that the gas is now beginning with a 5 and the scrip is 7 in a low number, that doesn’t eliminate the possibility, and I am not banking on this. But you know there is some profitability greater than 0 that we will see $10 plus gas for some period -- some time in the future, and if that happens there is a possibility that these low end -- of our low end rigs will find work. So there is no economical logic to what’s the scrap and before we can economically get benefit by cannibalizing.

Geoff Kieburtz - Citigroup

Alright. Okay and then you made a comment about your sort of a year from now starting to show sequential improvement. I can’t really recall exactly what you said, so I am going to ask you sort of what you were talking about. Were you talking about sequential improvement in earnings?

Gene Isenberg

Yeah.

Geoff Kieburtz - Citigroup

Okay. Very good. Thank you.

Gene Isenberg

Thank you.

Operator

Thank you. Your next question comes from Mike Urban of Deutsche Bank.

Mike Urban - Deutsche Bank

Thanks, good morning. I had a question for you on the international growth. Obviously, you have some new builds going in there but the opportunity set pretty large. How many rigs either for Nabors or the industry would envision leaving the US or being able to take out of the US for the international markets?

Gene Isenberg

We can move from the US. Canada, we have almost moved on, we have decided not to and other possible and work over rig. So right now I think we have ten direct, ten being prepared domestically to go to different places internationally. That includes three in the Middle East for work over there and the other seven. That's really saying that at least 15 plus will be placed before the end of this year internationally from domestic.

Mike Urban - Deutsche Bank

And in the US market again your preferences is clearly been new builds both in terms of the efficiency and the economics in terms of growing the business, with the pressure that the industry is seeing, with gas price set a little pressure, with the stocks obviously down a little bit. Have you seen any opportunities that have been attractive enough that you would be interested in acquiring any rigs in the US?

Gene Isenberg

No.

Mike Urban - Deutsche Bank

Okay. That's all from me. Thank you.

Gene Isenberg

Thank you.

Operator

Thank you. Your next question comes from Dan Pickering of Pickering Energy Partners.

Dan Pickering - Pickering Energy Partners

Good morning. Gene, can you talk a little bit about the build for purpose contract you signed this quarter, maybe compare them to contracts you might have signed six months ago, any differences in term or day rate?

Gene Isenberg

No, I think they are three years. I think six, nine months ago, at the beginning, they were lower than they are now. And these probably have more annum than the contract prices of say a couple of months ago.

Dan Pickering - Pickering Energy Partners

Okay

Gene Isenberg

But the value probably is a little better right now. But it's way high that it was at the beginning I think.

Dan Pickering - Pickering Energy Partners

So rates are higher than when you started building and lower than the best rates use on.

Gene Isenberg

On an apples-to-apples basis, a little lower because of more quality.

Dan Pickering - Pickering Energy Partners

Okay. That's helpful. Thank you. And Gene I guess as we look at your business, can you talk a little bit about kind of strategic issues? You are selling some properties in the E&P business. Did you not want to spin those into the First Reserve joint venture, or was just selling an easier strategy?

Gene Isenberg

When we do all these things as look at what the value two years going to be by producing them compared to selling them. The ones we actually sold, there was a unitization program. I work on which the details (inaudible) which makes properties worth more to the guidance on a control unit which is a kind of 48. So we can pay more than you would guess by producing it. So that's the case, you say okay we'll take more that way.

The second sale is something where we entered into with a partner, and the partner wants his $100 million quicker than we would've wanted to -- you know to deal as we can beat away. But we work with this guy a lot of times, lot of places if he wants to settle himself. If there was something logical to do with Nabors first result, and if I really would do it, but life is complicated enough without pricing as you make money with partners, not from partners. So it’s hard to set prices like that.

Dan Pickering - Pickering Energy Partners

Okay. That’s helpful. And then in terms of integrating your business, and kind of monetizing things, any thoughts around, I mean, we just saw NAV today, what fantastic numbers and stocks responded very well. Any thought that your manufacturing business is a better standalone business as opposed to internal and Nabors?

Gene Isenberg

Yes. Nothing has changed from what we've said in the past and we are reviewing that. But one of the things that’s relevant if we have, kind of humongous growth built in rather market is based on the growth in-house rather than on the [Comcast]. But we would continue to look at that.

Dan Pickering - Pickering Energy Partners

And how much of that business today, I mean, if we see the external revenues but they obviously internal revenues are backed out how much is internal versus external roughly?

Gene Isenberg

Let’s say a little more than half is still internal.

Dan Pickering - Pickering Energy Partners

Okay. Great. That's what I wanted to know. Thank you.

Operator

Thank you. Your next question comes from Roger Reid of Natexis.

Roger Reid - Natexis

Good morning, gentleman. Question about US Well Servicing market little bit weaker then we probably had anticipated there. Can you talk a little bit from your interaction with your customers what you see as a potential catalyst for a rebound there?

Gene Isenberg

I don't know, okay. I agree with you because, as you know the bulk of our workover business is with Lower 48 well drillings. Oil prices are not skimpy, and the drop were possibly due to weather, and apart from what I mentioned was our own shortcomings. So there is not an easy explanation.

Roger Reid - Natexis

Sure.

Gene Isenberg

We have been getting good prices. So the price is good. We do an LKF on the rest, but other than the rigs, and the rig margins are lower because utilization is lousy and some of its weather. Some of this has to be increased supply; I think the overall numbers are essentially the same for the industry.

Roger Reid - Natexis

Sure.

Gene Isenberg

I don’t know what the answer is but --

Roger Reid - Natexis

No, I appreciate that. That’s helpful. And then in the international business can you talk a little bit about where you think that could go certainly more robust market than the domestic market? Can you give us some colors as to where you think that could be headed in 2008?

Gene Isenberg

I think it will be up comfortably 50% in operating income.

Roger Reid - Natexis

Okay. Thank you.

Gene Isenberg

Thank you.

Roger Reid - Natexis

Thanks.

Operator

Thank you. Your next question comes from Benjamin Dell of Sanford Bernstein.

Benjamin Dell - Sanford Bernstein

Hi guys. I wonder if I could discuss nice to clarity, you talked about a $1,000 drop in the average rate towards the back end of the year. On those rigs that are rolling off contract, what would you expect those to do year-on-year decline -- or the declines being on those if they are on leading edge?

Gene Isenberg

If not leading edge, it probably would be closed to that (inaudible). Hopefully, you do better because if it gets renewed in the first place, which we hope to do, in doing the guy do a job if you are incumbent in doing a good job, you don’t necessarily have to meet the leading edge, but that’s the reality of the alternative you guys face. So, I think there are going to be drops that are probably pretty close to this thousand bucks.

Benjamin Dell - Sanford Bernstein

Okay. And the question I may it's about your investment. You talked about long-term returns being good so the double-digit number is10%.

Gene Isenberg

On the actively managed piece of the total portfolio.

Benjamin Dell - Sanford Bernstein

Okay. But the return on capital employed on your ongoing business is obviously being higher than that. I guess my question is why is that cash in there rather than being reinvested in the business and that is not being reinvested in the business. Why isn't it being return to the shareholders rather than you actively managing the money on behalf of shareholders?

Gene Isenberg

With the way we used them, I think they are more sophisticated and I think more or less conventional return on capital employed the Stern Stewart method anyway and the academic method and that is. So long as you have I'm putting this to provide. So long as you have excess cash, you take the excess cash out of the divisor in getting return capital employed.

So what we been doing is, we have been we borrowed money and we are leveraging in so they were having a better return on after tax cost of borrowing compared to what we are getting on it. It isn't adversely impacting our divisor in return on capital employed and we have the fire power when we needed. If we needed to do something for $1.5 billion, we can do it tomorrow. So, we will return stuff to shareholders and we have historically. I mean this calendar year we've bought back $1.5 worth stock.

Benjamin Dell - Sanford Bernstein

Okay, great. That was all. Thank you.

Gene Isenberg

Thank you. Operator, I think we only have time for one more question please.

Operator

Thank you. Your final question comes from [Rob MacKenzie of FBR Capital Markets].

Rob MacKenzie - FBR Capital Markets

Thanks guys. I will make it easy on you. Mine has been asked and answered.

Gene Isenberg

Okay, thanks. That's great question.

Rob MacKenzie - FBR Capital Markets

Okay.

Gene Isenberg

Ladies and gentlemen, thank you so much for attending our call. And if you have any further questions, just feel free to give us a call at anytime.

Operator

Thank you. This concludes today's conference call. You may now disconnect

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