Nabors Industries Q3 2007 Earnings Call Transcript

Nabors Industries Ltd.(NBR)

Q3 2007 Earnings Call

October 24, 2007 11:00 am ET

Executives

Dennis Smith - Director of Corporate Development

Gene Isenberg - Chairman & CEO

Joe Hudson - President of ND-USA

Jim Payne - Chairman and CEO of Shona Energy Company, LLC

Analysts

Arun Jayaram - Credit Suisse

Marshall Adkins - Raymond James

Mike Urban - Deutsche Bank

Dan Pickering - Pickering Energy Partners

Geoff Kieburtz - Citigroup

Kevin Simpson - Miller Tabak

Roger Read - Natexis Bleichroeder

Robert MacKenzie - FBR

Ben Dell - Bernstein

Presentation

Operator

Good morning, my name is Jakia and I will be your conference operator today. At this time, I would like to welcome everyone to the Nabors Industries Ltd Third Quarter Conference 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, Mr. Dennis Smith, Director of Corporate Development. Sir, you may begin your conference.

Dennis Smith

Thank you Jakia and good morning everyone and welcome to our third quarter conference call. The usual format that we have always followed, we will do again today. Gene will give about twenty to thirty minutes of review of the quarter and the best view we have right now, and I can give you a current outlook for fourth quarter and for the rest of the year and for 2008.

Of course this presentation constitutes forward-looking statements, I want to remind everybody as such. Besides the changes we have demonstrated many times in the past, we are anxiously waiting for the change to the positive side.

Also with us today as usual, is Tony Petrello, our President, Chief Operating Officer; Bruce Koch, our Chief Financial Officer, who stays in our general counsel, and all the heads of our most significant business units are here as well.

We've again posted a series of slides on the website under www.nabors.com, including investor information, an events calendar that you can use, and Gene will be highlighting a few others as he talks about particularly international as we get a little farther into the remarks.

With that I'll turn it over to Gene to get started.

Gene Isenberg

Thank you. Welcome to our conference call. As usual, as Denny just said, we posted on the Nabors website a series of slides, that contain details about the performance, and you might get those ready to be referred to. I'll reserve my comments. What I think you expect to hear from me namely is the bigger picture, the overall picture, what's happening now? What we expect to happen in the foreseeable and in our near-term future.

Let me first begin by commenting on our pre-announcement. At that time, we indicated earnings per share of $0.73 to $0.76 compared to a first half consensus at that time of $0.82. Our final results came in at the high end of the range, and operating income for the quarter was $287.3 million, which represented a slight increase over the prior quarter, but the compelling fact was that it was a 22% decrease over the same quarter in 2003.

The quarter included four significant below-the-operating line items, and let me discuss each of these. First, we experienced the net loss in investment income of $27.5 million, with most of this occurring in August, when the various debt markets became particularly distressed. We believe these losses are largely behind us, we've essentially gotten out as quickly as we can, of all the debt-related and high data investments, and by the end of the year, we will be pretty close to where we would like to be longer term.

The second significant item was the loss of $30.5 million on the other income line; this is primarily due to non-cash impairment charges against equipment, which no longer meets the criteria providing a positive return over the near term or the visible term.

We've been doing this from time-to-time regularly in the past. I would like to point out this $30.5 million doesn't affect anything except the book value of our remaining rigs and components doesn't affect our earnings power that has no meaningful impact in any significant ways.

More than offsetting the other income losses were reversal of tax reserves to $38 million. This is pretty significant and we faired pretty well on these items and we also faired pretty well on items which we didn't yet reserve for. In general, we are doing pretty well on income taxes and the outlook looks better than it has on that front for a while.

Finally, you'll note that this part as a result, included income from discontinued operations, this is the result of the long heralded and legally necessary sale of both businesses. This transaction resulted in pre-tax booking of nearly $15 million. And we ended up, even though we have necessary service by the end of [August '07], I think it was a good sale. It may turn out that we were forced to do something that at the end of the day we feel better than if we had an option and kept it.

Let me quickly go over as quickly as I can, go over the units. Canada is pretty crummy no matter how you look at it. It did show improvement in the second quarter compared to the first quarter, but it would have been, as you probably know, less money in the preceding quarter. This was still 60% below last year and I think even for the year, we'll end up probably 50% last year, which I could say there is something visible on the horizon but there isn't so there is no visible upside in sight.

However, we won't do this too often. In a way analytically, you can make the case that in the ways of rapid decline in drilling and clear evidence already of accelerating client reduction, and also general knowledge of what's going on in the heavy oil and tar sands, it is pretty much predictable that will for sure have a reversal of those trends in the not too distant future even though we can't do all projects well.

Lower 48, again, this was the largest sequential decrease we had quarter-to-quarter in all of our units. However, we believe the rates decrease in the subsequent quarters will be substantially less as the impact of new rigs face full effect and also the other important thing is, you bring a new rig on, you have higher cost, breaking it in so to speak than when it is actually operating and that also is going to have a mitigating effect on an otherwise probable downward market. So, we have 222 rigs working for the quarter, an average gross margin of just under $8900 a day and our margins are expected to decline further. In the near term, we expect them to hold well or at least north of $8000 for 2008.

We don’t see much change at this point in rig activity. For '08 there is a decline in older rigs should be made up by the deployment of new rigs. Again, the important thing here is the new rigs have good going in, take up pay contracts at high margins and we also have other affect continuing of getting the new rigs out of the breaking in stage and operating up to the full expectations.

Nabors well service, this probably has been our biggest adverse surprise and its one of the elements maybe key element in tempering our further outlook, if you recall this is obviously an oil market. And nevertheless, we still are surprisingly down even though we have pretty good acceptance, I would say very good acceptance of our saving out new rigs.

Anyway, the quarter was actually increased, because we operated in better areas. We got premium for our rigs, but that can't match the fact that this business is below expectations and it's likely to be there for this year, and it isn’t going to have a dramatic improvement that I can see in the next year. Although the client will be mitigated if any and there probably will be a decline in '08, it will be less than the decline we had between '06 and '07.

Nabors offshore, experience the significant drop in sequential income in the third quarter, primarily to what I believe is going to be a predictable continuing pattern analogous to a break up in Canada where people are worried about hurricanes, and we don’t get the activity that we use to get in the summer time. We also had a fire in one of our new barge rigs, one of the new state-of-the-art rigs, operated a whole month before we had a fire that's going to put it out, till the end of the year.

Nevertheless, we expect the fourth quarter to show a rebound with several rigs returning to work and 2008 should be modestly up, largely attributable to the contribution from two new barge rigs and the one I just mentioned. This unit will be hampered by the technical non-activity in jack-ups.

Lastly the picture is pretty much continuing what we told you before. This unit is closer to the sequential downturn in the quarter as winter seasonality concluded in the second quarter. And the outlook here I think is very good, as I have told you in the last couple of quarters. We have two new heli-portable rigs, did one start (inaudible).

Dennis Smith

Yes.

Gene Isenberg

And the second one?

Dennis Smith

December.

Gene Isenberg

Okay. So we'll have full years for two of those rigs, next year and the year after, even though we have only a few rig months this year. And we have signed contract on new 1,500 vertical tubing units, which will probably spud about a year.

In addition, again I am repeating myself. They have changed the price decks in Alaska big time so that we are anticipating four rigs being re-priced in the next 12 months or before the next 12 months. At current market prices compared to what they were priced at may be three years ago in most cases, and we are also hoping that we are successful on two new bill awards there.

Our oil and gas business has been doing pretty well. We had improvement this quarter largely on the sale of $15 million pre-tax gain from Fayetteville Shale acreage. We will see another increase in the fourth quarter and similar sale of this already completed in probably October. The Barnett Shale, this transaction will gain approximately $70 million.

We continue to have a significant amount of unrecognized value in our oil and gas operations. We view all these properties on a continual basis, we look at what the profitability is if we produce and hope and whether or not its opportunity for us to selling to somebody for whom they may have more value and accurately make their all in the long run that evens out to do what's best with the assets that if you want to consider it one time non-recurring, be my guest.

In the future most of the stuff will be done through a joint venture with Nabors and First Reserve. And I think we have good teams in place there and I think we are off to a decent start there.

Our other operating segments are doing pretty well, we had another good quarter even with only one month or five weeks contribution from our boat company. Growth in this segment is largely attributable to increased third party sales by Can Rig and continuing the solid performance by Ryan Technology our directional drilling company. We expect units from this to continue to improve as third party sales increasing at Can Rig and part of the Alaskan thing is drilling, which I referred to and also the ASCP growth, which is essentially construction, which is going to have a good fourth quarter.

International operations are extremely strong, but again I think the strength is masked sequentially. This market traditionally is characterized by fits and starts and more fits and starts lately I guess, but it's the nature of the business and the fact that our project is deferred a quarter, it bothers us in terms of what we led you to project for quarter, but it doesn’t bother us in the long term.

Visibly the market is something we have never seen before and it's pretty hot and I'll ask you to refer to three of the charts that we have here. I think chart 7, is the first one. I think if you look at international and Alaska, which is essentially totally removed from the North American gas situation. Even when we do gas internationally, it gets a tighter role than it is the North American gas. So, you can see from this that, we're going first these ties are increasing its size.

Secondly, the amount of this international and Alaska, which is essentially not a North American gas is growing like [topsy]. And in fact, if I were just to look at the operating income before corporate cost, overhead costs and eliminations between 2006 and 2009, I would expect roughly tripling of the international and Alaska operating income. This is before corporate overhead expectations.

So that’s pretty significant, I think this has emphasized a little bit in the next chart, which tries to breakdown the worldwide oil versus gas versus North American gas picture. And here again, each product is bigger, '09 isn't that much bigger than '06 was bigger and we can see what's happening with the oil segment. So, the North American gas picture is troublesome but it's not even the bulk of our company in the near term future.

The last thing, I want to talk a little bit about where the increase is going to come from. And I think the increase internationally, the increased operating income, and I think the important part of about this chart is, that new rig startups are important part of this picture but not really super significant after this year. The more important part is really the juiciest and best part is contract renewals, which traditionally had been way below, these are three-year contracts and stuff like that. The market is going up in these places, so we have enormous cash flows that are coming because the market is tightening and essentially in almost every market in the world its on a new replacement basis, and we are going to benefit from that, and we are and will. Sometimes its hard, sometimes it takes a change in our managers, because we go from the situation, for example in Argentina where there was chronic oversupply and a tight situation to it. You want a rig you need to get a new rig and unless somebody else is going to bring one in for free. God bless them, let them do it.

Even though the chart I just presented showed zero contribution in '08 and '09 from incremental rigs. We expect to have quite a few opportunities there. We are in good shape with respect to infrastructure, reputation, cash availability, everything is good. We have infrastructures, we have a situation where we should take advantage in incremental rigs of being great situation. I mean, right here and Mexico is sort of an example, rigs go down in the space and we can quickly refurbish them a little bit. Spend some amount of capital on it, but we have an infrastructure, we know how to work it and then we work with them actually we work with their subcontractors, their prime contractors. And their demand is going up as fast as anyplace else in the world.

I think that the other thing I should mention is that the rig refinance in this market are exclusively for new or almost new state-of-the-art rigs so almost state-of-the-art rigs, which we can manufacture new or adapt from existing high quality rigs. There is no such thing as taking a beat-up mechanical rig out of the weeds and fixing it up and generating EBITDA, which had been the situation for lower part of it.

Even with respect to North American gas market I am bullish in both the intermediate and long-term. At the moment, it costs about a half as much to buy a BTU of gas, there is BTU of oil, I don't think that will continue forever. The market works sooner or later, it's a good clean gas, it's the best CO2 gas that's available economically. And I think we will move to a balance short-term. I think, the other factor is that L&G is definitely going to be a major factor in the future, it's a significant factor now. But the capital cost and another cost is not going down in spite of the scale improvements and the technology improvements.

Anyway, I'll quickly conclude that we are in good shape with respect to cash, as we got reconfirmed with our investment grade rating with one of the agencies. The only issue we have now is to make sure that our CapEx and our overall cost are contained in line in those divisions where they need to be contained with our efforts, work over in domestic. And I just want to say, I am personally optimistic and my money is where my mouth is. My family and I have bought 1.5 million shares in last three to four months, in spite of the fact that I have not got the bridge and what's happened to the stock price between January '06 and now. But I think the game is not over and I think things will be a ton better from where they are before they are.

That concludes my comments.

Dennis Smith

Operator, we are ready for question-and-answer session, please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will pause for just a moment to compile the Q&A roster. Your first question comes from Arun Jayaram with Credit Suisse.

Dennis Smith

Yes, sir?

Arun Jayaram - Credit Suisse

I am wondering if you could comment on the impact of your retooling efforts on your fleet, you worked 220 rigs in the quarter. How much more efficient do you think the rig fleet is versus two or three years ago in the former well completions etc. I am just trying to gauge how much more efficient you think your operations are in Lower 48 versus couple of two three years ago?

Gene Isenberg

I think there are two things. The first terms of footing is knowledgeable, tough-minded operators are buying so-called fit-for-purpose rigs compared to lower price rigs that are on the market. So, that tells me whole lot. And depending on the market area, Denny, can you quote some of the areas where we've had what the old rigs- were what the modified rigs were and what the fit-for-purpose rigs were, in terms of say, rigs wells per year? Can you figure any of those? But it’s a pretty significant saving, it's a saving to the extent that when you count the ROP, the rate of penetration, the number of feet drilled in a day, and the rig moves, you can't take an oil mechanical rig at a zero price and compete with a fit-for-purpose rig.

Dennis Smith

One of the slides we have on the slide show here which tries to show what we believe the efficiencies are. Short-term, as Gene mentioned, there is issues getting the rigs up, the new technologies that kind of stuff, which is not getting us where we want to be, that’s working its way through, I think. We will have all that pretty well extinguished by the time we get into first quarter and a lot of efficiencies are generated by the new bits and buts but, exploiting those efficiencies requires the bigger rigs, the newer rigs. The brand new rigs got everything that we know how to put on the rig, all the automated pipe equipment, technology which is generating some of the learning curve issues. But when they are up and running, they are really drilling efficiently and drilling wells in half the time of some of the wells that we used to drill.

Arun Jayaram - Credit Suisse

Okay. That’s fair and second question. Not trying to pick on you here, but the Baker Hughes rig count, year-over-year has been up 6% onshore in the US. Your rig count is down 14% year-over-year. So, just trying to understand maybe some of the elements which goes into it, is that geographies that mix, but just trying to understand the deviation in your rig count versus the BHI number?

Dennis Smith

Joe, you want to comment on that, Joe Hudson who runs our ND USA.

Joe Hudson

Our rig count is slowing and 25 rigs today, give and take basis we bought a lot of new mills obviously, 60 plus into the marketplace, while we continue to see when you look the Baker Hughes rig count is not necessarily what I would call the big five, which is Nabors and three, four other publicly-traded companies but its others. And that’s where the majority of the rig count has come into. So, that’s the largest number in the differential in the percentage of market share.

Arun Jayaram - Credit Suisse

And I guess so, there are other operators more competing on price and you are being disciplined is that correct?

Dennis Smith

Yeah.

Arun Jayaram - Credit Suisse

Okay.

Gene Isenberg

Too disciplined.

Arun Jayaram - Credit Suisse

Okay. Thanks a lot guys.

Operator

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

Marshall Adkins - Raymond James

Since Joe got warmed up there, Joe, help me out here on the US margins going forward? Obviously, you had a pretty big drop on margin this quarter, but with all, I guess, new rigs and longer term contracts that will be in place next year. Gene you mentioned that thing should play now margin wise 8000 or higher. Help me with that progression over the next two-three quarters, extra long-term contracts maybe core day rates fall 500 a day. Is that too aggressively down or are your long-term contracts going to hold you up more than everyone else?

Joe Hudson

I think you got to break it into three pieces. The uncommitted spot market which is your evaluation, is probably better than ours because you look at everybody, we look at Nabors primarily. As been there are the term contracts, which are better generally, then there are new bill contracts, which have few components. They will be better, but they have a breaking in period. So, we have a cumulative positive effect of having 60 rigs just working right now, all of which are improving the day rate as we go, and we have 19 more coming by which time we will have less of identity in terms of both breaking it in, and we have slightly even higher day rate. So, I don’t want to promise more than we can deliver, but I think safely north of 8 is our expectation, which expectation on daily cost, we can deliver.

Marshall Adkins - Raymond James

Okay. In your slide presentation, you ably showed by '09 that you are going to be more oil driven and more international driven and we saw three - four years ago. Clearly, that is a trend that differentiates you from a lot of the other land drillers out there. Unfortunately, the questions I am going to get at are, what are you going to do next quarter, and a quarter after that, and quarter after that. So, help me filling the gap on when we think the international market will start to actually kick in as we go through '08? Or maybe, in other words, can we get operating income from where we were at mid 80’s this quarter? Can that be above 100, next quarter?

Gene Isenberg

I don’t know about quarter-to-quarter because the fits and the starts are something I don’t want get involved in, but a year from now, I will get a bunch and two years from now a bigger bunch. I can't really help you quarter-to-quarter although...

Marshall Adkins - Raymond James

I am sure no one is going to ask me those questions.

Gene Isenberg

No, I know. But that's the fact of it. The perception is, frankly, there were about 100% on North American Gas is a determined company in terms of stock price anyway. And the international stuff, it's coming. I sound wildly optimistic, if I told you every single thing we are looking at and every single aspiration we have because a lot of them won't come to pass and the ones that do will take longer than we thought et cetera. But it's probably there and it isn’t. We are not indifferent to the kind of question you've got, Marshall, but frankly, if we get a contract and if it is a good contract on say, rig 660 and it's three months later than what otherwise would be, I'll sleep just as well, even though that per say one month or one product delay could be $12 million to $15 million.

Marshall Adkins - Raymond James

Alright, well let me maybe ask it a different way then. You mentioned that operating income; I think it was '06 to '09 perhaps tripling could we see a doubling?

Gene Isenberg

International and Alaska.

Marshall Adkins - Raymond James

Right. Could we see a doubling in international and Alaska from say this quarter we just reported to say the very end of '08, does that make sense?

Gene Isenberg

Yeah, I would guess probably. I haven’t looked at the forecast that I have in front of me, but I guess, probably.

Marshall Adkins - Raymond James

Okay, well that’s very helpful guys, thanks.

Operator

Thank you your next question is coming from Mike Urban with Deutsche Bank.

Mike Urban - Deutsche Bank

Thanks good morning. Gene, you said you were a bit surprised by the well servicing business and we have been as well given that it is pretty heavily oily. What do you attribute it to? Is it customers holding back, or is there over capacity, has there been a shift may be on preference towards coil tubing units or is there something else. Could you try and calibrate that for us or give us a sense of what your view is there?

Joe Hudson

Some of everything, except the coil tubing unit. I will let Jim Payne answer this, my perception is there is increased supply a lot of companies are held on the margin but everything adds up to a not expected negative here. They are not only using their own rigs but putting new guys in business and Jim.

Jim Payne

I think my comments would pretty much mirror what Joe said. We would get lot of small competitors coming into the market making it more competitive out there. Like we see in our West Texas market, where we pretty much dominated that there has been 100 new rigs come in from small competitors alone. And a few of them are, we think, being financed by our some of our customers and stuff like that. And it's just a more competitive market out there right now.

Mike Urban - Deutsche Bank

Okay. And in the U.S. market in general on the labor side, that was clearly a big issue at one point with the labor cost rising. To what extent has that eased up the overall rig count obviously still pretty high. What are you seeing kind of on the wage and the cost side?

Gene Isenberg

Still high once you guys come. I think what we are trying to do to ensure that we keep our key people and lastly we've expressed to the units that are growing as rapidly as the international. You've got to have five people getting paid well above average than eight people fairly making industry average rates.

Mike Urban - Deutsche Bank

Yeah. Especially Joe or Jim, both.

Joe Hudson

It's still competitive out there. Like I say, some of these small companies coming in and they underwrite our employees. So, the market is still very competitive out there.

Jim Payne

I would mirror that last year was the last point we really saw wage increases that were industry wide. We're seeing some pressure in a given area that up in the Rocky Mountain areas that we may have to respond to. But that again is, in contracts that have all passed through those costs. But we're still finding the right number of people out there and as the rig count is even stable that’s a small pool and everybody is fishing out of the same pond. So speaking, including the international guys looking into that same area. So, it's a labor market from that perspective and still.

Mike Urban - Deutsche Bank

And what would you put the overall level cost inflation in the U.S. what number is that roughly?

Gene Isenberg

As a percentage wise, Mike I don’t think it’s that large right now, we are not…

Mike Urban - Deutsche Bank

No.

Gene Isenberg

Last year only it increased. What's happening is that people are poaching the very talented and best people, both from the international markets, offshore markets and from competitors in certain markets. So, we have to make higher offers to retain our people.

Mike Urban - Deutsche Bank

And you would be able to offset that in another places?

Joe Hudson

Well, I'm Joseph. Most of them are past.

Mike Urban - Deutsche Bank

Past. Okay. Alright, thank you.

Operator

Thank you. Your next question comes from Dan Pickering with Tudor Pickering.

Dan Pickering - Pickering Energy Partners

Good morning, guys. I don’t know if I missed it, the capital spending in the quarter, and then Gene, if you might provide an outlook for 2008?

Gene Isenberg

2008, I am hoping will have excess cash flow, i.e. all the factors that go into cash income and everything of over $1 billion. I think the only way that won't happen is if we have discretionary spending. If we have five 3,000 horsepower rigs it costs the 30 million a [park] and we get really good contracts. We will spend that on dooms day. But in terms of absent that, in terms of the projections we now have, I think we will probably spend a mite more than our maintenance than our depreciation. In other words, maintenance CapEx depreciation next year is probably going to be, [510ph] for the whole company. And I would say operating cash flow should be probably 17 and therefore, we are going to spend half $700 million or less, unless there is good reason for it.

Dan Pickering - Pickering Energy Partners

Alright.

Gene Isenberg

Good reason has to be incremental income.

Dan Pickering - Pickering Energy Partners

Alright and I guess that leads to the question, Eugene. Use of cash you said specific projects if those opportunities come up. I don't, unless you didn’t tell us, I don’t think you bought any shares back this quarter, it’s been a few quarters since the company has repurchased shares. What was your thinking around share repurchase at this point?

Gene Isenberg

I think, we have been frankly preoccupied with a bunch of other things. We still have authorized I think, $400 million-ish and as you guys all know that we could change that relatively quickly and we have plans to buyback shares. Just other things have taken time and analytical attention and my guess, is we brought it much back in the next periods.

Dan Pickering - Pickering Energy Partners

Alright, I realize I am jumping around, I apologize. The maintenance CapEx, the $700 million in CapEx that you are talking about potentially, I guess, as I think about that number. Is that lower than you would have told me six months ago or three months ago, have you changed your plans or this is just the development of the '08 budget as its coming together?

Gene Isenberg

No, I think we will have [done] 80 rigs in the last couple of three years domestically, including a small piece next year. I only expect the succeeding years to require that kind of -- if it does, god bless, it will do it. But I frankly don’t see the domestic market growing that big, I don't see the Canadian market growing that big. There may be some, some stuff in Alaska, where I mentioned that we'd be bidding on a couple of rigs and we have had CapEx. But you have CapEx spending two heli-portable rigs and which have very good contracts. And those contracts frankly we could probably finance, without recourse if we chose to and when we do something like we say, okay instead of having a good party more than our cost to capital, we'll keep it ourselves. I think the answer is still speculative in the sense that, we welcome the opportunities to spend money at our returns, that's our business.

Dan Pickering - Pickering Energy Partners

Okay last question, I just want to revisit Marshall's. Marshall pushed it a little bit in terms of growth in international operating income. It’s roughly $90 million now and he has to pick it double by the end of next year. I guess, as I schedule that out, that gets me to international operating profit growth at more like 75% than 50% and so.

Gene Isenberg

Well, I would say that it could be the conservative. The real - what we are actually projecting would be probably something more like 90 to 150 frankly, and also a substantial increase in Canada. But that's a smaller number to increase so.

Dan Pickering - Pickering Energy Partners

Right.

Gene Isenberg

Doubling with would be a possibility but not a probability. Not a 50% shot.

Dan Pickering - Pickering Energy Partners

Right, thank you very much.

Gene Isenberg

Okay.

Operator

Thank you, your next question comes from Geoff Kieburtz with Citigroup

Geoff Kieburtz - Citigroup

Good morning.

Gene Isenberg

Hi.

Geoff Kieburtz - Citigroup

Couple of questions, the new contracts you mentioned in the press release are coming out for the lower 48 roughly 40% above current rates. Do you have experiences that having done that in the past, I guess the question really gets to, what is your confidence level that you are going to be able to actually collect on that that higher rate?

Jim Payne

[37 to 110]

Geoff Kieburtz - Citigroup

Okay.

Gene Isenberg

The confidence level that we will do everything we need to get the margins we are projecting is, that’s lower certainty, 100% certainly given time, but lower certainty over time.

Geoff Kieburtz - Citigroup

Because of the debugging issues that you mentioned?

Gene Isenberg

You got it.

Geoff Kieburtz - Citigroup

Right.

Gene Isenberg

And also, we put out more new dose in the last year, in the Lower 48 than in Asian team at least 10% more. Plus, what we do in the rest of the world. So, maybe we're going to have to digest a little slower than we would hope we would all those issues.

Geoff Kieburtz - Citigroup

Okay. And I guess, you have talked earlier about the pricing competition from the smaller players. Is there a point at which, you more aggressively defend share?

Gene Isenberg

Yes, I think we're trying to be here now.

Geoff Kieburtz - Citigroup

Okay. And we've seen margins erode but they haven’t really collapsed and I guess, the question is, how should we think about the risk that you just - something happens that makes you break and get into a all out share war?

Jim Payne

No, I think we've been around a number of these things for longer than we would like to have been. I think the evidence so far we've been on the cautious side and I am not in a position probably has gone down two or three basis points since our peek.

Geoff Kieburtz - Citigroup

Right.

Jim Payne

And that replaces back that we are carefully balancing the effect on the overall market compared to the incremental business. But net-net-net, we're not going to go much slower in that position and I think we will grow higher.

Geoff Kieburtz - Citigroup

Okay.

Jim Payne

You take what Gene said, where we think we won't go below 8000 as Nabors specific, and you as you add to that the magnitude of improvement from the additional rigs that are coming out and getting all of our issues extinguished, as we hope to do early as a year. That implies that the spot market, for general rigs can go down for $3000 a day, and we still do, we think we will do.

Gene Isenberg

If we are not projecting EBITDA we are just saying that we will do at least 8000.

Geoff Kieburtz - Citigroup

I figured you weren't necessarily forecasting that.

Gene Isenberg

Yeah, I mean, also that could accommodated, Danny, exactly said a minute ago a much lower prices than I expected to occur in the spot market.

Geoff Kieburtz - Citigroup

Okay. Shifting to international, I think you acknowledge the fits and starts, you also you have made it clear you are not really prepared to make it quarter-by-quarter forecast, but is there a point on a quarter-to-quarter basis where your confidence in being able to achieve that growth would really be challenged?

Gene Isenberg

There are so many things, I don’t know right now - there are lots of activity, all over, not implicate on deep rigs, for example. There is lots of activity, even in Kazakhstan on deep rigs. I think I have told you this a bunch of times already, but there is an opportunity to do almost always we can do more than we have chosen so far to do in Saudi Arabia, and Mexico is a good market, and Russia we are trying to establish a primary market for ourselves down the road. So all those things are pending in, well, it actually come to pass and when it's hard to predict except that the portfolio of opportunities looks really good right now.

Geoff Kieburtz - Citigroup

Okay.

Gene Isenberg

And it is easier to say that the confidence then, to put up the quarterly number with that. So I can put up '09 number much more confidence and something I think we can easily be, but I don't know how it's going to come and where it's going to come and...

Geoff Kieburtz - Citigroup

Let me...

Gene Isenberg

Let me put it in this way, the outlook internationally is probably as good as it was domestically a couple of years ago except that there are five fewer qualified competitors and the kind of rigs you need, aren't the kind of rigs that worked in the states and we have a monster edge on both of those things. And putting reputation infrastructure you name it tax benefit whole god damn thing.

Geoff Kieburtz - Citigroup

If I kind of rephrase the question do you see any risk that your international contribution will be lower than your third quarter performance over the next five or six quarters?

Gene Isenberg

No.

Geoff Kieburtz - Citigroup

And then, just a last kind of bigger question, in press release you've talking about '08, overall, again being near a record performance, do you think it's going to be above '07?

Jim Payne

No, I think the safe thing to say is about the same modestly lower, do I personally think it will be, not the whole company.

Geoff Kieburtz - Citigroup

Alright, yes, whole company.

Jim Payne

I think so, particularly, in sense to integrate in time of the other questions that were before.

Gene Isenberg

At the end of the day we get the metric is per share, but even without that, I am referred. The first call is like 321 for this year at the moment it's 370 for next year. And I think that is probably the call I hear about the same maybe, modestly lower '08, but I certainly hope and frankly personally expect will do better but I am not projecting it a promise here.

Geoff Kieburtz - Citigroup

I got you, thanks very much.

Operator

Thank you. Your next question is coming from Kevin Simpson with Miller Tabak.

Kevin Simpson - Miller Tabak

Thanks couple of questions Joe, first for you when do you think the fleet of new rigs will be working up to capability in the debugging and start up cost will really be behind you. Is that a 1Q event for next year or is that going to linger do you think possibly well into '08?

Jim Payne

We are dying to hear the answer, Kevin.

Gene Isenberg

Actually, I think I had that discussion yesterday. No, I think by the first quarter of '08 we should see a majority of the forms past us in terms of the new build.

Jim Payne

At the end of the quarter?

Gene Isenberg

End of the quarter, yes.

Kevin Simpson - Miller Tabak

And where do you stand now relative to where you thought you would be say, if we had when we had the call three months ago. It seems like its taking longer but that may just be our expectation relative to your own…

Gene Isenberg

Yeah, I think I said at the call last time it is still looking in the first quarter we put a large number of new builds into the rig fleet in the last three to four months. And so, again, I would say at the end of the first quarter we should see I guess we call it debugging majority of that past us and that should be the case.

Kevin Simpson - Miller Tabak

Okay, thanks. And then one to Ziggy if you are there the…

Jim Payne

But you can see it at the Middle East, but it's…

Kevin Simpson - Miller Tabak

That’s a shame, that’s too bad.

Gene Isenberg

Non-gas.

Kevin Simpson - Miller Tabak

Talking about the international growth has clearly been, been below or I thought there would - I think below where you guys thought it would be. So, I guess one, is that just the start up issues inherent and ramping up internationally which are always going to be there or are those specific areas that have been disappointing in terms of cost or are you having less success in rolling pricing higher than that, than you would expect it, say at the beginning of this year?

Jim Payne

I don’t it’s a lack of success of rolling prices higher, because we've actually increased our day rates significantly. Some, we're still working on contract renewals we're trying to get rate increases. I think probably, the most as far as the growth is, as you have said the start up and some of that taking a little longer than anticipated. But also some of the growth in international is affected that as Gene said earlier. Some of the projects that we anticipate is starting six months ago having started now and this is not under any control that we have, it’s whether it’s government or just the project itself taking longer to get started.

Kevin Simpson - Miller Tabak

And is that factor gotten worse over the last year, be just because of the stresses in the system or is it about the same and I guess, should we be building it into our expectations for 2008 and 2009?

Jim Payne

It’s actually about the same. It’s what I have seen in international over the year's, some of the projects take longer to get started whether it's the operator, the government or whatever those factors are most of them are beyond our control, but I don’t see it being worse now than it's been in the past.

Kevin Simpson - Miller Tabak

I mean that would be the biggest risk to doing essentially 150 million EBIT in 4Q of '08?

Jim Payne

I would say, yes that’s the biggest risk.

Kevin Simpson - Miller Tabak

Okay, and Gene do you have any sense on what your possible obligations are going to be on this first reserve joint venture that would be a call on capital for 2008 that’s incremental to this 700 million units on…

Gene Isenberg

That’s going to happen in their, but if it's anything north of $100 million or $150 million, it will be one of those things that it's a voluntary decision we can say yes or no, aren’t this isn't good enough we will say no, and my hope is we say yes.

Kevin Simpson - Miller Tabak

To win this 700-ish you have got a something up to $250 million for…

Gene Isenberg

About…

Kevin Simpson - Miller Tabak

About…

Gene Isenberg

We don’t have this quite achieved, but that’s where I am expecting that will come up into.

Kevin Simpson - Miller Tabak

Okay, that’s it from me, thanks.

Gene Isenberg

Thank you.

Operator

Thank you. Your next question is coming from Roger Read with Natexis Bleichroeder.

Roger Read - Natexis Bleichroeder

Yeah. Good morning, gentlemen.

Gene Isenberg

Good morning, Roger.

Roger Read - Natexis Bleichroeder

Really quickly, Gene you guys haven't touch on it historically and markets get weak acquisitions, cost cutting, or items that come to the four, and on the last call you've talked about or maybe it was recent conference, you've mentioned the potential to MLP your own on-shore business. Could you comment on what you think may lay ahead in terms of consolidation you would want to do or consolidation you think others could be interested in the US Lower 48?

Gene Isenberg

100% for others doing a whole bunch of consolidation, especially in Lower 48. I think the MLP thing was, I spoke, well I should note, but I spoke in the sense that I didn't think it was possible, I am not damn sure whether it is possible or isn't impossible. But if we're saying any of that I don't see anything that's likely to be a major acquisition for Nabors drilling USA in the foreseeable future. I think, if there were something internationally we look at it, if there were something in work over, they would carefully look at it. And I don't really see, I think we've demonstrated that's it's our belief and I think it's going to be confirmed that we are not going to buying EBITDA, we will buying state-of-art equipment that can win contracts with some customers and work to two, three, four, five years from now. Do whatever the cycle may be -- I hope I just do it.

Roger Read - Natexis Bleichroeder

Okay. And then on the cost cutting side, it sounds like the various people here backed up, it still remains a very competitive markets. So clearly, tough time to try to sort of rationalize your crews to the amount of work you had. Does that mean we're in a period here where, we are going to see continued labor cost increases in spite of flat to down price changes for the rigs and equipments?

Gene Isenberg

I don't really think so. I think we frankly be paying your key guys more. So, we will probably have fewer people, I would say, except international, they are going to have to staff the growth, staff to grow. I think the other places will not have increased costs but they will increase pay for the key guys.

Roger Read - Natexis Bleichroeder

Okay, thanks.

Gene Isenberg

And it is done to itself, of course. They had their own and are having their own super inflation as we speak.

Operator

Thank you. Your next question is coming from Robert MacKenzie with FBR.

Robert MacKenzie - FBR

Thanks guys, one final question left, and you kind of answered it a little bit earlier Gene is, with the market land drill is being down and out. What's your interest level and what you see in the market for potential acquisitions and how likely do you expect Nabors to be or perhaps some of your competitors to be, in consolidating the industry?

Gene Isenberg

I don't see anything that we would be tempted within the Lower 48 type and as I have said before, I'd be delighted if all of our competitors got together and merged into one.

Robert MacKenzie - FBR

Okay. Fair enough, that's it from me.

Gene Isenberg

And that's price discipline.

Operator

Thank you. Your next question…

Gene Isenberg

Operator, we've are running off the time limits, so just one more question please. And if anybody else has any other question, feel free to call us.

Operator

Thank you. Your final question is coming from Ben Dell with Bernstein.

Ben Dell - Bernstein

Hi guys.

Gene Isenberg

Hi.

Ben Dell - Bernstein

Maybe if I can just follow-up on a question on the North American market. You talked about, pricing of competitors coming and taking market share. Yeah, they are obviously bringing in lower quality rigs. What is the risk there as you bring in your new fleet and your clients that have dropped some of your older rigs, that's why you continue to loose market share or do you have a strategy for pricing the old rigs that are rolling off on the low end just compete with those?

Jim Payne

I don't think that’s where we, Joe, I am sorry. But I don't think that's where we've lost anything. I think a lot of, a number of guys, we have had to deal - we take the old rig and the contract till we deliver the new rig. A lot of them are continuing with the old rig and the new rig. I don't know if any case where others have replaced us with the old rigs, Joseph.

Joe Hudson

Don’t make me a liar.

Jim Payne

Well, to answer your again question is, the response would be, we obviously - the new builds are taking right now larger percentage of our overall fleet is currently operating, but we are seeing an aggressively marketing. A lot of our existing SCR's and SCR upgrades that are, that come and know who is it on being seconded or post to international, who is also looking a lot of that equipment. So no, we're aggressively still pursuing the market share away from the new bills.

Ben Dell - Bernstein

Okay. And just on a step up update, Gene in your prepared remarks you said, your investment funds by year end would be, where you want them to be in the long-term. Can you just give us some color on where exactly that is and what that means?

Gene Isenberg

I am sorry, could you repeat the question?

Ben Dell - Bernstein

In your prepared remarks, you suggested that, the funds in your investment fund that obviously had some impact this year in from the debt market - the money management side would be where you wanted them to be in the long-term by the end of the year. And I was just wondering, what you meant by that remark in terms of it, is that a risk management, total investment style, have you changed what you are doing in those investments?

Gene Isenberg

Yeah, but not quick enough. Frankly, we had reliance that’s essentially my responsibility here on an organization and individual that we thought. We only have five straight years of really good results on debt management, fixed income management and that turned out to be pretty bad call in my part. But essentially, we are out or will be out by the end of the year on.

Jim Payne

Anything related to fixed income and anything we’re already out essentially of anything that’s high data, which we had some with one of the most prestigious investment banks in the world. But essentially where we are down to maybe other than LIBOR based, treasury based investments we probably got 15%, and our alternative investments which hopefully are not leverage hopefully in areas where manages an accurate results in, we hopefully get a decent return. So, that’s what I meant when I said we would be hopefully where we wanted to be by the end of the year.

Ben Dell - Bernstein

Okay, great. Thank you.

Jim Payne

You're welcome.

Operator

Thank you.

Gene Isenberg

Ladies and gentlemen, thank you very much. Please always feel free to give us a call if there is any further question.

Operator

Thank you. This does conclude today's Nabors Industries Conference Call. You may now disconnect your lines.

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