In commenting on these results Gene Isenberg, Nabors' Chairman and Chief Executive Officer, said "This quarter's results reflect short-term challenges in our North American gas directed markets and the increasing realization of the potential of our international markets. Despite a sizeable drop in the US lower 48 drilling activity and an abysmal quarter in Canada, our results were essentially in-line with last year as a result of a large increase in our International operations and smaller but meaningful increases in our Alaskan unit. Results were also bolstered by a lower effective tax rate and the large share buy-back.
"Internationally, the quarter represented a significant sequential increase even though we again experienced several project deferrals, more startup delays and a higher than usual level of downtime. During the quarter we secured another eight long-term commitments for incremental rigs, two of which are for new builds. This brings to 26 the total number of incremental rigs expected to commence operations during the year, including two previously idle international rigs, five new builds and ten relocations from our US operations. Of the ten relocated rigs, eight are deep drilling land rigs including a winterized Canadian rig, one is a SuperSundowner offshore platform rig and one is a heavy workover rig. We expect these rigs to contribute approximately 13 rig years in 2007. We continue to enjoy a high degree of visibility for substantial increases in this unit's profitability into 2009. These forward expectations are largely based upon repricing existing long-term contracts as they renew at current market rates combined with the quantity of incremental rig commitments already secured or highly probable. For 2007 we anticipate operating income will increase by more than 75% compared to last year and we believe another increase on the order of 50% or more is readily achievable in 2008.
"Our US Offshore operations posted a solid increase over the first quarter of 2007 with the early May deployment of two new-built barge rigs for deep gas work in the shallow waters of the Gulf of Mexico. The quarter's results would have been significantly higher except for sequentially lower jackup activity. We have also seen certain customers postpone several platform operations bringing increased uncertainty to the balance of the year. We remain optimistic regarding future increases in this business, but expect the third quarter to be slightly lower as the potential for hurricanes inhibits activity.
"Results for our Alaskan operations reflected the usual second quarter seasonal decrease, but were substantially higher than the same quarter last year as we began what is expected to be a multi-year market expansion. The full year should more than double last year's operating income despite some temporary project deferrals by certain customers.
"Our US Lower 48 Land drilling operations averaged 229 rigs working during the second quarter at an average margin per rig day of $9,619. This compares to first quarter 2007 averages of 243 rigs and $9,908 respectively. At the end of the quarter this unit had 68 idle rigs, excluding seven, which are now working under long-term contracts in our international operations. We deployed eight new rigs during the quarter, with 32 out of 81 new rigs yet to deploy over the next three quarters, all at much higher margins. We recently secured three additional new rig contracts consisting of two M-Series 750 PACE rigs and one 1,000 horsepower PACE rig. We continue to receive inquiries regarding additional new rigs as existing and incremental customers realize the enhanced performance characteristics of these rigs. We are seeing continuing rate pressure on existing rigs, particularly the less efficient ones, as the anticipated improvement in industry activity continues to be delayed. We continue to enjoy a high level of term contract coverage for our existing fleet, but we will see a significant number of these contracts expiring during the third and fourth quarters, most of which we expect to renew. Any idled rigs should be more than offset by the deployments of our new rigs and the improved margins that will result from diminishing costs associated with the start-up and debugging of this new technology. Meanwhile this unit continues to achieve new milestones in its already outstanding safety performance with a year-to-date reduction in the incident rate of 28%.
"Our US Land well servicing business posted another sequential decline in its results leading to diminished expectations for the full year. The decline was primarily attributable to fewer working hours per rig as a result of persistent rains in Texas and Oklahoma and a weakening market in West Texas and the Rocky Mountains. The decline in West Texas stems from increased competition due to a large influx of additional rigs by numerous contractors, while the slower results in the Rocky Mountain region appears to be temporary since it is driven primarily by seasonal effects, project deferrals and execution problems which have been rectified. We do expect to see improving results in the coming quarters with normal weather and ongoing deployments of our new generation Millennium rigs in markets away from West Texas. We deployed 23 new workover rigs during the quarter, 13 in the 500 horsepower class and 10 in the 200 horsepower class. This leaves 124 new rigs yet to deploy, with the 24 remaining 500 horsepower models expected by the end of the year and all 100 of the 400 horsepower units deploying throughout 2008.
"Our Canadian business unit posted an $8 million loss, its first significant quarterly loss since the early 1990s. The well servicing business, which suffered disproportionately from a lingering breakup and adverse weather, both of which exacerbated already weak market activity and pricing generated the bulk of the loss. We expect a significant seasonal rebound in the third quarter, although it will likely be less than one-half of last year's comparable quarter. We have little to no visibility as to when a turnaround will occur in this market and we anticipate little improvement before 2008.
"In our oil and gas operations, results increased modestly compared to the prior quarter. Subsequent to the quarter we sold a small portion of our acreage holdings in the Fayetteville shale play which will increase next quarter's operating income by approximately $15 million. We expect to complete more significant sales of acreage in the Barnett shale in the fourth quarter. The Fayetteville sale was opportunistic as it allowed the purchaser to gain operatorship of the area. We believe that the prospective Barnett sales represent higher present value than would be achieved by producing the properties. We expect the contribution of this unit to be increasingly more significant to our results as the investment cycle of existing properties winds down and new investments are made through our NFR joint venture.
"Our Other Operating Segments posted only slightly lower sequential results reflecting the weaker North American markets and seasonally weaker contributions from our Alaskan joint ventures. We expect the balance of the year to post flat results with large increases in Canrig, more modest increases in Ryan and EPOCH, and improving results in our Canadian service entities, largely offset by the loss of roughly $17 million in contribution from Sea Mar as a result of the pending sale.
"Investment Income for the quarter was a loss of $9.3 million reflecting net pre-tax losses of $19 million (2.8%) of the portion of our portfolio that is comprised of equities and actively managed funds. The losses were almost solely attributable to substantial losses in two of the 30 different funds included in this component of our portfolio. The performance of these equity and fund investments remains relatively good with a multi-year yield in excess of 10%, inclusive of this quarter's losses, which boosts our total portfolio yields to a level that is well in excess of that which would have been earned in money markets or treasuries.
"Other income reflected the completion of the sale of three small accommodation jackups in the Arabian Gulf to a group of private investors. This opportune sale garnered proceeds of $99 million yielding a pre-tax gain of approximately $38 million on the disposal of these non-strategic assets. The units have averaged annual operating income of $8.5 million over the three years in which, they were owned by Nabors. We expect another pre-tax gain of approximately $40 million in the third quarter arising from our definitive agreement with Hornbeck Offshore Services, Inc., wherein they will purchase 20 of our Marine transport vessels in an all cash transaction. Closing is subject to the customary closing conditions and should occur in early August. Nabors will maintain ownership of the five vessels it currently has in Mexico and will separately contract Hornbeck to operate these five vessels.
"In summary, we remain rather cautious regarding the short-term outlook in North American gas, but we are particularly optimistic regarding near-term and longer growth in our International operations and more modest but meaningful improvements in our US Offshore and Alaskan units. Nabors is in a unique position to capitalize on the strength of international rig demand through both our capacity to furnish new rigs expeditiously and the availability of suitable rigs from our underutilized North American fleets. Recently we have redeployed nine deep drilling rigs and one heavy workover rig from our US operations and we are currently preparing three more workover rigs and up to ten more deep drilling rigs. These incremental rigs combined with the scheduled renewal of existing international rig contracts at much higher market rates should result in next year's international income exceeding that of our US Lower 48 land drilling operations, even with a modest recovery in 2008."
The Nabors companies own and operate approximately 640 land drilling rigs worldwide and approximately 795 land workover and well-servicing rigs in North America. Nabors' actively marketed offshore fleet consists of; 41 platform rigs, 14 jack-up units and 4 barge rigs in the United States and multiple international markets. In addition, Nabors manufactures top drives and drilling instrumentation systems and provides comprehensive oilfield hauling, engineering, civil construction, logistics and facilities maintenance, and project management services. Nabors participates in most of the significant oil, gas and geothermal markets in the world.
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