e10vq
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2007
 
Commission file number:  001-32657
 
 
Nabors Industries Ltd.
 
Incorporated in Bermuda
Mintflower Place
8 Par-La-Ville Road
Hamilton, HM08
Bermuda
(441) 292-1510
 
98-0363970
(I.R.S. Employer Identification No.)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer þ     Accelerated Filer o     Non-accelerated Filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The number of common shares, par value $.001 per share, outstanding as of October 26, 2007 was 283,089,379. In addition, our subsidiary, Nabors Exchangeco (Canada) Inc., has 130,440 exchangeable shares outstanding as of October 26, 2007 that are exchangeable for Nabors common shares on a one-for-one basis, and have essentially identical rights as Nabors Industries Ltd. common shares, including but not limited to voting rights and the right to receive dividends, if any.
 


 

 
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
INDEX
 
                 
        Page No.
 
  Financial Statements(Unaudited)    
    Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006   2
    Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2007 and 2006   3
    Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006   4
    Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2007 and 2006   5
    Notes to Consolidated Financial Statements   7
    Report of Independent Registered Public Accounting Firm   31
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   32
  Quantitative and Qualitative Disclosures About Market Risk   46
  Controls and Procedures   46
 
  Legal Proceedings   46
  Risk Factors   47
  Exhibits   48
  49
 Awareness Letter of Independent Accountants
 Certification of Chairman & CEO Pursuant to Rule 13a-14(a)
 Certification of VP & CFO Pursuant to Rule 13a-14(a)
 Certification of Chairman, CEO, VP & CFO Pursuant to Section 1350


Table of Contents

 
PART I FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                 
    September 30,
    December 31,
 
(In thousands, except per share amounts)   2007     2006  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 693,777     $ 700,549  
Short-term investments
    186,196       439,467  
Accounts receivable, net
    1,043,235       1,109,738  
Inventory
    131,646       100,487  
Deferred income taxes
    35,738       38,081  
Other current assets
    455,829       116,534  
                 
Total current assets
    2,546,421       2,504,856  
Long-term investments
    383,288       513,269  
Property, plant and equipment, net
    6,466,732       5,410,101  
Goodwill
    367,376       362,269  
Other long-term assets
    314,590       351,808  
                 
Total assets
  $ 10,078,407     $ 9,142,303  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
Current portion of long-term debt
  $ 700,000     $  
Trade accounts payable
    367,113       459,179  
Accrued liabilities
    348,680       294,958  
Income taxes payable
    141,703       100,223  
                 
Total current liabilities
    1,557,496       854,360  
Long-term debt
    3,305,840       4,004,074  
Other long-term liabilities
    238,936       208,553  
Deferred income taxes
    562,442       538,663  
                 
Total liabilities
    5,664,714       5,605,650  
                 
Commitments and contingencies (Note 7)
               
Shareholders’ equity:
               
Common shares, par value $.001 per share:
               
Authorized common shares 800,000; issued 305,403 and 299,333, respectively
    306       299  
Capital in excess of par value
    1,731,531       1,637,204  
Accumulated other comprehensive income
    320,412       201,261  
Retained earnings
    3,136,928       2,473,373  
Less: treasury shares, at cost, 22,340 common shares
    (775,484 )     (775,484 )
                 
Total shareholders’ equity
    4,413,693       3,536,653  
                 
Total liabilities and shareholders’ equity
  $ 10,078,407     $ 9,142,303  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
(In thousands, except per share amounts)   2007     2006     2007     2006  
 
Revenues and other income:
                               
Operating revenues
  $ 1,250,299     $ 1,213,252     $ 3,620,996     $ 3,439,989  
Earnings from unconsolidated affiliates
    2,689       5,706       18,566       19,475  
Investment (loss) income
    (27,466 )     37,155       (8,029 )     67,753  
                                 
Total revenues and other income
    1,225,522       1,256,113       3,631,533       3,527,217  
                                 
Costs and other deductions:
                               
Direct costs
    722,058       654,265       2,043,459       1,835,523  
General and administrative expenses
    105,975       92,783       319,824       267,709  
Depreciation and amortization
    125,089       95,937       340,069       262,035  
Depletion
    12,533       7,731       28,318       28,661  
Interest expense
    13,450       13,744       40,235       33,970  
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
    30,524       4,076       4,775       11,925  
                                 
Total costs and other deductions
    1,009,629       868,536       2,776,680       2,439,823  
                                 
Income before income taxes from continuing operations
    215,893       387,577       854,853       1,087,394  
                                 
Income tax (benefit) expense:
                               
Current
    4,211       15,207       164,038       125,864  
Deferred
    15,919       87,587       17,300       200,907  
                                 
Total income tax expense
    20,130       102,794       181,338       326,771  
                                 
Income from continuing operations, net of tax
    195,763       284,783       673,515       760,623  
Income from discontinued operations, net of tax
    22,265       7,968       35,024       22,324  
                                 
Net income
  $ 218,028     $ 292,751     $ 708,539     $ 782,947  
                                 
Earnings per share:
                               
Basic from continuing operations
  $ .70     $ 1.02     $ 2.42     $ 2.58  
Basic from discontinued operations
    .08       .03       .12       .07  
                                 
Total Basic
  $ .78     $ 1.05     $ 2.54     $ 2.65  
                                 
Diluted from continuing operations
  $ .68     $ .99     $ 2.35     $ 2.50  
Diluted from discontinued operations
    .08       .03       .12       .07  
                                 
Total Diluted
  $ .76     $ 1.02     $ 2.47     $ 2.57  
                                 
Weighted-average number of common shares outstanding:
                               
Basic
    280,152       277,553       278,782       294,987  
                                 
Diluted
    287,969       286,544       286,894       305,066  
                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
                 
    Nine Months Ended September 30,  
(In thousands)   2007     2006  
 
Cash flows from operating activities:
               
Net income
  $ 708,539     $ 782,947  
Adjustments to net income:
               
Depreciation and amortization
    344,415       266,891  
Depletion
    28,318       28,661  
Deferred income tax (benefit) expense
    (19,139 )     198,730  
Deferred financing costs amortization
    6,264       4,168  
Pension liability amortization
    280       315  
Discount amortization on long-term debt
    1,465       3,370  
Amortization of loss on hedges
    414       416  
(Gains) losses on long-lived assets, net
    (252 )     10,394  
Losses (gains) on investments, net
    40,383       (26,421 )
Gain on disposition of Sea Mar business
    (49,500 )      
Losses (gains) on derivative instruments
    194       (850 )
Share-based compensation
    24,686       22,601  
Foreign currency transaction (gains) losses, net
    (3,073 )     556  
Equity in earnings of unconsolidated affiliates, net of dividends
    (6,979 )     (17,041 )
Changes in operating assets and liabilities, net of effects from acquisitions:
               
Accounts receivable
    88,892       (254,403 )
Inventory
    (25,851 )     (46,047 )
Other current assets
    (67,347 )     (26,720 )
Other long-term assets
    (147,573 )     (52,922 )
Trade accounts payable and accrued liabilities
    (79,090 )     107,081  
Income taxes payable
    (26,457 )     12,634  
Other long-term liabilities
    39,467       25,179  
                 
Net cash provided by operating activities
    858,056       1,039,539  
                 
Cash flows from investing activities:
               
Purchases of investments
    (231,070 )     (1,087,987 )
Sales and maturities of investments
    495,563       799,713  
Cash paid for acquisitions of businesses, net
    (8,391 )     (46,510 )
Capital expenditures
    (1,482,845 )     (1,344,682 )
Investment in affiliates
    (28,314 )     (2,433 )
Proceeds from sales of assets and insurance claims
    135,525       10,322  
Proceeds from sale of Sea Mar business
    194,332        
                 
Net cash used for investing activities
    (925,200 )     (1,671,577 )
                 
Cash flows from financing activities:
               
Decrease in cash overdrafts
    (15,337 )     (15,845 )
Proceeds from long-term debt
          2,750,000  
Reduction of long-term debt
          (769,789 )
Proceeds from sale of warrants
          421,162  
Purchase of exchangeable note hedge
          (583,550 )
Debt issuance costs
          (27,972 )
Proceeds from issuance of common shares
    60,362       21,925  
Repurchase and retirement of common shares
          (1,373,334 )
Purchase of restricted stock
    (1,811 )      
Tax benefit related to the exercise of stock options
    10,044       4,315  
                 
Net cash provided by financing activities
    53,258       426,912  
Effect of exchange rate changes on cash and cash equivalents
    7,114       331  
                 
Net decrease in cash and cash equivalents
    (6,772 )     (204,795 )
Cash and cash equivalents, beginning of period
    700,549       565,001  
                 
Cash and cash equivalents, end of period
  $ 693,777     $ 360,206  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
                                                                         
                      Accumulated Other
                   
                      Comprehensive Income (Loss)                    
                      Unrealized
                               
                      Gains
                               
    Common Shares     Capital in
    (Losses) on
    Cumulative
                      Total
 
          Par
    Excess of
    Marketable
    Translation
          Retained
    Treasury
    Shareholders’
 
    Shares     Value     Par Value     Securities     Adjustment     Other     Earnings     Shares     Equity  
 
Balances, December 31, 2006
    299,333     $ 299     $ 1,637,204     $ 33,400     $ 171,160     $ (3,299 )   $ 2,473,373     $ (775,484 )   $ 3,536,653  
                                                                         
Comprehensive income (loss):
                                                                       
Net income
                                                    708,539               708,539  
Translation adjustment
                                    152,286                               152,286  
Unrealized gains on marketable securities, net of income taxes of $495
                            13,621                                       13,621  
Less: reclassification adjustment for gains included in net income, net of income taxes of $2,661
                            (47,046 )                                     (47,046 )
Pension liability amortization, net of income taxes of $104
                                            176                       176  
Amortization of loss on cash flow hedges
                                            114                       114  
                                                                         
Total comprehensive income (loss)
                      (33,425 )     152,286       290       708,539             827,690  
                                                                         
Cumulative effect of adoption of FIN 48 effective January 1, 2007
                                                    (44,984 )             (44,984 )
Issuance of common shares for stock options exercised, net of surrender of unexercised vested stock options
    4,457       5       60,357                                               60,362  
Nabors Exchangeco shares exchanged
    41                                                                
Tax effect of exercised stock option deductions
                    11,097                                               11,097  
Restricted stock awards, net
    1,572       2       (1,813 )                                             (1,811 )
Share-based compensation
                    24,686                                               24,686  
                                                                         
Subtotal
    6,070       7       94,327                         (44,984 )           49,350  
                                                                         
Balances, September 30, 2007
    305,403     $ 306     $ 1,731,531     $ (25 )   $ 323,446     $ (3,009 )   $ 3,136,928     $ (775,484 )   $ 4,413,693  
                                                                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY (Continued)
(Unaudited)
 
                                                                                 
                Accumulated Other
                   
                      Comprehensive Income (Loss)                    
                            Unrealized
                               
                            Gains
                               
    Common Shares     Capital in
          (Losses) on
    Cumulative
                      Total
 
          Par
    Excess of
    Unearned
    Marketable
    Translation
          Retained
    Treasury
    Shareholders’
 
(In thousands)
  Shares     Value     Par Value     Compensation     Securities     Adjustment     Other     Earnings     Shares     Equity  
 
Balances, December 31, 2005
    315,393     $ 315     $ 1,590,968     $ (15,649 )   $ 18,865     $ 178,109     $ (3,994 )   $ 1,989,526     $     $ 3,758,140  
Comprehensive income (loss):
                                                                               
Net income
                                                            782,947               782,947  
Translation adjustment
                                            31,528                               31,528  
Unrealized gains on marketable securities, net of income taxes of $749
                                    10,099                                       10,099  
Less: reclassification adjustment for gains included in net income, net of income tax expense of $24
                                    (2,489 )                                     (2,489 )
Pension liability amortization, net of income taxes of $117
                                                    198                       198  
Amortization of loss on cash flow hedges
                                                    113                       113  
                                                                                 
Total comprehensive income
                            7,610       31,528       311       782,947             822,396  
                                                                                 
Adoption of SFAS 123-R
                    (15,649 )     15,649                                                
Issuance of common shares for stock options exercised
    1,033       1       21,924                                                       21,925  
Nabors Exchangeco shares exchanged
    43                                                                        
Purchase of call options
                    (583,550 )                                                     (583,550 )
Sale of warrants
                    421,162                                                       421,162  
Tax benefit from the purchase of call options
                    215,914                                                       215,914  
Repurchase and retirement of common shares
    (17,935 )     (18 )     (90,449 )                                     (536,890 )             (627,357 )
Repurchase of 22,240 treasury shares
                                                                    (772,554 )     (772,554 )
Tax effect of exercised stock option deductions
                    4,455                                                       4,455  
Restricted stock awards, net
    609                                                                        
Share-based compensation
                    22,601                                                       22,601  
                                                                                 
Subtotal
    (16,250 )     (17 )     (3,592 )     15,649                         (536,890 )     (772,554 )     (1,297,404 )
                                                                                 
Balances, September 30, 2006
    299,143     $ 298     $ 1,587,376     $     $ 26,475     $ 209,637     $ (3,683 )   $ 2,235,583     $ (772,554 )   $ 3,283,132  
                                                                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1   Nature of Operations
 
Nabors is the largest land drilling contractor in the world, with approximately 670 land drilling rigs. We conduct oil, gas and geothermal land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South and Central America, the Middle East, the Far East and Africa. We are also one of the largest land well-servicing and workover contractors in the United States and Canada. We own approximately 635 land workover and well-servicing rigs in the United States, primarily in the southwestern and western United States, and approximately 191 land workover and well-servicing rigs in Canada. Nabors is a leading provider of offshore platform workover and drilling rigs, and actively markets 41 platform, 14 jack-up units and 4 barge rigs in the United States and multiple international markets. These rigs provide well-servicing, workover and drilling services. We have a 50% ownership interest in a joint venture in Saudi Arabia, which owns 18 rigs. We also offer a wide range of ancillary well-site services, including engineering, transportation, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services in selected domestic and international markets. We provide logistics services for onshore drilling and well-servicing operations in Canada using helicopters and fixed-winged aircraft. We manufacture and lease or sell top drives for a broad range of drilling applications, directional drilling systems, rig instrumentation and data collection equipment, and rig reporting software. We also invest in oil and gas exploration, development and production activities.
 
The majority of our business is conducted through our various Contract Drilling operating segments, which include our drilling, workover and well-servicing operations, on land and offshore. Our oil and gas exploration, development and production operations are included in a category labeled Oil and Gas for segment reporting purposes. Our operating segments engaged in drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are aggregated in a category labeled Other Operating Segments for segment reporting purposes.
 
During the third quarter of 2007, we sold our Sea Mar business to an unrelated third party. Accordingly, the accompanying consolidated statements of income, and the respective accompanying notes to the consolidated financial statements, have been updated to retroactively reclassify the operating results of this Sea Mar business, previously included in Other Operating Segments, as a discontinued operation for all periods presented. See Note 10 Discontinued Operations.
 
As used in this Report, “we,” “us,” “our”, “the Company” and “Nabors” means Nabors Industries Ltd. and, where the context requires, includes our subsidiaries.
 
Note 2   Summary of Significant Accounting Policies
 
Interim Financial Information
 
The unaudited consolidated financial statements of Nabors are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain reclassifications have been made to the prior period to conform to the current period presentation, with no effect on our consolidated financial position, results of operations or cash flows. Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. Therefore, these financial statements should be read along with our Annual Report on Form 10-K for the year ended December 31, 2006. In our management’s opinion, the consolidated financial statements contain all adjustments necessary to present fairly our financial position as of September 30, 2007 and the results of our operations for the three and nine months ended September 30, 2007 and 2006, and our cash flows for the nine months ended September 30, 2007 and 2006, in accordance with GAAP. Interim results for the three and nine months ended September 30, 2007 may not be indicative of results that will be realized for the full year ending December 31, 2007.
 
Our independent registered public accounting firm has performed a review of, and issued a report on, these consolidated interim financial statements in accordance with standards established by the Public Company


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Accounting Oversight Board. Pursuant to Rule 436(c) under the Securities Act of 1933, as amended (the “Securities Act”), this report should not be considered a part of any registration statement prepared or certified within the meanings of Sections 7 and 11 of the Securities Act.
 
Principles of Consolidation
 
Our consolidated financial statements include the accounts of Nabors, all majority-owned subsidiaries, and all non-majority owned subsidiaries required to be consolidated under Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46R”). All significant intercompany accounts and transactions are eliminated in consolidation.
 
Investments in operating entities where we have the ability to exert significant influence, but where we do not control their operating and financial policies, are accounted for using the equity method. Our share of the net income of these entities is recorded as Earnings from unconsolidated affiliates in our consolidated statements of income and our investment in these entities is carried as a single amount in our consolidated balance sheets. Investments in net assets of unconsolidated affiliates accounted for using the equity method totaled $134.4 million and $98.0 million as of September 30, 2007 and December 31, 2006, respectively, and are included in other long-term assets in our consolidated balance sheets. Similarly, investments in certain offshore funds classified as non-marketable are accounted for using the equity method of accounting based on our ownership interest in each fund. Our share of the gains and losses of these funds is recorded in investment (loss) income in our consolidated statements of income and our investments in these funds are included in long-term investments in our consolidated balance sheets.
 
Note 3   Share-Based Compensation
 
The Company has several share-based employee compensation plans, which are more fully described in Note 3 of our Annual Report on Form 10-K for the year ended December 31, 2006. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment,” (“SFAS 123-R”), using the modified prospective application method.
 
Total share-based compensation expense, which includes both stock options and restricted stock, totaled $8.4 million and $7.5 million for the three months ended September 30, 2007 and 2006, respectively, and $24.7 million and $22.6 million for the nine months ended September 30, 2007 and 2006. Share-based compensation expense has been allocated to our various operating segments (Note 11).
 
During the nine months ended September 30, 2007, the Company awarded 1,740,763 shares of restricted stock to its employees, directors and executive officers. These awards had an aggregate value at their date of grant of $52.5 million and vest over a period of three to four years.
 
Note 4   Long-term Debt
 
Our $700 million zero coupon senior exchangeable notes due 2023 can be put to us on June 15, 2008, June 15, 2013 and June 15, 2018 for a purchase price equal to 100% of the principal amount of the notes plus contingent interest and additional amounts, if any. Accordingly, as our $700 million zero coupon senior exchangeable notes can be put to us on June 15, 2008, the outstanding principal amount of these notes of $700 million were reclassified from long-term debt to current liabilities in our balance sheet as of June 30, 2007. If these notes are not put to us on June 15, 2008, the notes will be reclassified back to long-term debt at that time.
 
Note 5   Income Taxes
 
Effective January 1, 2007, we adopted the provisions of the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” In connection with the adoption of FIN 48, the Company recognized increases of $24 million and $21 million to its tax reserves for uncertain tax positions and interest and penalties,


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
respectively. These increases were accounted for as an increase to other long-term liabilities and as a reduction to retained earnings at January 1, 2007. As of January 1, 2007, the Company had approximately $114.1 million of total gross unrecognized tax benefits, including $29.8 million of interest and penalties, which also represents the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate in future periods. As of September 30, 2007, the Company had approximately $74.1 million of total gross unrecognized tax benefits, including $26.0 million of interest and penalties, recorded as other long-term liabilities. During the three and nine months ended September 30, 2007, the Company accrued and recognized estimated interest and penalties of approximately $1.5 million and $5.5 million, respectively.
 
We are subject to income taxes in the United States and numerous foreign jurisdictions. U.S. federal income tax returns for 2004 and 2005 are currently under examination. Internationally, income tax returns from 1995 through 2005 are currently under examination. Based on the number of tax years currently under audit by relevant Federal, State and foreign tax authorities, the Company anticipates that several of these audits could be finalized within 12 months. As a result, it is reasonably possible that the amount of the unrecognized benefits with respect to certain of our unrecognized tax positions will significantly increase or decrease within the next 12 months. However, based on the current status of examinations, and the protocol for finalizing audits with the relevant tax authorities, which could include formal legal proceedings, it is not possible to estimate the future impact of the amount of changes, if any, to recorded uncertain tax positions at September 30, 2007. Due to recent examinations, our FIN 48 tax reserves were reduced by $38.6 million during the quarter ended September 30, 2007.
 
The Company recognizes interest and penalties related to income tax matters in the income tax expense line item in the consolidated statement of income.
 
Note 6   Common Shares
 
During the nine months ended September 30, 2007 and 2006, our employees exercised vested options to acquire 4.5 million and 1.0 million of our common shares, respectively, resulting in proceeds of $60.4 million and $21.9 million, respectively.
 
During the three months ended September 30, 2007, our outstanding shares increased by 729,866 related to a share settlement of stock options exercised by Mr. Isenberg. As part of the share settlement, Mr. Isenberg surrendered 4,142,812 unexercised vested stock options to the Company with a value of approximately $29.7 million to satisfy the stock options exercise price and related income taxes owed.
 
During the nine months ended September 30, 2007, there were no repurchases of our common shares in the open market. During the nine months ended September 30, 2006, we repurchased 40.2 million of our common shares in the open market for $1.4 billion. We retired 17.9 million shares during the nine months ended September 30, 2006 and held 22.2 million of these shares in treasury.
 
Note 7   Commitments and Contingencies
 
Commitments
 
Employment Contracts
 
Nabors’ Chairman and Chief Executive Officer, Eugene M. Isenberg, and its Deputy Chairman, President and Chief Operating Officer, Anthony G. Petrello, have employment agreements which were amended and restated effective October 1, 1996 and which currently are due to expire on September 30, 2010.
 
Mr. Isenberg’s employment agreement was originally negotiated with a creditor’s committee in 1987 in connection with the reorganization proceedings of Anglo Energy, Inc., which subsequently changed its name to Nabors. These contractual arrangements subsequently were approved by the various constituencies in those reorganization proceedings, including equity and debt holders, and confirmed by the United States Bankruptcy Court.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Mr. Petrello’s employment agreement was first entered into effective October 1, 1991. Mr. Petrello’s employment agreement was agreed upon as part of arm’s length negotiations with the Board before he joined Nabors in October 1991 and was reviewed and approved by the Compensation Committee of the Board and the full Board of Directors at that time.
 
The employment agreements for Messrs. Isenberg and Petrello were amended in 1994 and 1996. These amendments were approved by the Compensation Committee of the Board and the full Board of Directors at that time.
 
The employment agreements each provide for an initial term of five years with an evergreen provision which automatically extended the agreement for an additional one-year term on each anniversary date, unless Nabors provided notice to the contrary ten days prior to such anniversary. In March 2006, the Board of Directors exercised its election to fix the expiration date of the employment agreements for Messrs. Isenberg and Petrello and accordingly, these agreements will expire at the end of their current term at September 30, 2010.
 
In addition to a base salary, the employment agreements provide for annual cash bonuses in an amount equal to 6% and 2%, for Messrs. Isenberg and Petrello, respectively, of Nabors’ net cash flow (as defined in the respective employment agreements) in excess of 15% of the average shareholders’ equity for each fiscal year. (Mr. Isenberg’s cash bonus formula originally was set at 10% in excess of a 10% return on shareholders’ equity and he has voluntarily reduced it over time to its 6% in excess of 15% level.) Mr. Petrello’s bonus is subject to a minimum of $700,000 per year. In 17 of the last 18 years, Mr. Isenberg has agreed voluntarily to accept a lower annual cash bonus (i.e., an amount lower than the amount provided for under his employment agreement) in light of his overall compensation package. Mr. Petrello has agreed voluntarily to accept a lower annual cash bonus (i.e., an amount lower than the amount provided for under his employment agreement) in light of his overall compensation package in 14 of the last 17 years.
 
Mr. Isenberg voluntarily agreed to amend his employment agreement in March 2006 (the “2006 Amendment”). Under the 2006 Amendment, Mr. Isenberg agreed to reduce the annual cash bonus to an amount equal to 3% of Nabors’ net cash flow (as defined in his employment agreement) in excess of 15% of the average shareholders’ equity for 2006. For 2006, the annual cash bonuses for Messrs. Isenberg and Petrello pursuant to the formula described in their employment agreements, as amended per the 2006 Amendment described above, were $43.2 million and $28.7 million, respectively. In light of their overall compensation package including significant restricted stock awards, they agreed to accept cash bonuses in the amount of $22.0 million and $14.6 million, respectively.
 
For the three months ended March 31, 2007, Messrs. Isenberg and Petrello voluntarily agreed to a reduction of the cash bonus in an amount equal to 3% and 1.5%, respectively, of Nabors’ net cash flow (as defined in their respective employment agreements.) Mr. Isenberg voluntarily agreed to the same reduction for the three months ended June 30, 2007 and agreed to a $3 million reduction in the amount of his annual cash bonus for the three months ended September 30, 2007. For the remainder of 2007 through the expiration date of the employment agreement, the annual cash bonus will remain 6% and 2%, respectively, for Messrs. Isenberg and Petrello of Nabors’ net cash flow in excess of 15% of the average shareholders’ equity for each fiscal year.
 
Messrs. Isenberg and Petrello also are eligible for awards under Nabors’ equity plans and may participate in annual long-term incentive programs and pension and welfare plans, on the same basis as other executives; and may receive special bonuses from time to time as determined by the Board.
 
Termination in the event of death, disability, or termination without cause.  In the event that either Mr. Isenberg’s or Mr. Petrello’s employment agreement is terminated (i) upon death or disability (as defined in the respective employment agreements), (ii) by Nabors prior to the expiration date of the employment agreement for any reason other than for Cause (as defined in the respective employment agreements) or (iii) by either individual for Constructive Termination Without Cause (as defined in the respective employment agreements), each would be entitled to receive within 30 days of the triggering event (a) all base salary which would have been payable through


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
the expiration date of the contract or three times his then current base salary, whichever is greater; plus (b) the greater of (i) all annual cash bonuses which would have been payable through the expiration date; (ii) three times the highest bonus (including the imputed value of grants of stock awards and stock options), paid during the last three fiscal years prior to termination; or (iii) three times the highest annual cash bonus payable for each of the three previous fiscal years prior to termination, regardless of whether the amount was paid. In computing any amount due under (b)(i) and (iii) above, the calculation is made without regard to the 2006 Amendment or the amounts agreed to for 2007 reducing Mr. Isenberg’s and Mr. Petrello’s bonus percentages as described above. If, by way of example, these provisions had applied at September 30, 2007, Mr. Isenberg would have been entitled to a payment of approximately $328 million, subject to a “true-up” equal to the amount of cash bonus he would have earned under the formula during the remaining term of the agreement, based upon actual results, but the payment would not be less than approximately $264 million. Similarly, with respect to Mr. Petrello, had these provisions applied at September 30, 2007, Mr. Petrello would have been entitled to a payment of approximately $111 million, subject to a “true-up” equal to the amount of cash bonus he would have earned under the formula during the remaining term of the agreement, based upon actual results, but the payment would not be less than approximately $103 million. These payment amounts are based on historical data and are not intended to be estimates of future payments required under the agreements. Depending upon future operating results, the “true-up” could result in the payment of amounts which are significantly higher. The Company does not have insurance to cover its obligations in the event of death, disability, or termination without cause for either Messrs. Isenberg or Petrello. In addition, the affected individual is entitled to receive (a) any unvested restricted stock outstanding, which shall immediately and fully vest; (b) any unvested outstanding stock options, which shall immediately and fully vest; (c) any amounts earned, accrued or owing to the executive but not yet paid (including executive benefits, life insurance, disability benefits and reimbursement of expenses and perquisites), which shall be continued through the later of the expiration date or three years after the termination date; (d) continued participation in medical, dental and life insurance coverage until the executive receives equivalent benefits or coverage through a subsequent employer or until the death of the executive or his spouse, whichever is later; and (e) any other or additional benefits in accordance with applicable plans and programs of Nabors. For Messrs. Isenberg and Petrello, the values of unvested restricted stock were approximately $28 million and $17 million, respectively, as of September 30, 2007. Neither Messrs. Isenberg nor Petrello had unvested stock options as of September 30, 2007. Estimates of the cash value of Nabors’ obligations to Messrs. Isenberg and Petrello under (c), (d) and (e) above are included in the payment amounts above.
 
As noted above in March 2006, the Board of Directors exercised its election to fix the expiration date of the employment agreements for Messrs. Isenberg and Petrello such that each of these agreements expires at the end of their respective current term at September 30, 2010. Messrs. Isenberg and Petrello have informed the Board of Directors that they have reserved their rights under their employment agreements with respect to the notice setting the expiration dates of their employment agreements, including whether such notice could trigger an acceleration of certain payments pursuant to their employment agreements.
 
Termination in the event of a Change in Control.  In the event that Messrs. Isenberg’s or Petrello’s termination of employment is related to a Change in Control (as defined in their respective employment agreements), they would be entitled to receive a cash amount equal to the greater of (a) one dollar less than the amount that would constitute an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code, or (b) the cash amount that would be due in the event of a constructive Termination Without Cause, as described above. If, by way of example, there was a change of control event that applied on September 30, 2007, then the payments to Messrs. Isenberg and Petrello would be approximately $328 million and $111 million, respectively. These payment amounts are based on historical data and are not intended to be estimates of future payments required under the agreements. Depending upon future operating results, the “true-up” could result in the payment of amounts which are significantly higher but the payment would not be less than $264 million and $103 million, respectively. In addition, they would receive (a) any unvested restricted stock outstanding, which shall immediately and fully vest; (b) any unvested outstanding stock options, which shall immediately and fully vest; (c) any amounts earned, accrued or owing to the executive but not yet paid (including executive benefits, life insurance, disability benefits


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
and reimbursement of expenses and perquisites), which shall be continued through the later of the expiration date or three years after the termination date; (d) continued participation in medical, dental and life insurance coverage until the executive receives equivalent benefits or coverage through a subsequent employer or until the death of the executive or his spouse, whichever is later; and (e) any other or additional benefits in accordance with applicable plans and programs of Nabors. For Messrs. Isenberg and Petrello, the values of unvested restricted stock were approximately $28 million and $17 million, respectively, as of September 30, 2007. Neither Messrs. Isenberg nor Petrello had unvested stock options as of September 30, 2007. The cash value of Nabors’ obligations to Messrs. Isenberg and Petrello under (c), (d) and (e) above are included in the payment amounts above. Also, they would receive additional stock options immediately exercisable for 5 years to acquire a number of shares of common stock equal to the highest number of options granted during any fiscal year in the previous three fiscal years, at an option exercise price equal to the average closing price during the 20 trading days prior to the event which resulted in the change of control. If, by way of example, there was a change of control event that applied at September 30, 2007, Mr. Isenberg would have received 3,366,666 options valued at approximately $36 million and Mr. Petrello would have received 1,683,332 options valued at approximately $18 million, in each case based upon a Black-Scholes analysis. Finally, in the event that an excise tax was applicable, they would receive a gross-up payment to make them whole with respect to any excise taxes imposed by Section 4999 of the Internal Revenue Code. With respect to the preceding sentence, by way of example, if there was a change of control event that applied on September 30, 2007, and assuming that the excise tax was applicable to the transaction, then the additional payments to Messrs. Isenberg and Petrello for the gross-up would be up to approximately $146 million and $51 million, respectively.
 
Other Obligations.  In addition to salary and bonus, each of Messrs. Isenberg and Petrello receive group life insurance at an amount at least equal to three times their respective base salaries; various split-dollar life insurance policies, reimbursement of expenses, various perquisites and a personal umbrella insurance policy in the amount of $5 million. Premiums payable under the split-dollar life insurance policies were suspended as a result of the adoption of the Sarbanes-Oxley Act of 2002.
 
Contingencies
 
Income Tax Contingencies
 
We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities. Although we believe our tax reserves are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in our income tax provisions and accruals. Based on the results of an audit or litigation, a material effect on our financial position, income tax provision, net income, or cash flows in the period or periods for which that determination is made could result.
 
It is possible that future changes to tax laws (including tax treaties) could have an impact on our ability to realize the tax savings recorded to date as well as future tax savings as a result of our corporate reorganization, depending on any responsive action taken by us.
 
On May 31, 2006, Nabors International Finance Inc. (“NIFI”), a wholly-owned U.S. subsidiary of Nabors, received from the U.S. Internal Revenue Service (the “IRS”) two Notices of Proposed Adjustment (“NOPA”) in connection with an audit of NIFI for tax years 2002 and 2003. One NOPA proposes to deny a deduction of $85.1 million in interest expense in our 2002 tax year relating to intercompany indebtedness incurred in connection with our June 2002 transaction, whereby we reorganized as a Bermuda company. The second NOPA proposes to deny a deduction of $207.6 million in the same item of interest expense in our 2003 tax year. On August 9, 2006, NIFI received a Revenue Agent Report, asserting the adjustments relating to the two NOPAs referred to above. On September 18, 2006, NIFI filed a protest with the IRS related to the two adjustments. We previously had obtained


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
advice from our tax advisors that the deduction of such amounts was appropriate, and more recently that the position of the IRS lacks merit. At the end of 2003, the Company paid off approximately one-half of the intercompany indebtedness incurred in connection with the inversion. On August 30, 2007, the Company was notified by the Appeals Division of the IRS that neither NOPA had been sustained. The IRS could propose the disallowance of the deductions that relate to the remaining inversion debt upon audit of NIFI’s 2004, 2005, 2006 and 2007 tax years. We have not recorded any reserves related to the foregoing matters.
 
On September 14, 2006, Nabors Drilling International Limited (“NDIL”), a wholly-owned Bermuda subsidiary of Nabors, received a Notice of Assessment (the “Notice”) from the Mexican Servicio de Administracion Tributaria (the “SAT”) in connection with the audit of NDIL’s Mexican branch for tax year 2003. The Notice proposes to deny a depreciation expense deduction that relates to drilling rigs operating in Mexico in 2003, as well as a deduction for payments made to an affiliated company for the provision of labor services in Mexico. The amount assessed by the SAT is approximately $19.8 million (including interest and penalties). Nabors and its tax advisors previously concluded that the deduction of said amounts was appropriate and more recently that the position of the SAT lacks merit. NDIL’s Mexican branch took similar deductions for depreciation and labor expenses in 2004, 2005 and 2006. It is likely that the SAT will propose the disallowance of these deductions upon audit of NDIL’s Mexican branch’s 2004, 2005, 2006 and 2007 tax years.
 
Self-Insurance Accruals
 
We are self-insured for certain losses relating to workers’ compensation, employers’ liability, general liability, automobile liability and property damage. Effective April 1, 2007, hurricane coverage for Gulf of Mexico exposures is subject to a $10 million deductible. We are insured for $25 million over the deductible at 100%, and have added a second insured layer for $30 million at 60%. We are self-insuring 40% of the second layer.
 
Litigation
 
Nabors and its subsidiaries are defendants or otherwise involved in a number of lawsuits in the ordinary course of business. We estimate the range of our liability related to pending litigation when we believe the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ from our estimates. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our results of operations for a particular reporting period.
 
On December 22, 2005, we received a grand jury subpoena from the United States Attorney’s Office in Anchorage, Alaska, seeking documents and information relating to an alleged spill, discharge, overflow or cleanup of drilling mud or sludge involving one of our rigs during March 2003. We are cooperating with the authorities in this matter.
 
On February 6, 2007, a purported shareholder derivative action entitled Kenneth H. Karstedt v. Eugene M. Isenberg, et al was filed in the United States District Court for the Southern District of Texas against the Company’s officers and directors, and against the Company as a nominal defendant. The complaint alleges that stock options were priced retroactively and were improperly accounted for, and alleges various causes of action based on that assertion. The complaint seeks, among other things, payment by the defendants to the Company of damages allegedly suffered by it and disgorgement of profits. On March 5, 2007, another purported shareholder derivative action entitled Gail McKinney v. Eugene M. Isenberg, et al was also filed in the United States District Court for the Southern District of Texas. The complaint makes substantially the same allegations against the same defendants and


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
seeks the same elements of damages. The two purported derivative actions have been consolidated into one proceeding. The ultimate outcome of this matter cannot be determined at this time.
 
During the fourth quarter of 2006 and the first quarter of 2007, a review was conducted of the Company’s granting practices and accounting for certain employee equity awards to both the senior executives of the Company and other employees from 1988 through 2006. Based on the results of the review, the Company recorded a noncash charge of $38.3 million, net of tax, at December 31, 2006. The Company determined that no restatement of its historical financial statements was necessary because there were no findings of fraud or intentional wrongdoing, and because the effects of certain revised measurement dates were not material in any fiscal year.
 
In a letter dated December 28, 2006, the SEC staff advised us that it had commenced an informal inquiry regarding our stock option grants and related practices, procedures and accounting. By letter dated May 7, 2007, the SEC staff informed us they had closed the investigation without any recommendation of enforcement action.
 
On July 5, 2007, we received an inquiry from the U.S. Department of Justice relating to its investigation of one of our vendors and compliance with the Foreign Corrupt Practices Act. We are reviewing certain transactions with this vendor, which provides freight forwarding and customs clearance services, and intend to cooperate with the Department of Justice inquiry. The ultimate outcome of this review cannot be determined at this time.
 
On October 17, 2007, we settled a dispute with a vendor. Pursuant to the settlement, we received an equity interest in a parent company of the vendor, we, in consideration of which, granted the vendor a nonexclusive, royalty-free license to use certain technology, and the parties each executed a mutual release of claims against each other.
 
Off-Balance Sheet Arrangements (Including Guarantees)
 
We are a party to certain transactions, agreements or other contractual arrangements defined as “off-balance sheet arrangements” that could have a material future effect on our financial position, results of operations, liquidity and capital resources. The most significant of these off-balance sheet arrangements involve agreements and obligations in which we provide financial or performance assurance to third parties. Certain of these agreements serve as guarantees, including standby letters of credit issued on behalf of insurance carriers in conjunction with our workers’ compensation insurance program and other financial surety instruments such as bonds. We have also guaranteed payment of contingent consideration in conjunction with certain acquisitions in 2005. Potential contingent consideration is based on future operating results of those businesses. In addition, we have provided indemnifications to certain third parties which serve as guarantees. These guarantees include indemnification provided by Nabors to our share transfer agent and our insurance carriers. We are not able to estimate the potential future maximum payments that might be due under our indemnification guarantees.
 
Management believes the likelihood that we would be required to perform or otherwise incur any material losses associated with any of these guarantees is remote. The following table summarizes the total maximum amount of financial and performance guarantees issued by Nabors:
 
                                         
    Maximum Amount  
    Remainder
                         
(In thousands)   of 2007     2008     2009     Thereafter     Total  
 
Financial standby letters of credit and other financial surety instruments
  $ 23,822     $ 109,574     $ 100     $ 1,953     $ 135,449  
Contingent consideration in acquisition
          1,063       1,063       2,124       4,250  
                                         
Total
  $ 23,822     $ 110,637     $ 1,163     $ 4,077     $ 139,699  
                                         


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 8   Earnings Per Share
 
A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows:
 
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
(In thousands, except per share amounts)   2007     2006     2007     2006  
 
Net income (numerator):
                               
Income from continuing operations, net of tax — basic
  $ 195,763     $ 284,783     $ 673,515     $ 760,623  
Add interest expense on assumed conversion of our zero coupon convertible/exchangeable senior debentures/notes, net of tax:
                               
$2.75 billion due 2011(1)
                       
$82.8 million due 2021(2)
                       
$700 million due 2023(3)
                       
                                 
Adjusted income from continuing operations, net of tax — diluted
    195,763       284,783       673,515       760,623  
Income from discontinued operations, net of tax
    22,265       7,968       35,024       22,324  
                                 
Total adjusted net income
  $ 218,028     $ 292,751     $ 708,539     $ 782,947  
                                 
Earnings per share:
                               
Basic from continuing operations
  $ .70     $ 1.02     $ 2.42     $ 2.58  
Basic from discontinued operations
    .08       .03       .12       .07  
                                 
Total Basic
  $ .78     $ 1.05     $ 2.54     $ 2.65  
                                 
Diluted from continuing operations
  $ .68     $ .99     $ 2.35     $ 2.50  
Diluted from discontinued operations
    .08       .03       .12       .07  
                                 
Total Diluted
  $ .76     $ 1.02     $ 2.47     $ 2.57  
                                 
Shares (denominator):
                               
Weighted-average number of shares outstanding — basic(4)
    280,152       277,553       278,782       294,987  
Net effect of dilutive stock options, warrants and restricted stock awards based on the treasury stock method
    7,817       8,991       8,112       9,893  
Assumed conversion of our zero coupon convertible/exchangeable senior debentures/notes:
                               
$2.75 billion due 2011(1)
                       
$82.8 million due 2021(2)
                       
$700 million due 2023(3)
                      186  
                                 
Weighted-average number of shares outstanding — diluted
    287,969       286,544       286,894       305,066  
                                 
 
 
(1) Diluted earnings per share for the three and nine months ended September 30, 2007 and 2006 do not include any incremental shares issuable upon the exchange of the $2.75 billion 0.94% senior exchangeable notes. The number of shares that we would be required to issue upon exchange consists of only the incremental shares that would be issued above the principal amount of the notes, as we are required to pay cash up to the principal amount of the notes exchanged. We would only issue an incremental number of shares upon exchange of these


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
notes. Such shares are only included in the calculation of the weighted-average number of shares outstanding in our diluted earnings per share calculation, when the price of our shares exceeds $45.83 on the last trading day of the quarter, which did not occur during either the three and nine months ended September 30, 2007 or 2006.
 
(2) Diluted earnings per share for the three and nine months ended September 30, 2007 and 2006 exclude approximately 1.2 million potentially dilutive shares initially issuable upon the conversion of the $82.8 million zero coupon convertible senior debentures. We would only issue an incremental number of shares upon conversion of these debentures, and such shares would only be included in the calculation of the weighted-average number of shares outstanding in our diluted earnings per share calculation if the price of our shares exceeded approximately $51.
 
(3) Diluted earnings per share for the three months ended September 30, 2007 and 2006 and the nine months ended September 30, 2007 do not include any incremental shares issuable upon the exchange of the $700 million zero coupon senior exchangeable notes. The number of shares that we would be required to issue upon exchange consists of only the incremental shares that would be issued above the principal amount of the notes, as we are required to pay cash up to the principal amount of the notes exchanged. We would only issue an incremental number of shares upon exchange of these notes. Such shares are only included in the calculation of the weighted-average number of shares outstanding in our diluted earnings per share calculation, when the price of our shares exceeds $35.05 on the last trading day of the quarter. This was the case for the quarter ended March 31, 2006, and is, therefore, included in the weighted-average number of shares outstanding in our diluted earnings per share calculation for the nine months ended September 30, 2006.
 
(4) Includes the following weighted-average number of common shares of Nabors and weighted-average number of exchangeable shares of our subsidiary, Nabors (Canada) Exchangeco Inc., respectively: 280.1 million and .1 million shares for the three months ended September 30, 2007; 277.4 million and .2 million shares for the three months ended September 30, 2006; 278.6 million and .2 million for the nine months ended September 30, 2007; and 294.8 million and .2 million shares for the nine months ended September 30, 2006. The exchangeable shares of Nabors Exchangeco are exchangeable for Nabors’ common shares on a one-for-one basis, and have essentially identical rights as Nabors Industries Ltd. common shares, including, but not limited to, voting rights and the right to receive dividends, if any.
 
For all periods presented, the computation of diluted earnings per share excludes outstanding stock options and warrants with exercise prices greater than the average market price of Nabors’ common shares, because the inclusion of such options and warrants would be anti-dilutive. The average number of options and warrants that were excluded from diluted earnings per share that would potentially dilute earnings per share in the future were 4,601,925 and 4,327,513 shares during the three months ended September 30, 2007 and 2006, respectively, and 4,629,158 and 2,443,254 shares during the nine months ended September 30, 2007 and 2006, respectively. In any period during which the average market price of Nabors’ common shares exceeds the exercise prices of these stock options and warrants, such stock options and warrants will be included in our diluted earnings per share computation using the treasury stock method of accounting. Restricted stock will similarly be included in our diluted earnings per share computation using the treasury stock method of accounting in any period where the amount of restricted stock exceeds the number of shares assumed repurchased in those periods based upon future unearned compensation.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 9   Supplemental Balance Sheet and Income Statement Information
 
Accrued liabilities include the following:
 
                 
    September 30,
    December 31,
 
(In thousands)   2007     2006  
 
Accrued compensation
  $ 121,886     $ 136,276  
Deferred revenue
    110,497       65,747  
Workers’ compensation liabilities
    28,032       28,032  
Interest payable
    13,224       13,024  
Litigation reserves
    4,868       4,536  
Other taxes payable
    33,944       19,906  
Warranty accrual
    10,034       6,377  
Other accrued liabilities
    26,195       21,060  
                 
    $ 348,680     $ 294,958  
                 
 
Our cash and cash equivalents, short-term and long-term investments consist of the following:
 
                 
    September 30,
    December 31,
 
(In thousands)   2007     2006  
 
Cash and cash equivalents
  $ 693,777     $ 700,549  
Short-term investments
    186,196       439,467  
Long-term investments
    383,288       513,269  
Other current assets
    43,555        
                 
Total
  $ 1,306,816     $ 1,653,285  
                 
 
As of September 30, 2007 and December 31, 2006, our short-term investments consist entirely of investments in available-for-sale marketable debt securities while our long-term investments consist entirely of investments in non-marketable securities. The $43.6 million represents cash proceeds receivable from the sale of certain non-marketable securities. The cash proceeds were received during October.
 
Investment income for the three months ended September 30, 2007 was a net loss of $27.5 million compared to income of $37.2 million during the prior year quarter. The loss during the current quarter reflected a net loss of $37.7 million from the portion of our investment portfolio that is comprised of our actively managed funds that are classified as long-term investments. Investment income for the nine months ended September 30, 2007 was a net loss of $8.0 million compared to income of $67.8 million during the prior year period. The loss for the nine months ended September 30, 2007 included a net loss of $40.7 million from our long-term investments described above inclusive of substantial gains recorded in the second quarter of 2007 from sales of short-term investments of marketable equity securities.
 
On June 28, 2007, the Company completed the sale of three accommodation jackups from its International operating segment to an unrelated party. As consideration for the sale, the Company received net proceeds of approximately $99 million, resulting in a $38 million gain. The gain is included in the “Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net” line item of the consolidated statements of income for the nine months ended September 30, 2007.
 
During the three months ended September 30, 2007, we recorded impairment losses totaling $29 million, primarily related to certain rig components across several business units. The loss is included in the “Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net” line item of the consolidated statements of income for the three and nine months ended September 30, 2007.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 10   Discontinued Operations
 
In August 2007, we sold our Sea Mar business which had previously been included in Other Operating segments to an unrelated third party for a cash purchase price of $194.3 million. The assets included 20 offshore supply vessels and certain related assets, including a right under a vessel construction contract. The operating results of this business for all periods presented are accounted for as discontinued operations in the accompanying consolidated statements of income, including a gain, net of tax of $19.6 million recorded in the current quarter. Our condensed statements of income from discontinued operations related to the Sea Mar business for the three and nine months ended September 30, 2007 and 2006 were as follows:
 
Condensed Statements of Income
 
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
(In thousands)   2007     2006     2007     2006  
 
Revenues from discontinued operations
  $ 6,168     $ 31,226     $ 58,887     $ 86,415  
                                 
Income from discontinued operations
                               
Income from discontinued operations
  $ 4,852     $ 12,361     $ 26,092     $ 34,634  
Gain on disposal of business
    49,500             49,500        
Income tax expense
    (32,087 )     (4,393 )     (40,568 )     (12,310 )
                                 
Income from discontinued operations, net of taxes
  $ 22,265     $ 7,968     $ 35,024     $ 22,324  
                                 
 
As of December 31, 2006, the net book value of the assets of Sea Mar being disposed of was approximately $141 million.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 11   Segment Information
 
The following tables set forth certain financial information with respect to our reportable segments:
 
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
(In thousands)   2007     2006     2007     2006  
 
Operating revenues and Earnings from unconsolidated affiliates from continuing operations:(1) 
                               
Contract Drilling:(2) 
                               
U.S. Lower 48 Land Drilling
  $ 416,525     $ 498,173     $ 1,295,908     $ 1,393,310  
U.S. Land Well-servicing
    180,370       188,650       544,998       518,224  
U.S. Offshore
    48,895       56,219       164,986       162,299  
Alaska
    30,854       24,098       115,467       75,816  
Canada
    132,434       167,705       400,802       514,849  
International
    296,219       195,445       781,963       511,487  
                                 
Subtotal Contract Drilling(3)
    1,105,297       1,130,290       3,304,124       3,175,985  
Oil and Gas(4)(5)
    35,770       9,268       67,009       48,808  
Other Operating Segments(6)(7)
    163,397       120,539       433,771       366,416  
Other reconciling items(8)
    (51,476 )     (41,139 )     (165,342 )     (131,745 )
                                 
Total
  $ 1,252,988     $ 1,218,958     $ 3,639,562     $ 3,459,464  
                                 
Adjusted income (loss) derived from operating activities:(1)(9) 
                               
Contract Drilling:
                               
U.S. Lower 48 Land Drilling
  $ 130,761     $ 219,485     $ 458,354     $ 611,912  
U.S. Land Well-servicing
    42,291       54,495       125,752       148,000  
U.S. Offshore
    9,245       17,492       43,500       51,613  
Alaska
    4,214       2,123       29,006       9,749  
Canada
    16,920       42,549       62,056       145,524  
International
    88,574       58,145       240,001       146,142  
                                 
Subtotal Contract Drilling(3)
    292,005       394,289       958,669       1,112,940  
Oil and Gas
    17,868       (5,101 )     22,370       7,751  
Other Operating Segments
    10,297       7,975       28,630       24,345  
                                 
Total segment adjusted income derived from operating activities
    320,170       397,163       1,009,669       1,145,036  
Other reconciling items(10)
    (32,837 )     (28,921 )     (101,777 )     (79,500 )
Interest expense
    (13,450 )     (13,744 )     (40,235 )     (33,970 )
Investment (loss) income
    (27,466 )     37,155       (8,029 )     67,753  
Losses on sales of long-lived assets, impairment charges and other income (expense), net
    (30,524 )     (4,076 )     (4,775 )     (11,925 )
                                 
Income before income taxes from continuing operations
  $ 215,893     $ 387,577     $ 854,853     $ 1,087,394  
                                 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                 
    September 30,
    December 31,
 
(In thousands)   2007     2006  
 
Total assets:
               
Contract Drilling:
               
U.S. Lower 48 Land Drilling
  $ 2,521,415     $ 2,210,070  
U.S. Land Well-servicing
    720,154       597,082  
U.S. Offshore
    439,732       456,889  
Alaska
    258,772       221,927  
Canada
    1,249,979       1,059,243  
International
    2,426,707       2,006,941  
                 
Subtotal Contract Drilling(11)
    7,616,759       6,552,152  
Oil and Gas(12)
    616,333       328,114  
Other Operating Segments(13)
    629,919       638,600  
Other reconciling items(10)
    1,215,396       1,623,437  
                 
Total assets
  $ 10,078,407     $ 9,142,303  
                 
 
 
(1) All segment information excludes the Sea Mar business, which has been classified as a discontinued operation.
 
(2) These segments include our drilling, workover and well-servicing operations, on land and offshore.
 
(3) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $3.4 million and $1.1 million for the three months ended September 30, 2007 and 2006, respectively, and $5.9 million for the nine months ended September 30, 2007 and 2006, respectively.
 
(4) Represents our oil and gas exploration, development and production operations.
 
(5) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of ($2.0) million and ($2.8) million for the three and nine months ended September 30, 2007, respectively, and $0 for the three and nine months ended September 30, 2006.
 
(6) Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations.
 
(7) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $1.3 million and $4.6 million for the three months ended September 30, 2007 and 2006, respectively, and $15.5 million and $13.6 million for the nine months ended September 30, 2007 and 2006, respectively.
 
(8) Represents the elimination of inter-segment transactions.
 
(9) Adjusted income derived from operating activities is computed by: subtracting direct costs, general and administrative expenses, depreciation and amortization, and depletion expense from Operating revenues and then adding Earnings from unconsolidated affiliates. Such amounts should not be used as a substitute to those amounts reported under accounting principles generally accepted in the United States of America (GAAP). However, management evaluates the performance of our business units and the consolidated company based on several criteria, including adjusted income derived from operating activities, because it believes that this financial measure is an accurate reflection of the ongoing profitability of our company. A reconciliation of this non-GAAP measure to income before income taxes, which is a GAAP measure, is provided within the above table.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
(10) Represents the elimination of inter-segment transactions and unallocated corporate expenses and assets.
 
(11) Includes $47.1 million and $39.6 million of investments in unconsolidated affiliates accounted for by the equity method as of September 30, 2007 and December 31, 2006, respectively.
 
(12) Includes $25.0 million and $0 of investments in unconsolidated affiliates accounted for by the equity method as of September 30, 2007 and December 31, 2006, respectively.
 
(13) Includes $62.4 million and $58.5 million of investments in unconsolidated affiliates accounted for by the equity method as of September 30, 2007 and December 31, 2006, respectively.
 
Note 12   Condensed Consolidating Financial Information
 
Nabors has fully and unconditionally guaranteed all of the issued public debt securities of Nabors Delaware, a wholly-owned subsidiary, and Nabors and Nabors Delaware have fully and unconditionally guaranteed the $225 million 4.875% senior notes due 2009 issued by Nabors Holdings 1, ULC, our indirect wholly-owned subsidiary.
 
The following condensed consolidating financial information is included so that separate financial statements of Nabors Delaware and Nabors Holdings are not required to be filed with the SEC. The condensed consolidating financial information presents investments in both consolidated and unconsolidated affiliates using the equity method of accounting.
 
The following condensed consolidating financial information presents: condensed consolidating balance sheets as of September 30, 2007 and December 31, 2006, statements of income and cash flows for each of the three and nine month periods ended September 30, 2007 and 2006 of (a) Nabors, parent/guarantor, (b) Nabors Delaware, issuer of public debt securities guaranteed by Nabors and guarantor of the $225 million 4.875% senior notes issued by Nabors Holdings, (c) Nabors Holdings, issuer of the $225 million 4.875% senior notes, (d) the non-guarantor subsidiaries, (e) consolidating adjustments necessary to consolidate Nabors and its subsidiaries and (f) Nabors on a consolidated basis.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Condensed Consolidating Balance Sheets
 
                                                 
    September 30, 2007  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
ASSETS
Current assets:
                                               
Cash and cash equivalents
  $ 18,002     $ 4,428     $ 4     $ 671,343     $     $ 693,777  
Short-term investments
                      186,196             186,196  
Accounts receivable, net
                      1,043,235             1,043,235  
Inventory
                      131,646             131,646  
Deferred income taxes
                      35,738             35,738  
Other current assets
    162       1,127       376       454,164             455,829  
                                                 
Total current assets
    18,164       5,555       380       2,522,322             2,546,421  
Long-term investments
                      383,288             383,288  
Property, plant and equipment, net
                      6,466,732             6,466,732  
Goodwill
                      367,376             367,376  
Intercompany receivables
    348,596       1,379,605             19,944       (1,748,145 )      
Investments in affiliates
    4,051,149       4,235,944       300,767       1,868,163       (10,321,608 )     134,415  
Other long-term assets
          25,690       649       153,836             180,175  
                                                 
Total assets
  $ 4,417,909     $ 5,646,794     $ 301,796     $ 11,781,661     $ (12,069,753 )   $ 10,078,407  
                                                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
                                               
Current portion of long- term debt
  $     $ 700,000     $     $     $     $ 700,000  
Trade accounts payable
    13       36             367,064             367,113  
Accrued liabilities
    4,203       11,625       1,409       331,443             348,680  
Income taxes payable
          95,504       2,416       43,783             141,703  
                                                 
Total current liabilities
    4,216       807,165       3,825       742,290             1,557,496  
Long-term debt
          3,081,344       224,495       1             3,305,840  
Other long-term liabilities
                      238,936             238,936  
Deferred income taxes
          13,700       15       548,727             562,442  
Intercompany payable
                5,015       1,743,130       (1,748,145 )      
                                                 
Total liabilities
    4,216       3,902,209       233,350       3,273,084       (1,748,145 )     5,664,714  
                                                 
Total shareholders’ equity
    4,413,693       1,744,585       68,446       8,508,577       (10,321,608 )     4,413,693  
                                                 
Total liabilities and shareholders’ equity
  $ 4,417,909     $ 5,646,794     $ 301,796     $ 11,781,661     $ (12,069,753 )   $ 10,078,407  
                                                 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    December 31, 2006  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
ASSETS
Current assets:
                                               
Cash and cash equivalents
  $ 14,874     $ 2,394     $ 8     $ 683,273     $     $ 700,549  
Short-term investments
                      439,467             439,467  
Accounts receivable, net
                      1,109,738             1,109,738  
Inventory
                      100,487             100,487  
Deferred income taxes
                      38,081             38,081  
Other current assets
    162       1,103       376       114,893             116,534  
                                                 
Total current assets
    15,036       3,497       384       2,485,939             2,504,856  
Long-term investments
                      513,269             513,269  
Property, plant and equipment, net
                      5,410,101             5,410,101  
Goodwill
                      362,269             362,269  
Intercompany receivables
    343,644       1,151,556             19,944       (1,515,144 )      
Investments in affiliates
    3,184,303       3,748,626       286,818       1,318,478       (8,440,176 )     98,049  
Other long-term assets
          249,040       608       220,025       (215,914 )     253,759  
                                                 
Total assets
  $ 3,542,983     $ 5,152,719     $ 287,810     $ 10,330,025       (10,171,234 )   $ 9,142,303  
                                                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
                                               
Trade accounts payable
  $ 35     $ 22     $     $ 459,122     $     $ 459,179  
Accrued liabilities
    6,295       8,870       4,151       275,642             294,958  
Income taxes payable
          81,429       1,792       17,002             100,223  
                                                 
Total current liabilities
    6,330       90,321       5,943       751,766             854,360  
Long-term debt
          3,779,778       224,296                   4,004,074  
Other long-term liabilities
                      208,553             208,553  
Deferred income taxes
          50,696             703,881       (215,914 )     538,663  
Intercompany payable
                3,733       1,511,411       (1,515,144 )      
                                                 
Total liabilities
    6,330       3,920,795       233,972       3,175,611       (1,731,058 )     5,605,650  
                                                 
Total shareholders’ equity
    3,536,653       1,231,924       53,838       7,154,414       (8,440,176 )     3,536,653  
                                                 
Total liabilities and shareholders’ equity
  $ 3,542,983     $ 5,152,719     $ 287,810     $ 10,330,025     $ (10,171,234 )   $ 9,142,303  
                                                 


23


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Condensed Consolidating Statements of Income
 
                                                 
    Three Months Ended September 30, 2007  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
Revenues and other income:
                                               
Operating revenues
  $     $     $     $ 1,250,299     $     $ 1,250,299  
Earnings from unconsolidated affiliates
                      2,689             2,689  
Earnings (losses) from consolidated affiliates
    204,052       107,763       3,684       118,464       (433,963 )      
Investment income (loss)
    170       39             (27,675 )           (27,466 )
Intercompany interest income
    1,333       22,544       1             (23,878 )      
                                                 
Total revenues and other income
    205,555       130,346       3,685       1,343,777       (457,841 )     1,225,522  
                                                 
Costs and other deductions:
                                               
Direct costs
                      722,058             722,058  
General and administrative expenses
    3,954       83       5       102,056       (123 )     105,975  
Depreciation and amortization
          150             124,939             125,089  
Depletion
                      12,533             12,533  
Interest expense
          12,811       2,860       (2,221 )           13,450  
Intercompany interest (expense)
    5,846                   18,032       (23,878 )      
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
    (8 )     1,189             29,220       123       30,524  
                                                 
Total costs and other deductions
    9,792       14,233       2,865       1,006,617       (23,878 )     1,009,629  
                                                 
Income before income taxes from continuing operations
    195,763       116,113       820       337,160       (433,963 )     215,893  
Income tax expense
          3,090       262       16,778             20,130  
                                                 
Income from continuing operations, net of tax
    195,763       113,023       558       320,382       (433,963 )     195,763  
Income from discontinued operations, net of tax
    22,265       22,265             44,530       (66,795 )     22,265  
                                                 
Net income
  $ 218,028     $ 135,288     $ 558     $ 364,912     $ (500,758 )   $ 218,028  
                                                 


24


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Three Months Ended September 30, 2006  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
Revenues and other income:
                                               
Operating revenues
  $     $     $     $ 1,213,252     $     $ 1,213,252  
Earnings from unconsolidated affiliates
                      5,706             5,706  
Earnings (losses) from consolidated affiliates
    288,552       210,881       3,683       216,136       (719,252 )      
Investment income
    68       683             36,404             37,155  
Intercompany interest income
    1,019       17,289                   (18,308 )      
                                                 
Total revenues and other income
    289,639       228,853       3,683       1,471,498       (737,560 )     1,256,113  
                                                 
Costs and other deductions:
                                               
Direct costs
                      654,265             654,265  
General and administrative expenses
    4,417       67             88,552       (253 )     92,783  
Depreciation and amortization
          150             95,787             95,937  
Depletion
                      7,731             7,731  
Interest expense
          12,727       2,860       (1,843 )           13,744  
Intercompany interest (expense)
    439                   17,869       (18,308 )      
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
          809             3,014       253       4,076  
                                                 
Total costs and other deductions
    4,856       13,753       2,860       865,375       (18,308 )     868,536  
                                                 
Income before income taxes from continuing operations
    284,783       215,100       823       606,123       (719,252 )     387,577  
Income tax expense
          1,561       263       100,970             102,794  
                                                 
Income from continuing operations, net of tax
    284,783       213,539       560       505,153       (719,252 )     284,783  
Income from discontinued operations, net of tax
    7,968       7,968             15,936       (23,904 )     7,968  
                                                 
Net income
  $ 292,751     $ 221,507     $ 560     $ 521,089     $ (743,156 )   $ 292,751  
                                                 


25


Table of Contents

 
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Nine Months Ended September 30, 2007  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
Revenues and other income:
                                               
Operating revenues
  $     $     $     $ 3,620,996     $     $ 3,620,996  
Earnings from unconsolidated affiliates
                      18,566             18,566  
Earnings (losses) from consolidated affiliates
    688,748       312,350       13,949       341,672       (1,356,719 )      
Investment (loss) income
    504       96             (8,629 )           (8,029 )
Intercompany interest income
    2,989       63,208       2             (66,199 )      
                                                 
Total revenues and other income
    692,241       375,654       13,951       3,972,605       (1,422,918 )     3,631,533  
                                                 
Costs and other deductions:
                                               
Direct costs
                      2,043,459             2,043,459  
General and administrative expenses
    12,473       96       7       307,685       (437 )     319,824  
Depreciation and amortization
          450             339,619             340,069  
Depletion
                      28,318             28,318  
Interest expense
          38,366       8,592       (6,723 )           40,235  
Intercompany interest expense
    6,261                   59,938       (66,199 )      
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
    (8 )     223             4,123       437       4,775  
                                                 
Total costs and other deductions
    18,726       39,135       8,599       2,776,419       (66,199 )     2,776,680  
                                                 
Income before income taxes from continuing operations
    673,515       336,519       5,352       1,196,186       (1,356,719 )     854,853  
Income tax expense
          8,943       1,712       170,683             181,338  
                                                 
Income from continuing operations, net of tax
    673,515       327,576       3,640       1,025,503       (1,356,719 )     673,515  
Income from discontinued operations, net of tax
    35,024       35,024             70,048       (105,072 )     35,024  
                                                 
Net income
  $ 708,539     $ 362,600     $ 3,640     $ 1,095,551     $ (1,461,791 )   $ 708,539  
                                                 


26


Table of Contents

 
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Nine Months Ended September 30, 2006  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
Revenues and other income:
                                               
Operating revenues
  $     $     $     $ 3,439,989     $     $ 3,439,989  
Earnings from unconsolidated affiliates
                      19,475             19,475  
Earnings from consolidated affiliates
    771,504       609,076       12,672       636,880       (2,030,132 )      
Investment income
    179       10,343             57,231             67,753  
Intercompany interest income
    3,003       48,669                   (51,672 )      
                                                 
Total revenues and other income
    774,686       668,088       12,672       4,153,575       (2,081,804 )     3,527,217  
                                                 
Costs and other deductions:
                                               
Direct costs
                      1,835,523             1,835,523  
General and administrative expenses
    12,966       146       2       254,938       (343 )     267,709  
Depreciation and amortization
          450             261,585             262,035  
Depletion
                      28,661             28,661  
Interest expense
          27,776       8,580       (2,386 )           33,970  
Intercompany interest expense
    1,097                   50,575       (51,672 )      
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
          (832 )           12,414       343       11,925  
                                                 
Total costs and other deductions
    14,063       27,540       8,582       2,441,310       (51,672 )     2,439,823  
                                                 
Income before income taxes from continuing operations
    760,623       640,548       4,090       1,712,265       (2,030,132 )     1,087,394  
Income tax expense
          11,645       1,359       313,767             326,771  
                                                 
Income from continuing operations, net of tax
    760,623       628,903       2,731       1,398,498       (2,030,132 )     760,623  
Income from discontinued operations, net of tax
    22,324       22,324             44,648       (66,972 )     22,324  
                                                 
Net income
  $ 782,947     $ 651,227     $ 2,731     $ 1,443,146     $ (2,097,104 )   $ 782,947  
                                                 


27


Table of Contents

 
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Condensed Consolidating Statements of Cash Flows
 
                                                 
    Nine Months Ended September 30, 2007  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
Net cash (used for) provided by operating activities
  $ 2,388     $ (3,182 )   $ (10,972 )   $ 875,306     $ (5,484 )   $ 858,056  
                                                 
Cash flows from investing activities:
                                               
Purchases of investments
                      (231,070 )           (231,070 )
Sales and maturities of investments
          656             494,907             495,563  
Cash paid for investments in consolidated affiliates
          (5,484 )           (10,968 )     16,452        
Cash paid for acquisitions of businesses, net
                      (8,391 )           (8,391 )
Capital expenditures
                      (1,482,845 )           (1,482,845 )
Investments in affiliates
                      (28,314 )           (28,314 )
Proceeds from sales of assets and insurance claims
                      135,525             135,525  
Proceeds from sale of Sea Mar business
                      194,332             194,332  
                                                 
Net cash used for investing activities
          (4,828 )           (936,824 )     16,452       (925,200 )
                                                 
Cash flows from financing activities:
                                               
Increase in cash overdrafts
                      (15,337 )           (15,337 )
Proceeds from issuance of common shares
    60,362                               60,362  
Proceeds (payments) from intercompany long-term debt
    (57,811 )                 57,811              
Purchase of restricted stock
    (1,811 )                             (1,811 )
Tax benefit related to the exercise of stock options
          10,044                         10,044  
Proceeds from parent contributions
                10,968       5,484       (16,452 )      
Cash dividends paid
                      (5,484 )     5,484        
                                                 
Net cash provided by (used for) financing activities
    740       10,044       10,968       42,474       (10,968 )     53,258  
                                                 
Effect of exchange rate changes on cash and cash equivalents
                      7,114             7,114  
                                                 
Net (decrease) increase in cash and cash equivalents
    3,128       2,034       (4 )     (11,930 )           (6,772 )
Cash and cash equivalents, beginning of period
    14,874       2,394       8       683,273             700,549  
                                                 
Cash and cash equivalents, end of period
  $ 18,002     $ 4,428     $ 4     $ 671,343     $     $ 693,777  
                                                 


28


Table of Contents

 
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Nine Months Ended September 30, 2006  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
Net cash provided by (used for) operating activities
  $ 1,175,772     $ (155,865 )   $ (10,968 )   $ 2,872,939     $ (2,842,339 )   $ 1,039,539  
                                                 
Cash flows from investing activities:
                                               
Purchases of investments
                      (1,087,987 )           (1,087,987 )
Sales and maturities of investments
                      799,713             799,713  
Cash paid for investments in consolidated affiliates
    (977,927 )     (487,275 )           (1,189,056 )     2,654,258        
Cash paid for acquisitions of businesses, net
                      (46,510 )           (46,510 )
Proceeds from sale of affiliate’s stock
                      1,800,000       (1,800,000 )      
Investment in affiliates
                      (2,433 )           (2,433 )
Capital expenditures
                      (1,344,682 )           (1,344,682 )
Proceeds from sales of assets and insurance claims
                      10,322             10,322  
                                                 
Net cash provided by (used for) investing activities
    (977,927 )     (487,275 )           (1,060,633 )     854,258       (1,671,577 )
                                                 
Cash flows from financing activities:
                                               
Decrease in cash overdrafts
                      (15,845 )           (15,845 )
Proceeds from sale of warrants
    421,162                               421,162  
Purchase of exchangeable note hedge
          (583,550 )                       (583,550 )
Proceeds from long-term debt
          2,750,000                         2,750,000  
Reduction of long-term debt
          (769,789 )                       (769,789 )
Debt issuance costs
          (27,972 )                       (27,972 )
Proceeds from issuance of common shares
    21,925                               21,925  
Repurchase and retirement of common shares
    (627,357 )                 (2,545,977 )     1,800,000       (1,373,334 )
Tax benefit related to the exercise of stock options
          4,315                         4,315  
Proceeds from parent contributions
          1,178,088       10,968       1,465,202       (2,654,258 )      
Cash dividends paid
          (1,870,942 )           (971,397 )     2,842,339        
                                                 
Net cash (used for) provided by financing activities
    (184,270 )     680,150       10,968       (2,068,017 )     1,988,081       426,912  
                                                 
Effect of exchange rate changes on cash and cash equivalents
                      331             331  
                                                 
Net increase in cash and cash equivalents
    13,575       37,010             (255,380 )           (204,795 )
Cash and cash equivalents, beginning of period
    527       14       11       564,449             565,001  
                                                 
Cash and cash equivalents, end of period
  $ 14,102     $ 37,024     $ 11     $ 309,069     $     $ 360,206  
                                                 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 13   Subsequent Events
 
On October 3, 2007, we and one of our joint venture partners sold certain oil and gas holdings, included in our Oil and Gas operating segment, to an unrelated party. Related to the holdings, we collected $208 million of outstanding receivables from production contracts and sold holdings with a net book value of approximately $16 million of which these balances were classified in prior periods as other long term assets and plant, property and equipment, net, respectively. These balances have been reclassified to other current assets as of September 30, 2007. The Company received net proceeds of approximately $297.5 million, which will result in a fourth quarter pre-tax gain of approximately $70 million.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders
of Nabors Industries Ltd.:
 
We have reviewed the accompanying consolidated balance sheet of Nabors Industries Ltd. and its subsidiaries as of September 30, 2007, and the related consolidated statements of income for each of the three-month and nine-month periods ended September 30, 2007 and 2006, and the consolidated statements of cash flows and of changes in shareholders’ equity for the nine-month periods ended September 30, 2007 and 2006. This interim financial information is the responsibility of the Company’s management.
 
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
 
We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2006, and the related consolidated statements of income, of cash flows, and of changes in shareholders’ equity for the year then ended, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006; and in our report dated March 1, 2007 we expressed unqualified opinions thereon. The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2006, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
 
/s/  PricewaterhouseCoopers LLP
 
Houston, Texas
October 31, 2007


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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-looking Statements
 
We often discuss expectations regarding our future markets, demand for our products and services, and our performance in our annual and quarterly reports, press releases, and other written and oral statements. Statements that relate to matters that are not historical facts are “forward-looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act and Section 21E of the Exchange Act. These “forward-looking statements” are based on an analysis of currently available competitive, financial and economic data and our operating plans. They are inherently uncertain and investors should recognize that events and actual results could turn out to be significantly different from our expectations. By way of illustration, when used in this document, words such as “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “will,” “should,” “could,” “may,” “predict” and similar expressions are intended to identify forward-looking statements.
 
You should consider the following key factors when evaluating these forward-looking statements:
 
  •  fluctuations in worldwide prices of and demand for natural gas and oil;
 
  •  fluctuations in levels of natural gas and oil exploration and development activities;
 
  •  fluctuations in the demand for our services;
 
  •  the existence of competitors, technological changes and developments in the oilfield services industry;
 
  •  the existence of operating risks inherent in the oilfield services industry;
 
  •  the existence of regulatory and legislative uncertainties;
 
  •  the possibility of changes in tax laws;
 
  •  the possibility of political instability, war or acts of terrorism in any of the countries in which we do business; and
 
  •  general economic conditions.
 
The above description of risks and uncertainties is by no means all-inclusive, but is designed to highlight what we believe are important factors to consider. For a more detailed description of risk factors, please refer to our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 1, 2007, under Part 1, Item 1A, “Risk Factors.”
 
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” “the Company” or “Nabors” means Nabors Industries Ltd. and, where the context requires, includes our subsidiaries.
 
Management Overview
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of our operations and our financial condition. This information is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements.
 
Nabors is the largest land drilling contractor in the world. We conduct oil, gas and geothermal land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South and Central America, the Middle East, the Far East and Africa. Nabors is also one of the largest land well-servicing and workover contractors in the United States and Canada and is a leading provider of offshore platform workover and drilling rigs in the United States and multiple international markets. To further supplement and complement our primary business, we offer a wide range of ancillary well-site services, including engineering, transportation, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services in selected domestic and international markets. We provide logistics services for onshore drilling and well-servicing operations in Canada using helicopter and fixed-winged aircraft. We manufacture and lease or sell top drives for a broad range of drilling


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applications, directional drilling systems, rig instrumentation and data collection equipment, and rig reporting software. We also invest in oil and gas exploration, development and production activities.
 
The majority of our business is conducted through our various Contract Drilling operating segments, which include our drilling, workover and well-servicing operations, on land and offshore. Our oil and gas exploration, development and production operations are included in a category labeled Oil and Gas for segment reporting purposes. Our operating segments engaged in drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are aggregated in a category labeled Other Operating Segments for segment reporting purposes.
 
Our businesses depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Therefore, a sustained increase or decrease in the price of natural gas or oil, which could have a material impact on exploration, development and production activities, could also materially affect our financial position, results of operations and cash flows.
 
Natural gas prices are the primary drivers of our U.S. Lower 48 Land Drilling, Canadian and U.S. Offshore (Gulf of Mexico) operations, while oil prices are the primary driver of our Alaskan, International and U.S. Land Well-servicing operations. The Henry Hub natural gas spot price (per Bloomberg) averaged $6.88 per million cubic feet (mcf) during the period from October 1, 2006 through September 30, 2007, down from a $8.05 per mcf average during the period from October 1, 2005 through September 30, 2006. West Texas intermediate spot oil prices (per Bloomberg) averaged $64.63 per barrel during the period from October 1, 2006 through September 30, 2007, slightly down from a $66.11 per barrel average during the period from October 1, 2005 through September 30, 2006.
 
Operating revenues and Earnings from unconsolidated affiliates for the three months ended September 30, 2007 totaled $1.3 billion, representing an increase of $34.0 million, or 3% as compared to the three months ended September 30, 2006 and $3.6 billion for the nine months ended September 30, 2007, representing an increase of $180.1 million, or 5% as compared to the nine months ended September 30, 2006. Adjusted income derived from operating activities and net income for the three months ended September 30, 2007 totaled $287.3 million and $218.0 million, ($.76 per diluted share), respectively, representing decreases of 22% and 26%, respectively, compared to the three months ended September 30, 2006. Adjusted income derived from operating activities and net income for the nine months ended September 30, 2007 totaled $907.9 million and $708.5 million, ($2.47 per diluted share), respectively, representing decreases of 15% and 10%, respectively, compared to the nine months ended September 30, 2006.
 
The decrease in our adjusted income derived from operating activities during the three and nine months ended September 30, 2007 as compared to the three and nine months ended September 30, 2006 related primarily to our U.S. Lower 48 Land Drilling, U.S. Land Well-servicing and Canada Drilling and Well-servicing operations, where activity levels decreased as a result of lower natural gas prices and inclement weather. Operating results were further impacted by higher levels of depreciation expense due to our capital expenditures and higher general and administrative expenses due to an increase in wages and burden for a majority of our operating segments and Corporate during the three and nine months ended September 30, 2007. Partially offsetting the decreases in our adjusted income derived from operating activities were the increases in operating results from our International operations and to a lesser extent by our Alaska operations, both driven from the continuing high oil prices. In addition, our net income for the three and nine months ended September 30, 2007 has decreased compared to the prior year periods primarily as a result of investment net losses only partially offset by a lower effective tax rate.
 
We anticipate that 2007 results for our U.S. Lower 48 Land Drilling, U.S. Land Well-servicing and Canadian drilling operations are likely to be significantly lower than 2006 with a slower market and an influx of new rig capacity in the U.S. Lower 48 market and more extensive market weakness in Canada. We expect increases in our International operations followed to a lesser extent by our Alaskan businesses resulting from a full year’s contribution of rig deployments in 2006 and further deployments in 2007, most of which are for multi-year contracts. Further income increments from our Alaskan and International operations are being realized from expected renewals of existing multi-year contracts to much higher current market rates.


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The following table sets forth certain information with respect to our reportable segments and rig activity:
 
                                                                 
    Three Months Ended September 30,     Increase
    Nine Months Ended September 30,     Increase
 
    2007     2006     (Decrease)     2007     2006     (Decrease)  
(In thousands, except percentages and rig activity)  
 
Reportable segments:
                                                               
Operating revenues and Earnings from unconsolidated affiliates from continuing operations:(1) 
                                                               
Contract Drilling:(2)
                                                               
U.S. Lower 48 Land Drilling
  $ 416,525     $ 498,173     $ (81,648 )     (16 )%   $ 1,295,908     $ 1,393,310     $ (97,402 )     (7 )%
U.S. Land Well-servicing
    180,370       188,650       (8,280 )     (4 )%     544,998       518,224       26,774       5 %
U.S. Offshore
    48,895       56,219       (7,324 )     (13 )%     164,986       162,299       2,687       2 %
Alaska
    30,854       24,098       6,756       28 %     115,467       75,816       39,651       52 %
Canada
    132,434       167,705       (35,271 )     (21 )%     400,802       514,849       (114,047 )     (22 )%
International
    296,219       195,445       100,774       52 %     781,963       511,487       270,476       53 %
                                                                 
Subtotal Contract Drilling(3)
    1,105,297       1,130,290       (24,993 )     (2 )%     3,304,124       3,175,985       128,139       4 %
Oil and Gas(4)(5)
    35,770       9,268       26,502       286 %     67,009       48,808       18,201       37 %
Other Operating Segments(6)(7)
    163,397       120,539       42,858       36 %     433,771       366,416       67,355       18 %
Other reconciling items(8)
    (51,476 )     (41,139 )     (10,337 )     (25 )%     (165,342 )     (131,745 )     (33,597 )     (26 )%
                                                                 
Total
  $ 1,252,988     $ 1,218,958     $ 34,030       3 %   $ 3,639,562     $ 3,459,464     $ 180,098       5 %
                                                                 
Adjusted income (loss) derived from operating activities from continuing operations:(1)(9)
                                                               
Contract Drilling:
                                                               
U.S. Lower 48 Land Drilling
  $ 130,761     $ 219,485     $ (88,724 )     (40 )%   $ 458,354     $ 611,912     $ (153,558 )     (25 )%
U.S. Land Well-servicing
    42,291       54,495       (12,204 )     (22 )%     125,752       148,000       (22,248 )     (15 )%
U.S. Offshore
    9,245       17,492       (8,247 )     (47 )%     43,500       51,613       (8,113 )     (16 )%
Alaska
    4,214       2,123       2,091       98 %     29,006       9,749       19,257       198 %
Canada
    16,920       42,549       (25,629 )     (60 )%     62,056       145,524       (83,468 )     (57 )%
International
    88,574       58,145       30,429       52 %     240,001       146,142       93,859       64 %
                                                                 
Subtotal Contract Drilling(3)
    292,005       394,289       (102,284 )     (26 )%     958,669       1,112,940       (154,271 )     (14 )%
Oil and Gas
    17,868       (5,101 )     22,969       450 %     22,370       7,751       14,619       189 %
Other Operating Segments
    10,297       7,975       2,322       29 %     28,630       24,345       4,285       18 %
Other reconciling items(10)
    (32,837 )     (28,921 )     (3,916 )     (14 )%     (101,777 )     (79,500 )     (22,277 )     (28 )%
                                                                 
Total
    287,333       368,242       (80,909 )     (22 )%     907,892       1,065,536       (157,644 )     (15 )%
Interest expense
    (13,450 )     (13,744 )     294       2 %     (40,235 )     (33,970 )     (6,265 )     (18 )%
Investment (loss) income
    (27,466 )     37,155       (64,621 )     (174 )%     (8,029 )     67,753       (75,782 )     (112 )%
Losses on sales of long-lived assets, impairment charges and other income (expense), net
    (30,524 )     (4,076 )     (26,448 )     (649 )%     (4,775 )     (11,925 )     7,150       60 %
                                                                 
Income before income taxes from continuing operations
  $ 215,893     $ 387,577     $ (171,684 )     44 %   $ 854,853     $ 1,087,394     $ (232,541 )     (21 )%
                                                                 
Rig activity:
                                                               
Rig years: (11)
                                                               
U.S. Lower 48 Land Drilling
    221.6       257.3       (35.7 )     (14 )%     231.0       255.3       (24.3 )     (10 )%
U.S. Offshore
    14.4       16.0       (1.6 )     (10 )%     16.4       16.3       .1       1 %
Alaska
    8.4       9.3       (.9 )     (10 )%     8.9       8.1       .8       10 %
Canada
    37.0       52.9       (15.9 )     (30 )%     37.8       54.6       (16.8 )     (31 )%
International(12)
    117.9       100.8       17.1       17 %     115.6       93.5       22.1       24 %
                                                                 
Total rig years
    399.3       436.3       (37.0 )     (8 )%     409.7       427.8       (18.1 )     (4 )%
                                                                 
Rig hours: (13)
                                                               
U.S. Land Well-servicing
    274,084       322,445       (48,361 )     (15 )%     864,602       953,174       (88,572 )     (9 )%
Canada Well-servicing
    72,593       91,047       (18,454 )     (20 )%     211,794       273,919       (62,125 )     (23 )%
                                                                 
Total rig hours
    346,677       413,492       (66,815 )     (16 )%     1,076,396       1,227,093       (150,697 )     (12 )%
                                                                 


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(1) All segment information excludes the Sea Mar business, which has been classified as a discontinued operation.
 
(2) These segments include our drilling, workover and well-servicing operations, on land and offshore.
 
(3) Includes earnings (loss), net from unconsolidated affiliates, accounted for by the equity method, of $3.4 million and $1.1 million for the three months ended September 30, 2007 and 2006, respectively, and $5.9 million for the nine months ended September 30, 2007 and 2006, respectively.
 
(4) Represents our oil and gas exploration, development and production operations.
 
(5) Includes earnings (losses), net, from unconsolidated affiliates, accounted for by the equity method, of ($2.0) million and $0 for the three months ended September 30, 2007 and 2006, respectively, and ($2.8) million and $0 for the nine months ended September 30, 2007 and 2006, respectively.
 
(6) Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations.
 
(7) Includes earnings (loss), net from unconsolidated affiliates, accounted for by the equity method, of $1.3 million and $4.6 million for the three months ended September 30, 2007 and 2006, respectively, and $15.5 million and $13.6 million for the nine months ended September 30, 2007 and 2006, respectively.
 
(8) Represents the elimination of inter-segment transactions.
 
(9) Adjusted income derived from operating activities is computed by: subtracting direct costs, general and administrative expenses, depreciation and amortization, and depletion expense from Operating revenues and then adding Earnings from unconsolidated affiliates. Such amounts should not be used as a substitute to those amounts reported under accounting principles generally accepted in the United States of America (GAAP). However, management evaluates the performance of our business units and the consolidated company based on several criteria, including adjusted income derived from operating activities, because it believes that this financial measure is an accurate reflection of the ongoing profitability of our company. A reconciliation of this non-GAAP measure to income before income taxes, which is a GAAP measure, is provided within the table above.
 
(10) Represents the elimination of inter-segment transactions and unallocated corporate expenses.
 
(11) Excludes well-servicing rigs, which are measured in rig hours. Includes our equivalent percentage ownership of rigs owned by unconsolidated affiliates. Rig years represent a measure of the number of equivalent rigs operating during a given period. For example, one rig operating 182.5 days during a 365-day period represents 0.5 rig years.
 
(12) International rig years include our equivalent percentage ownership of rigs owned by unconsolidated affiliates which totaled 4.0 years during the three and nine months ended September 30, 2007 and 2006, respectively.
 
(13) Rig hours represents the number of hours that our well-servicing rig fleet operated during the period.
 
Segment Results of Operations
 
Contract Drilling
 
Our Contract Drilling operating segments contain one or more of the following operations: drilling, workover and well-servicing, on land and offshore.


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U.S. Lower 48 Land Drilling.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months
                Nine Months
             
    Ended September 30,                 Ended September 30,              
    2007     2006     (Decrease)     2007     2006     (Decrease)  
(In thousands, except percentages and rig activity)  
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 416,525     $ 498,173     $ (81,648 )     (16 )%   $ 1,295,908     $ 1,393,310     $ (97,402 )     (7 )%
Adjusted income derived from operating activities
  $ 130,761     $ 219,485     $ (88,724 )     (40 )%   $ 458,354     $ 611,912     $ (153,558 )     (25 )%
Rig years
    221.6       257.3       (35.7 )     (14 )%     231.0       255.3       (24.3 )     (10 )%
 
The decrease in operating results during the three and nine months ended September 30, 2007 as compared to prior year periods is a result of decreased drilling activity, driven by lower natural gas prices. Additionally, the decrease in operating results is due to increased drilling rig operating costs, including depreciation expense related to capital expansion projects.
 
U.S. Land Well-servicing.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months
                Nine Months
             
    Ended September 30,           Ended September 30,     Increase
 
    2007     2006     (Decrease)     2007     2006     (Decrease)  
(In thousands, except percentages and rig activity)  
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 180,370     $ 188,650     $ (8,280 )     (4 )%   $ 544,998     $ 518,224     $ 26,774       5 %
Adjusted income derived from operating activities
  $ 42,291     $ 54,495     $ (12,204 )     (22 )%   $ 125,752     $ 148,000     $ (22,248 )     (15 )%
Rig hours
    274,084       322,445       (48,361 )     (15 )%     864,602       953,174       (88,572 )     (9 )%
 
Operating revenues and Earnings from unconsolidated affiliates decreased during the three months ended September 30, 2007 as compared to the prior year period as a result of lower utilization for our daylight rigs caused by inclement weather restricting asset mobility in most markets. The decrease in adjusted income derived from operating activities during the three months ended September 30, 2007 over the prior year period reflect lower rig utilization as well as higher depreciation expense related to capital expansion projects.
 
Operating revenues and Earnings from unconsolidated affiliates increased during the nine months ended September 30, 2007 over the prior year period as a result of higher average dayrates, driven by the sustained level of high oil prices partially offset by lower rig utilization. The decrease in adjusted income derived from operating activities during the nine months ended September 30, 2007 over the prior year period reflects lower rig utilization, higher operating costs and higher depreciation expense as discussed above.


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U.S. Offshore.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months
                Nine Months
             
    Ended September 30,           Ended September 30,     Increase
 
    2007     2006     (Decrease)     2007     2006     (Decrease)  
(In thousands, except percentages and rig activity)  
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 48,895     $ 56,219     $ (7,324 )     (13 )%   $ 164,986     $ 162,299     $ 2,687       2 %
Adjusted income derived from operating activities
  $ 9,245     $ 17,492     $ (8,247 )     (47 )%   $ 43,500     $ 51,613     $ (8,113 )     (16 )%
Rig years
    14.4       16.0       (1.6 )     (10 )%     16.4       16.3       .1       1 %
 
The decrease in operating results during the three months ended September 30, 2007 as compared to the prior year period primarily resulted from a decrease in average dayrates and utilization for our jack-up rigs partially offset by the deployment of two new-built Barge and one Platform Workover Drilling rigs in early 2007. Operating results were further negatively impacted by increased depreciation expense relating to new rigs added to the fleet.
 
Operating revenues and Earnings from unconsolidated affiliates increased slightly for the nine months ended September 30, 2007 as compared to the prior year period as a result of increased utilization from platform workover drilling and barge rigs added to the fleet, offsetting the lower average dayrates and lower utilization of jack-up rigs. Adjusted income derived from operating activities decreased for the nine months ended September 30, 2007 as compared to the prior year period due to higher operating costs and increased depreciation expense relating to new rigs added to the fleet.
 
Alaska.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months
                Nine Months
             
    Ended September 30,                 Ended September 30,              
    2007     2006     Increase (Decrease)     2007     2006     Increase  
(In thousands, except percentages and rig activity)  
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 30,854     $ 24,098     $ 6,756       28 %   $ 115,467     $ 75,816     $ 39,651       52 %
Adjusted income derived from operating activities
  $ 4,214     $ 2,123     $ 2,091       98 %   $ 29,006     $ 9,749     $ 19,257       198 %
Rig years
    8.4       9.3       (.9 )     (10 )%     8.9       8.1       .8       10 %
 
The increase in operating results during the three and nine months ended September 30, 2007 as compared to prior year periods is primarily due to increases in average dayrates, driven by the sustained level of high oil prices.


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Canada.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months
                Nine Months
             
    Ended September 30,                 Ended September 30,              
    2007     2006     (Decrease)     2007     2006     (Decrease)  
(In thousands, except percentages and rig activity)  
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 132,434     $ 167,705     $ (35,271 )     (21 )%   $ 400,802     $ 514,849     $ (114,047 )     (22 )%
Adjusted income derived from operating activities
  $ 16,920     $ 42,549     $ (25,629 )     (60 )%   $ 62,056     $ 145,524     $ (83,468 )     (57 )%
Rig years
    37.0       52.9       (15.9 )     (30 )%     37.8       54.6       (16.8 )     (31 )%
Rig hours
    72,593       91,047       (18,454 )     (20 )%     211,794       273,919       (62,125 )     (23 )%
 
The decrease in operating results during the three and nine months ended September 30, 2007 resulted primarily from lower average dayrates and an overall decrease in drilling and well-servicing activity compared to the prior year periods. These decreases were driven by lower natural gas prices, which resulted in lower demand for our services in this market. Operating results were further negatively impacted by increased operating expenses, including depreciation expense related to capital expansion projects. Canadian drilling activity is subject to substantial levels of seasonality, as activity levels typically peak in the first quarter, decline substantially in the second quarter and then generally increase over the last half of the year.
 
International.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months
                Nine Months
             
    Ended September 30,                 Ended September 30,              
    2007     2006     Increase     2007     2006     Increase  
(In thousands, except percentages and rig activity)  
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 296,219     $ 195,445     $ 100,774       52 %   $ 781,963     $ 511,487     $ 270,476       53 %
Adjusted income derived from operating activities
  $ 88,574     $ 58,145     $ 30,429       52 %   $ 240,001     $ 146,142     $ 93,859       64 %
Rig years
    117.9       100.8       17.1       17 %     115.6       93.5       22.1       24 %
 
The increase in operating results during the three and nine months ended September 30, 2007 as compared to the prior year periods primarily resulted from higher average dayrates and an increase in drilling activities, driven by the sustained level of high oil prices and from an expansion of the rig fleet and renewal of existing multi-year contracts at higher average dayrates.


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Oil and Gas
 
This operating segment represents our oil and gas exploration, development and production operations. The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months
          Nine Months
       
    Ended September 30,           Ended September 30,        
    2007   2006   Increase   2007   2006   Increase
(In thousands, except percentages)
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 35,770     $ 9,268     $ 26,502       286 %   $ 67,009     $ 48,808     $ 18,201       37 %
Adjusted income derived from operating activities
  $ 17,868     $ (5,101 )   $ 22,969       450 %   $ 22,370     $ 7,751     $ 14,619       189 %
 
The increase in operating results during the three and nine months ended September 30, 2007 as compared to the prior year periods is primarily a result of the increase in income attributable to production payment contracts and a $15 million gain recognized on the sale of property during the current quarter. Additionally, operating results were higher due to an increase in volumes and an increase in oil and natural gas liquid prices only partially offset by lower natural gas prices.
 
For the three months ended September 30, 2006, adjusted income derived from operating activities was a net loss as a result of lower production payment contracts and higher costs. Operating results during the nine months ended September 30, 2006 were positively impacted by a $20.7 million gain recognized on the sale of certain leasehold interests in early 2006, partially offset by impairment charges in the first quarter of 2006 to certain oil and gas properties.
 
Other Operating Segments
 
These operations include drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations. The results of operations for these operating segments are as follows:
 
                                                                 
    Three Months
          Nine Months
       
    Ended September 30,           Ended September 30,        
    2007   2006   Increase   2007   2006   Increase
(In thousands, except percentages)
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 163,397     $ 120,539     $ 42,858       36 %   $ 433,771     $ 366,416     $ 67,355       18 %
Adjusted income derived from operating activities
  $ 10,297     $ 7,975     $ 2,322       29 %   $ 28,630     $ 24,345     $ 4,285       18 %
 
The increase in our operating results during the three and nine months ended September 30, 2007 as compared to the prior year periods primarily resulted from (i) increased sales of top drives driven by the strengthened oil market and increased equipment sales from the acquisition of Pragma in the second quarter of 2006 and (ii) increased demand for the directional drilling market in the U.S. and increased market share in Canada. These increases were partially offset by a decreased demand for construction and logistics services.


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Other Financial Information
 
General and administrative expenses
 
                                                                 
    Three Months
          Nine Months
       
    Ended September 30,           Ended September 30,        
    2007   2006   Increase   2007   2006   Increase
(In thousands, except percentages)
 
General and administrative expenses
  $ 105,975     $ 92,783     $ 13,192       14 %   $ 319,824     $ 267,709     $ 52,115       19 %
General and administrative expenses as a percentage of operating revenues
    8.5 %     7.6 %     .9 %     12 %     8.8 %     7.8 %     1.0 %     13 %
 
General and administrative expenses increased during the three and nine months ended September 30, 2007 as compared to the prior year periods as a result of increases in wages and burden for a majority of our operating segments and Corporate, which primarily resulted from an increase in the number of employees. Additionally, during the three and nine months ended September 30, 2007, corporate compensation expense increased due to non-cash compensation expense recorded for restricted stock grants, partially offset by a decrease in stock option expense as a result of completion of the amortization of certain past awards.
 
Depreciation and amortization, and depletion expense
 
                                                                 
    Three Months
          Nine Months
       
    Ended September 30,           Ended September 30,        
    2007   2006   Increase   2007   2006   Increase (Decrease)
(In thousands, except percentages)
 
Depreciation and amortization expense
  $ 125,089     $