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 June 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 July 27, 2007 was 282,309,214. In addition, our subsidiary, Nabors Exchangeco (Canada) Inc., has 135,036 exchangeable shares outstanding as of July 27, 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 June 30, 2007 and December 31, 2006   2
    Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007 and 2006   3
    Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006   4
    Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2007 and 2006   5
    Notes to Consolidated Financial Statements   7
    Report of Independent Registered Public Accounting Firm   29
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   30
  Quantitative and Qualitative Disclosures About Market Risk   43
  Controls and Procedures   43
 
  Legal Proceedings   44
  Risk Factors   44
  Submission of Matters to a Vote of Security Holders   45
  Exhibits   46
  47
 Asset Purchase Agreement
 Awareness Letter of Independent Accountants
 Certification of Chairman and CEO Pursuant to Rule 13a-14(a)
 Certification of Vice President and CFO Pursuant to Rule 13a-14(a)
 Certification Pursuant to 18 U.S.C. Section 1350


Table of Contents

 
PART I FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                 
    June 30,     December 31,  
(In thousands, except per share amounts)   2007     2006  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 608,739     $ 700,549  
Short-term investments
    218,552       439,467  
Accounts receivable, net
    1,035,895       1,109,738  
Inventory
    127,368       100,487  
Deferred income taxes
    36,943       38,081  
Other current assets
    230,729       116,534  
                 
Total current assets
    2,258,226       2,504,856  
Long-term investments
    480,341       513,269  
Property, plant and equipment, net
    6,298,371       5,410,101  
Goodwill
    388,981       362,269  
Other long-term assets
    486,341       351,808  
                 
Total assets
  $ 9,912,260     $ 9,142,303  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
Current portion of long-term debt
  $ 700,000     $  
Trade accounts payable
    508,712       459,179  
Accrued liabilities
    321,547       294,958  
Income taxes payable
    118,426       100,223  
                 
Total current liabilities
    1,648,685       854,360  
Long-term debt
    3,305,249       4,004,074  
Other long-term liabilities
    295,223       208,553  
Deferred income taxes
    540,488       538,663  
                 
Total liabilities
    5,789,645       5,605,650  
                 
Commitments and contingencies (Note 7)
               
Shareholders’ equity:
               
Common shares, par value $.001 per share:
               
Authorized common shares 800,000; issued 303,940 and 299,333, respectively
    304       299  
Capital in excess of par value
    1,721,200       1,637,204  
Accumulated other comprehensive income
    257,695       201,261  
Retained earnings
    2,918,900       2,473,373  
Less: treasury shares, at cost, 22,340 common shares
    (775,484 )     (775,484 )
                 
Total shareholders’ equity
    4,122,615       3,536,653  
                 
Total liabilities and shareholders’ equity
  $ 9,912,260     $ 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 June 30,     Six Months Ended June 30,  
(In thousands, except per share amounts)   2007     2006     2007     2006  
 
Revenues and other income:
                               
Operating revenues
  $ 1,162,773     $ 1,118,000     $ 2,423,416     $ 2,281,926  
Earnings from unconsolidated affiliates
    3,436       9,370       15,877       13,769  
Investment (loss) income
    (9,272 )     16,728       19,437       30,598  
                                 
Total revenues and other income
    1,156,937       1,144,098       2,458,730       2,326,293  
                                 
Costs and other deductions:
                               
Direct costs
    649,969       594,226       1,347,273       1,208,843  
General and administrative expenses
    100,989       87,830       215,963       176,627  
Depreciation and amortization
    112,988       87,946       218,216       169,335  
Depletion
    9,160       7,913       15,785       20,930  
Interest expense
    13,716       12,168       26,765       20,223  
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
    (39,510 )     4,216       (25,472 )     8,245  
                                 
Total costs and other deductions
    847,312       794,299       1,798,530       1,604,203  
                                 
Income before income taxes
    309,625       349,799       660,200       722,090  
                                 
Income tax (benefit) expense:
                               
Current
    58,828       58,549       168,909       119,974  
Deferred
    22,448       57,817       780       111,920  
                                 
Total income tax expense
    81,276       116,366       169,689       231,894  
                                 
Net income
  $ 228,349       233,433     $ 490,511     $ 490,196  
                                 
Earnings per share:
                               
Basic
  $ .82       .79     $ 1.76     $ 1.61  
Diluted
  $ .79       .77     $ 1.71     $ 1.56  
Weighted-average number of common shares outstanding:
                               
Basic
    279,253       294,419       278,098       303,704  
                                 
Diluted
    287,898       304,394       286,356       314,608  
                                 
 
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)
 
                 
    Six Months Ended June 30,  
(In thousands)   2007     2006  
 
Cash flows from operating activities:
               
Net income
  $ 490,511     $ 490,196  
Adjustments to net income:
               
Depreciation and amortization
    218,216       169,335  
Depletion
    15,785       20,930  
Deferred income tax (benefit) expense
    780       111,920  
Deferred financing costs amortization
    4,176       2,104  
Pension liability amortization
    240       210  
Discount amortization on long-term debt
    974       2,888  
Amortization of loss on hedges
    276       277  
(Gains) losses on long-lived assets, net
    (29,547 )     8,111  
Losses (gains) on investments, net
    2,665       (7,696 )
Gains on derivative instruments
    (979 )     (1,642 )
Share-based compensation
    16,285       15,150  
Foreign currency transaction gains, net
    (3,290 )     (7 )
Equity in earnings of unconsolidated affiliates, net of dividends
    (4,291 )     (11,336 )
Changes in operating assets and liabilities, net of effects from acquisitions:
               
Accounts receivable
    88,267       (163,397 )
Inventory
    (24,213 )     (18,028 )
Other current assets
    (56,644 )     (13,249 )
Other long-term assets
    (127,262 )     (24,271 )
Trade accounts payable and accrued liabilities
    37,710       82,112  
Income taxes payable
    (24,811 )     57,446  
Other long-term liabilities
    50,537       20,513  
                 
Net cash provided by operating activities
    655,385       741,566  
                 
Cash flows from investing activities:
               
Purchases of investments
    (203,222 )     (212,682 )
Sales and maturities of investments
    366,239       727,741  
Cash paid for acquisitions of businesses, net
    (8,391 )     (82,236 )
Deposits released for acquisitions
          35,844  
Capital expenditures
    (1,095,496 )     (840,006 )
Investment in affiliates
    (8,433 )     (2,433 )
Proceeds from sales of assets and insurance claims
    119,447       7,794  
                 
Net cash used for investing activities
    (829,856 )     (365,978 )
                 
Cash flows from financing activities:
               
Increase (decrease) in cash overdrafts
    12,042       (26,322 )
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
          (27,500 )
Proceeds from issuance of common shares
    67,824       19,173  
Repurchase and retirement of common shares
    (1,811 )     (1,309,102 )
Tax benefit related to the exercise of stock options
    784       3,954  
                 
Net cash provided by financing activities
    78,839       478,026  
                 
Effect of exchange rate changes on cash and cash equivalents
    3,822       645  
                 
Net (decrease) in cash and cash equivalents
    (91,810 )     854,259  
Cash and cash equivalents, beginning of period
    700,549       565,001  
                 
Cash and cash equivalents, end of period
  $ 608,739     $ 1,419,260  
                 
 
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
                               
    Common
          Gains
                               
    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
                                                    490,511               490,511  
Translation adjustment
                                    89,780                               89,780  
Unrealized gains on marketable securities, net of income taxes of $452
                            13,476                                       13,476  
Less: reclassification adjustment for gains included in net income, net of income tax benefit of $2,662
                            (47,048 )                                     (47,048 )
Pension liability amortization, net of income taxes of $89
                                            151                       151  
Amortization of loss on cash flow hedges
                                            75                       75  
                                                                         
Total comprehensive income (loss)
                      (33,572 )     89,780       226       490,511             546,945  
                                                                         
Cumulative effect of adoption of FIN 48 effective January 1, 2007
                                                    (44,984 )             (44,984 )
Issuance of common shares for stock options exercised
    2,982       3       67,821                                               67,824  
Nabors Exchangeco shares exchanged
    36                                                                
Tax effect of exercised stock option deductions
                    1,703                                               1,703  
Restricted stock awards, net
    1,589       2       (1,813 )                                             (1,811 )
Share-based compensation
                    16,285                                               16,285  
                                                                         
Subtotal
    4,607       5       83,996                         (44,984 )           39,017  
                                                                         
Balances, June 30, 2007
    303,940     $ 304     $ 1,721,200     $ (172 )   $ 260,940     $ (3,073 )   $ 2,918,900     $ (775,484 )   $ 4,122,615  
                                                                         
 
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)                    
    Common
                Unrealized Gains
                               
    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
                                                            490,196               490,196  
Translation adjustment
                                            34,353                               34,353  
Unrealized gains on marketable securities, net of income taxes of $667
                                    15,752                                       15,752  
Less: reclassification adjustment for gains included in net income, net of income tax expense of $17
                                    (1,408 )                                     (1,408 )
Pension liability amortization, net of income taxes of $78
                                                    132                       132  
Amortization of loss on cash flow hedges
                                                    75                       75  
                                                                                 
Total comprehensive income
                      —-       14,344       34,353       207       490,196             539,100  
                                                                                 
Adoption of SFAS 123-R
                    (15,649 )     15,649                                                
Issuance of common shares for stock options exercised
    913       1       19,172                                                       19,173  
Nabors Exchangeco shares exchanged
    42                                                                        
Purchase of call options
                    (583,550 )                                                     (583,550 )
Sale of warrants
                    421,162                                                       421,162  
Tax benefit from the purchase of call options
                    211,832                                                       211,832  
Repurchase and retirement of common shares
    (17,935 )     (18 )     (90,450 )                                     (536,889 )             (627,357 )
Repurchase of 19,440 treasury shares
                                                                    (681,745 )     (681,745 )
Tax effect of exercised stock option deductions
                    3,954                                                       3,954  
Restricted stock awards, net
    613                                                                        
Share-based compensation
                    15,150                                                       15,150  
                                                                                 
Subtotal
    (16,367 )     (17 )     (18,379 )     15,649                         (536,889 )     (681,745 )     (1,221,381 )
                                                                                 
Balances, June 30, 2006
    299,026     $ 298     $ 1,572,589     $     $ 33,209     $ 212,462     $ (3,787 )   $ 1,942,833     $ (681,745 )   $ 3,075,859  
                                                                                 
 
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 650 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 615 land workover and well-servicing rigs in the United States, primarily in the southwestern and western United States, and approximately 190 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 market 25 marine transportation and supply vessels, which provide transportation of drilling materials, supplies and crews for offshore operations. 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 marine transportation and supply services, 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.
 
As used in this Report, “we,” “us,” “our” 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 June 30, 2007 and the results of our operations and our cash flows for the three and six months ended June 30, 2007 and 2006, in accordance with GAAP. Interim results for the three and six months ended June 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 Accounting Oversight Board. Pursuant to Rule 436(c) under the Securities Act of 1933, 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.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 $111.1 million and $98.0 million as of June 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 stock-based employee compensation plans, which are more fully described in Note 3 of our 2006 Annual Report on Form 10-K. 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 $7.4 million for the three months ended June 30, 2007 and 2006, respectively, and $16.3 million and $15.2 million for the six months ended June 30, 2007 and 2006. Share-based compensation expense has been allocated to our various operating segments (Note 10).
 
During the six months ended June 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 has been 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, 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


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

periods. As of June 30, 2007, the Company had approximately $120.1 of total gross unrecognized tax benefits, including interest and penalties, recorded as other long-term liabilities. During the three and six months ended June 30, 2007, the Company accrued and recognized estimated interest and penalties of approximately $2.4 million and $4.0 million, respectively.
 
We are subject to income taxes in the United States and numerous foreign jurisdictions. U.S. federal income tax returns for 2002 through 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 previously recorded uncertain tax positions.
 
The Company continues to recognize 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 six months ended June 30, 2007 and 2006, our employees exercised vested options to acquire 3.0 million and .9 million of our common shares, respectively, resulting in proceeds of $67.8 million and $19.2 million, respectively.
 
During the six months ended June 30, 2006, we repurchased 37.4 million of our common shares in the open market for $1.31 billion. We retired 17.9 million shares during the six months ended June 30, 2006 and held 19.4 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 creditors 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.
 
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


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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. For the remainder of 2007 through the expiration date of the employment agreement, the annual cash bonus will return to 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 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 or 2007 Amendments reducing Mr. Isenberg’s and Mr. Petrello’s bonus percentage as described above. If, by way of example, these provisions had applied at June 30, 2007, Mr. Isenberg would have been entitled to a payment of approximately $329 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 would not be less than approximately $264 million. Similarly, with respect to Mr. Petrello, had these provisions applied at June 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 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


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

have insurance to cover its exposure 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 $30.0 million and $18.8 million, respectively, as of June 30, 2007. Neither Messrs. Isenberg nor Petrello had unvested stock options as of June 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.
 
In March 2006 the Board of Directors exercised its election to fix the expiration date of the employment agreements for Messrs. Isenberg and Petrello. 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 termination without cause, as described above. If, by way of example, there was a change of control event that applied on June 30, 2007, then the payments to Messrs. Isenberg and Petrello would be approximately $329 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. 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 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 $30.0 million and $18.8 million, respectively, as of June 30, 2007. Neither Messrs. Isenberg nor Petrello had unvested stock options as of June 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 June 30, 2007, Mr. Isenberg would have received 3,366,666 options valued at approximately $40 million and Mr. Petrello would have received 1,683,332 options valued at approximately $20 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 June 30, 2007, and


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 $148 million and $52 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 have and will continue to contest the IRS position vigorously. We previously had obtained 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. 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 currently have not recorded any reserves for such proposed adjustments.
 
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


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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.
 
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


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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  
(In thousands)   Remainder of 2007     2008     2009     Thereafter     Total  
 
Financial standby letters of credit and other financial surety instruments
  $ 24,573     $ 108,008     $ 100     $ 1,953     $ 134,634  
Contingent consideration in acquisition
          1,063       1,063       2,124       4,250  
                                         
Total
  $ 24,573     $ 109,071     $ 1,163     $ 4,077     $ 138,884  
                                         
 
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 June 30,     Six Months Ended June 30,  
(In thousands, except per share amounts)   2007     2006     2007     2006  
 
Net income (numerator):
                               
Net income — basic
  $ 228,349     $ 233,433     $ 490,511     $ 490,196  
Add interest expense on assumed conversion of our zero coupon senior convertible/exchangeable debentures/notes, net of tax:
                               
$2.75 billion due 2011(1)
                       
$82.8 million due 2021(2)
                       
$700 million due 2023(3)
                       
                                 
Adjusted net income — diluted
  $ 228,349     $ 233,433     $ 490,511     $ 490,196  
                                 
Earnings per share:
                               
Basic
  $ .82     $ .79     $ 1.76     $ 1.61  
Diluted
  $ .79     $ .77     $ 1.71     $ 1.56  
Shares (denominator):
                               
Weighted-average number of shares outstanding - basic(4)
    279,253       294,419       278,098       303,704  
Net effect of dilutive stock options, warrants and restricted stock awards based on the treasury stock method
    8,645       9,975       8,258       10,344  
Assumed conversion of our zero coupon senior convertible/exchangeable debentures/notes:
                               
$2.75 billion due 2011(1)
                       
$82.8 million due 2021(2)
                       
$700 million due 2023(3)
                      560  
                                 
Weighted-average number of shares outstanding - diluted
    287,898       304,394       286,356       314,608  
                                 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
(1) Diluted earnings per share for the three and six months ended June 30, 2007 and the three months ended June 30, 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 notes, and 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 six months ended June 30, 2007 or the three months ended June 30, 2006. The $2.75 billion notes were issued during the quarter ended June 30, 2006 and had no effect on first quarter’s 2006 earnings per share calculation.
 
(2) Diluted earnings per share for the three and six months ended June 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 $50.
 
(3) Diluted earnings per share for the three months ended June 30, 2007 and 2006 and the six months ended June 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, and 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 six months ended June 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: 279.2 million and .1 million shares for the three months ended June 30, 2007; 294.2 million and .2 million shares for the three months ended June 30, 2006; 277.9 million and .2 million for the six months ended June 30, 2007; and 303.5 million and .2 million shares for the six months ended June 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 4,322,513 and 2,001,500 shares during the three months ended June 30, 2007 and 2006, respectively, and 4,642,775 and 1,501,125 shares during the six months ended June 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:
 
                 
    June 30,
    December 31,
 
(In thousands)   2007     2006  
 
Accrued compensation
  $ 108,170     $ 136,276  
Deferred revenue
    107,664       65,747  
Workers’ compensation liabilities
    28,032       28,032  
Interest payable
    13,208       13,024  
Litigation reserves
    5,647       4,536  
Other taxes payable
    25,742       19,906  
Other accrued liabilities
    33,084       27,437  
                 
    $ 321,547     $ 294,958  
                 
 
Our cash and cash equivalents, short-term and long-term investments consist of the following:
 
                 
    June 30,
    December 31,
 
(In thousands)   2007     2006  
 
Cash and cash equivalents
  $ 608,739     $ 700,549  
Short-term investments
    218,552       439,467  
Long-term investments
    480,341       513,269  
Other current assets
    52,913        
                 
Total
  $ 1,360,545     $ 1,653,285  
                 
 
As of June 30, 2007 and December 31, 2006, our short-term investments consist entirely of investments in available-for-sale marketable debt and equity securities while our long-term investments consist entirely of investments in nonmarketable securities. As of June 30, 2007, our current assets included a receivable from brokers from the sale of certain marketable equity securities. The cash proceeds relating to this receivable were collected during the first week of July.
 
Investment income for the three months ended June 30, 2007 was a net loss of $9.3 million compared to income of $16.7 million during the prior year quarter. The loss during the current quarter reflected a net loss of $19 million from the portion of our investment portfolio that is comprised of marketable equity securities that are classified as short-term investments and our actively managed funds that are classified as long-term investments. These losses were attributable to substantial losses in two of the 30 different funds classified as long-term investments partially offset by substantial gains realized from sales of our 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 three and six months ended June 30, 2007.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 10   Segment Information
 
The following tables set forth certain financial information with respect to our reportable segments:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
(In thousands)   2007     2006     2007     2006  
 
Operating revenues and Earnings from unconsolidated affiliates:
                               
Contract Drilling:(1)
                               
U.S. Lower 48 Land Drilling
  $ 426,787     $ 468,787     $ 879,383     $ 895,137  
U.S. Land Well-servicing
    182,410       168,841       364,628       329,574  
U.S. Offshore
    60,316       62,554       116,091       106,080  
Alaska
    36,777       24,912       84,613       51,718  
Canada
    75,088       120,587       268,368       347,144  
International
    261,262       169,147       485,744       316,042  
                                 
Subtotal Contract Drilling(2)
    1,042,640       1,014,828       2,198,827       2,045,695  
Oil and Gas(3)(4)
    18,110       9,703       31,239       39,540  
Other Operating Segments(5)(6)
    170,484       153,593       327,404       305,296  
Other reconciling items(7)
    (65,025 )     (50,754 )     (118,177 )     (94,836 )
                                 
Total
  $ 1,166,209     $ 1,127,370     $ 2,439,293     $ 2,295,695  
                                 
Adjusted income (loss) derived from operating activities:(8)
                               
Contract Drilling:
                               
U.S. Lower 48 Land Drilling
  $ 154,667     $ 212,696     $ 327,593     $ 392,427  
U.S. Land Well-servicing
    40,105       47,435       83,461       93,505  
U.S. Offshore
    19,206       23,667       34,255       34,121  
Alaska
    8,225       3,384       24,792       7,626  
Canada
    (7,992 )     19,873       45,136       102,975  
International
    85,409       50,500       151,427       87,997  
                                 
Subtotal Contract Drilling(2)
    299,620       357,555       666,664       718,651  
Oil and Gas
    3,374       (584 )     4,502       12,852  
Other Operating Segments
    19,151       18,469       39,959       39,036  
                                 
Total segment adjusted income derived from operating activities
    322,145       375,440       711,125       770,539  
Other reconciling items(9)
    (29,042 )     (25,985 )     (69,069 )     (50,579 )
Interest expense
    (13,716 )     (12,168 )     (26,765 )     (20,223 )
Investment (loss) income
    (9,272 )     16,728       19,437       30,598  
Gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net
    39,510       (4,216 )     25,472       (8,245 )
                                 
Income before income taxes
  $ 309,625     $ 349,799     $ 660,200     $ 722,090  
                                 
 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                 
    June 30,
    December 31,
 
(In thousands)   2007     2006  
 
Total assets:
               
Contract Drilling:
               
U.S. Lower 48 Land Drilling
  $ 2,462,020     $ 2,210,070  
U.S. Land Well-servicing
    706,465       597,082  
U.S. Offshore
    448,828       456,889  
Alaska
    255,664       221,927  
Canada
    1,174,050       1,059,243  
International
    2,418,945       2,006,941  
                 
Subtotal Contract Drilling(10)
    7,465,972       6,552,152  
Oil and Gas(11)
    540,016       328,114  
Other Operating Segments(12)
    730,365       638,600  
Other reconciling items(9)
    1,175,907       1,623,437  
                 
Total assets
  $ 9,912,260     $ 9,142,303  
                 
 
 
(1) These segments include our drilling, workover and well-servicing operations, on land and offshore.
 
(2) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $.7 million and $4.1 million for the three months ended June 30, 2007 and 2006, respectively, and $2.5 million and $4.8 million for the six months ended June 30, 2007 and 2006, respectively.
 
(3) Represents our oil and gas exploration, development and production operations.
 
(4) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $(.8) million for the three and six months ended June 30, 2007, and $0 for the three and six months ended June 30, 2006.
 
(5) Includes our marine transportation and supply services, drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations.
 
(6) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $3.5 million and $5.3 million for the three months ended June 30, 2007 and 2006, respectively, and $14.2 million and $9.0 million for the six months ended June 30, 2007 and 2006, respectively.
 
(7) Represents the elimination of inter-segment transactions.
 
(8) 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.
 
(9) Represents the elimination of inter-segment transactions and unallocated corporate expenses and assets.
 
(10) Includes $43.2 million and $39.6 million of investments in unconsolidated affiliates accounted for by the equity method as of June 30, 2007 and December 31, 2006, respectively.
 
(11) Includes $6.8 million and $0 of investments in unconsolidated affiliates accounted for by the equity method as of June 30, 2007 and December 31, 2006, respectively.

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
(12) Includes $61.1 million and $58.5 million of investments in unconsolidated affiliates accounted for by the equity method as of June 30, 2007 and December 31, 2006, respectively.
 
Note 11   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 June 30, 2007 and December 31, 2006, statements of income and cash flows for each of the three and six month periods ended June 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
 
                                                 
    June 30, 2007  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
(In thousands)                                    
 
ASSETS
Current assets:
                                               
Cash and cash equivalents
  $ 12,212     $ 2,683     $ 8     $ 593,836     $     $ 608,739  
Short-term investments
                      218,552             218,552  
Accounts receivable, net
                      1,035,895             1,035,895  
Inventory
                      127,368             127,368  
Deferred income taxes
                      36,943             36,943  
Other current assets
    162       1,100       376       229,091             230,729  
                                                 
Total current assets
    12,374       3,783       384       2,241,685             2,258,226  
Long-term investments
                      480,341             480,341  
Property, plant and equipment, net
                      6,298,371             6,298,371  
Goodwill
                      388,981             388,981  
Intercompany receivables
    417,871       1,337,466             19,944       (1,775,281 )      
Investments in affiliates
    3,694,909       4,036,079       297,083       1,627,975       (9,544,904 )     111,142  
Other long-term assets
          29,296       618       345,285             375,199  
                                                 
Total assets
  $ 4,125,154     $ 5,406,624     $ 298,085     $ 11,402,582     $ (11,320,185 )   $ 9,912,260  
                                                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
                                               
Current portion of long- term debt
  $     $ 700,000     $     $     $     $ 700,000  
Trade accounts payable
          24             508,688             508,712  
Accrued liabilities
    2,539       8,858       4,151       305,999             321,547  
Income taxes payable
          70,694       2,887       44,845             118,426  
                                                 
Total current liabilities
    2,539       779,576       7,038       859,532             1,648,685  
Long-term debt
          3,080,820       224,429                   3,305,249  
Other long-term liabilities
                      295,223             295,223  
Deferred income taxes
          16,201       9       524,278             540,488  
Intercompany payable
                4,205       1,771,076       (1,775,281 )      
                                                 
Total liabilities
    2,539       3,876,597       235,681       3,450,109       (1,775,281 )     5,789,645  
                                                 
Shareholders’ equity
    4,122,615       1,530,027       62,404       7,952,473       (9,544,904 )     4,122,615  
                                                 
Total liabilities and shareholders’ equity
  $ 4,125,154     $ 5,406,624     $ 298,085     $ 11,402,582     $ (11,320,185 )   $ 9,912,260  
                                                 


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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
 
    Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
(In thousands)                                    
 
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  
                                                 
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  
                                                 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statements of Income
 
                                                 
    Three Months Ended June 30, 2007  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
(In thousands)                                    
 
Revenues and other income:
                                               
Operating revenues
  $     $     $     $ 1,162,773     $     $ 1,162,773  
Earnings from unconsolidated affiliates
                      3,436             3,436  
Earnings (losses) from consolidated affiliates
    231,442       59,649       3,644       70,361       (365,096 )      
Investment income (loss)
    107       36             (9,415 )           (9,272 )
Intercompany interest income
    667       21,263       1             (21,931 )      
                                                 
Total revenues and other income
    232,216       80,948       3,645       1,227,155       (387,027 )     1,156,937  
                                                 
Costs and other deductions:
                                               
Direct costs
                      649,969             649,969  
General and administrative expenses
    3,867       133             97,133       (144 )     100,989  
Depreciation and amortization
          150             112,838             112,988  
Depletion
                      9,160             9,160  
Interest expense
          12,776       2,872       (1,932 )           13,716  
Intercompany interest (expense)
                      21,931       (21,931 )      
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
          (941 )           (38,713 )     144       (39,510 )
                                                 
Total costs and other deductions
    3,867       12,118       2,872       850,386       (21,931 )     847,312  
                                                 
Income before income taxes
    228,349       68,830       773       376,769       (365,096 )     309,625  
                                                 
Income tax expense
          3,397       247       77,632             81,276  
                                                 
Net income
  $ 228,349     $ 65,433     $ 526     $ 299,137     $ (365,096 )   $ 228,349  
                                                 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                                 
    Three Months Ended June 30, 2006  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
(In thousands)                                    
 
Revenues and other income:
                                               
Operating revenues
  $     $     $     $ 1,118,000     $     $ 1,118,000  
Earnings from unconsolidated affiliates
                      9,370             9,370  
Earnings (losses) from consolidated affiliates
    237,356       211,843       3,643       226,137       (678,979 )      
Investment income
    35       9,533             7,160             16,728  
Intercompany interest income
    998       15,588                   (16,586 )      
                                                 
Total revenues and other income
    238,389       236,964       3,643       1,360,667       (695,565 )     1,144,098  
                                                 
Costs and other deductions:
                                               
Direct costs
                      594,226             594,226  
General and administrative expenses
    4,517       54             83,304       (45 )     87,830  
Depreciation and amortization
          150             87,796             87,946  
Depletion
                      7,913             7,913  
Interest expense
          8,057       2,860       1,251             12,168  
Intercompany interest expense
    439                   16,147       (16,586 )      
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
          (682 )           4,853       45       4,216  
                                                 
Total costs and other deductions
    4,956       7,579       2,860       795,490       (16,586 )     794,299  
                                                 
Income before income taxes
    233,433       229,385       783       565,177       (678,979 )     349,799  
                                                 
Income tax expense
          6,491       251       109,624             116,366  
                                                 
Net income
  $ 233,433     $ 222,894     $ 532     $ 455,553     $ (678,979 )   $ 233,433  
                                                 


23


Table of Contents

 
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                                 
    Six Months Ended June 30, 2007  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
(In thousands)                                    
 
Revenues and other income:
                                               
Operating revenues
  $     $     $     $ 2,423,416     $     $ 2,423,416  
Earnings from unconsolidated affiliates
                      15,877             15,877  
Earnings (losses) from consolidated affiliates
    497,455       217,346       10,265       235,969       (961,035 )      
Investment (loss) income
    334       57             19,046             19,437  
Intercompany interest income
    1,656       40,664       1             (42,321 )      
                                                 
Total revenues and other income
    499,445       258,067       10,266       2,694,308       (1,003,356 )     2,458,730  
                                                 
Costs and other deductions:
                                               
Direct costs
                      1,347,273             1,347,273  
General and administrative expenses
    8,519       13       2       207,743       (314 )     215,963  
Depreciation and amortization
          300             217,916             218,216  
Depletion
                      15,785             15,785  
Interest expense
          25,555       5,732       (4,522 )           26,765  
Intercompany interest expense
    415                   41,906       (42,321 )      
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
          (966 )           (24,820 )     314       (25,472 )
                                                 
Total costs and other deductions
    8,934       24,902       5,734       1,801,281       (42,321 )     1,798,530  
                                                 
Income before income taxes
    490,511       233,165       4,532       893,027       (961,035 )     660,200  
                                                 
Income tax expense
          5,853       1,450       162,386             169,689  
                                                 
Net income
  $ 490,511     $ 227,312     $ 3,082     $ 730,641     $ (961,035 )   $ 490,511  
                                                 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                                 
    Six Months Ended June 30, 2006  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
(In thousands)                                    
 
Revenues and other income:
                                               
Operating revenues
  $     $     $     $ 2,281,926     $     $ 2,281,926  
Earnings from unconsolidated affiliates
                      13,769             13,769  
Earnings from consolidated affiliates
    497,308       412,551       8,989       435,099       (1,353,947 )      
Investment income
    111       9,660             20,827             30,598  
Intercompany interest income
    1,984       31,380                   (33,364 )      
                                                 
Total revenues and other income
    499,403       453,591       8,989       2,751,621       (1,387,311 )     2,326,293  
                                                 
Costs and other deductions:
                                               
Direct costs
                      1,208,843             1,208,843  
General and administrative expenses
    8,549       79       2       168,087       (90 )     176,627  
Depreciation and amortization
          300             169,035             169,335  
Depletion
                      20,930             20,930  
Interest expense
          15,049       5,720       (546 )           20,223  
Intercompany interest expense
    658                   32,706       (33,364 )      
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
          (1,641 )           9,796       90       8,245  
                                                 
Total costs and other deductions
    9,207       13,787       5,722       1,608,851       (33,364 )     1,604,203  
                                                 
Income before income taxes
    490,196       439,804       3,267       1,142,770       (1,353,947 )     722,090  
                                                 
Income tax expense
          10,084       1,096       220,714             231,894  
                                                 
Net income
  $ 490,196     $ 429,720     $ 2,171     $ 922,056     $ (1,353,947 )   $ 490,196  
                                                 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statements of Cash Flows
 
                                                 
    Six Months Ended June 30, 2007  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
(In thousands)                                    
 
Net cash (used for) provided by operating activities
  $ (68,675 )   $ 4,553     $ (5,484 )   $ 730,475     $ (5,484 )   $ 655,385  
                                                 
Cash flows from investing activities:
                                               
Purchases of investments
                      (203,222 )           (203,222 )
Sales and maturities of investments
          436             365,803             366,239  
Cash paid for acquisitions of businesses, net
                      (8,391 )           (8,391 )
Capital expenditures
                      (1,095,496 )           (1,095,496 )
Investments in affiliates
                      (8,433 )           (8,433 )
Proceeds from sales of assets and insurance claims
                      119,447             119,447  
Cash paid for investments in consolidated affiliates
          (5,484 )           (5,484 )     10,968        
                                                 
Net cash used for investing activities
          (5,048 )           (835,776 )     10,968       (829,856 )
                                                 
Cash flows from financing activities:
                                               
Increase in cash overdrafts
                      12,042             12,042  
Proceeds from issuance of common shares
    67,824                               67,824  
Tax benefit related to the exercise of stock options
          784                         784  
Proceeds from parent contributions
                5,484       5,484       (10,968 )      
Cash dividends paid
                      (5,484 )     5,484        
Repurchase and retirement of common shares
    (1,811 )                             (1,811 )
                                                 
Net cash provided by (used for) financing activities
    66,013       784       5,484       12,042       (5,484 )     78,839  
                                                 
Effect of exchange rate changes on cash and cash equivalents
                      3,822             3,822  
                                                 
Net (decrease) increase in cash and cash equivalents
    (2,662 )     289             (89,437 )           (91,810 )
Cash and cash equivalents, beginning of period
    14,874       2,394       8       683,273             700,549  
                                                 
Cash and cash equivalents, end of period
  $ 12,212     $ 2,683     $ 8     $ 593,836     $     $ 608,739  
                                                 


26


Table of Contents

 
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                                 
    Six Months Ended June 30, 2006  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
(In thousands)                                    
 
Net cash provided by (used for) operating activities
  $ 1,170,414     $ (42,507 )   $ (5,484 )   $ 2,444,379     $ (2,825,236 )   $ 741,566  
                                                 
Cash flows from investing activities:
                                               
Purchases of investments
                      (212,682 )           (212,682 )
Sales and maturities of investments
                      727,741             727,741  
Cash paid for investments in consolidated affiliates
    (977,927 )     (410,791 )           (1,083,572 )     2,472,290        
Cash paid for acquisitions of businesses, net
                      (82,236 )           (82,236 )
Deposits released for acquisitions
                      35,844             35,844  
Proceeds from sale of affiliate’s stock
                      1,800,000       (1,800,000 )      
Investment in affiliates
                      (2,433 )           (2,433 )
Capital expenditures
                      (840,006 )           (840,006 )
Proceeds from sales of assets and insurance claims
                      7,794             7,794  
                                                 
Net cash provided by (used for) investing activities
    (977,927 )     (410,791 )           350,450       672,290       (365,978 )
                                                 
Cash flows from financing activities:
                                               
Decrease in cash overdrafts
                      (26,322 )           (26,322 )
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
          (27,500 )                       (27,500 )
Proceeds from issuance of common shares
    19,173                               19,173  
Repurchase and retirement of common shares
    (627,357 )                 (2,481,745 )     1,800,000       (1,309,102 )
Tax benefit related to the exercise of stock options
          3,954                         3,954  
Proceeds from parent contributions
          1,078,088       5,484       1,388,718       (2,472,290 )      
Cash dividends paid
          (1,870,573 )           (954,663 )     2,825,236        
                                                 
Net cash (used for) provided by financing activities
    (187,022 )     580,630       5,484       (2,074,012 )     2,152,946       478,026  
                                                 
Effect of exchange rate changes on cash and cash equivalents
                      645             645  
                                                 
Net increase in cash and cash equivalents
    5,465       127,332             721,462             854,259  
Cash and cash equivalents, beginning of period
    527       14       11       564,449             565,001  
                                                 
Cash and cash equivalents, end of period
  $ 5,992     $ 127,346     $ 11     $ 1,285,911     $     $ 1,419,260  
                                                 


27


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 12   Subsequent Events
 
On July 20, 2007, the Company entered into an Asset Purchase Agreement with an unrelated third party to sell 20 offshore supply vessels and certain related assets, including its rights under a vessel construction contract for a cash purchase price of $189 million, which will result in a pre-tax gain of approximately $40 million. Included in Other Operating Segments, the net book value of the assets being disposed of was approximately $141 million. Closing of the transaction is subject to customary closing conditions and is expected to close during the third quarter of 2007.


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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 June 30, 2007, and the related consolidated statements of income for each of the three-month and six-month periods ended June 30, 2007 and 2006, and the consolidated statements of cash flows and of changes in shareholders’ equity for the six-month periods ended June 30, 2007 and 2006. This interim financial information is the responsibility of the Company’s management.
 
We conducted our review in accordance with 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
August 1, 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 of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (“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,” 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 marine transportation and supply services, 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 $6.87 per million cubic feet (mcf) during the period from July 1, 2006 through June 30, 2007, down from a $8.90 per mcf average during the period from July 1, 2005 through June 30, 2006. West Texas intermediate spot oil prices (per Bloomberg) averaged $63.40 per barrel during the period from July 1, 2006 through June 30, 2007, slightly down from a $64.29 per barrel average during the period from July 1, 2005 through June 30, 2006.
 
Operating revenues and Earnings from unconsolidated affiliates for the three months ended June 30, 2007 totaled $1.2 billion, representing an increase of $38.8 million, or 3% as compared to the three months ended June 30, 2006 and $2.4 billion for the six months ended June 30, 2007, representing an increase of $143.6 million, or 6% as compared to the six months ended June 30, 2006. Adjusted income derived from operating activities and net income for the three months ended June 30, 2007 totaled $293.1 million and $228.3 million, ($.79 per diluted share), respectively, representing decreases of 16% and 2%, respectively, compared to the three months ended June 30, 2006. Adjusted income derived from operating activities for the six months ended June 30, 2007 totaled $642.1 million, representing a decrease of 11% compared to the six months ended June 30, 2006. Net income for the six months ended June 30, 2007 totaled $490.5 million ($1.71 per diluted share) compared to $490.2 million ($1.56 per diluted share) for the six months ended June 30, 2006.
 
The decrease in our adjusted income derived from operating activities during the three and six months ended June 30, 2007 as compared to the three and six months ended June 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 six months ended June 30, 2007. Partially offsetting the decreases in our adjusted income derived from operating activities are 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. Our net income for the three and six months ended June 30, 2007 has increased compared to the prior year periods as a result of a lower effective tax rate and lower shares outstanding.
 
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 significant increases in our International operations followed to a lesser extent by our Alaskan and U.S. Offshore 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 U.S. Offshore, Alaska 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 June 30,     Increase
    Six Months Ended June 30,     Increase
 
    2007     2006     (Decrease)     2007     2006     (Decrease)  
(In thousands, except percentages and rig activity)  
 
Reportable segments:
                                                               
Operating revenues and Earnings from unconsolidated affiliates:
                                                               
Contract Drilling:(1) 
                                                               
U.S. Lower 48 Land Drilling
  $ 426,787     $ 468,787     $ (42,000 )     (9 )%   $ 879,383     $ 895,137     $ (15,754 )     (2 )%
U.S. Land Well-servicing
    182,410       168,841       13,569       8 %     364,628       329,574       35,054       11 %
U.S. Offshore
    60,316       62,554       (2,238 )     (4 )%     116,091       106,080       10,011       9 %
Alaska
    36,777       24,912       11,865       48 %     84,613       51,718       32,895       64 %
Canada
    75,088       120,587       (45,499 )     (38 )%     268,368       347,144       (78,776 )     (23 )%
International
    261,262       169,147       92,115       54 %     485,744       316,042       169,702       54 %
                                                                 
Subtotal Contract Drilling(2)
    1,042,640       1,014,828       27,812       3 %     2,198,827       2,045,695       153,132       7 %
Oil and Gas(3)(4)
    18,110       9,703       8,407       87 %     31,239       39,540       (8,301 )     (21 )%
Other Operating Segments(5)(6)
    170,484       153,593       16,891       11 %     327,404       305,296       22,108       7 %
Other reconciling items(7)
    (65,025 )     (50,754 )     (14,271 )     (28 )%     (118,177 )     (94,836 )     (23,341 )     (25 )%
                                                                 
Total
  $ 1,166,209     $ 1,127,370     $ 38,839       3 %   $ 2,439,293     $ 2,295,695     $ 143,598       6 %
                                                                 
Adjusted income (loss) derived from operating activities:(8) 
                                                               
Contract Drilling:
                                                               
U.S. Lower 48 Land Drilling
  $ 154,667     $ 212,696     $ (58,029 )     (27 )%   $ 327,593     $ 392,427     $ (64,834 )     (17 )%
U.S. Land Well-servicing
    40,105       47,435       (7,330 )     (15 )%     83,461       93,505       (10,044 )     (11 )%
U.S. Offshore
    19,206       23,667       (4,461 )     (19 )%     34,255       34,121       134       0 %
Alaska
    8,225       3,384       4,841       143 %     24,792       7,626       17,166       225 %
Canada
    (7,992 )     19,873       (27,865 )     (140 )%     45,136       102,975       (57,839 )     (56 )%
International
    85,409       50,500       34,909       69 %     151,427       87,997       63,430       72 %
                                                                 
Subtotal Contract Drilling(2)
    299,620       357,555       (57,935 )     (16 )%     666,664       718,651       (51,987 )     (7 )%
Oil and Gas
    3,374       (584 )     3,958       N/M (9)     4,502       12,852       (8,350 )     (65 )%
Other Operating Segments
    19,151       18,469       682       4 %     39,959       39,036       923       2 %
Other reconciling items(10)
    (29,042 )     (25,985 )     (3,057 )     (12 )%     (69,069 )     (50,579 )     (18,490 )     (37 )%
                                                                 
Total
    293,103       349,455       (56,352 )     (16 )%     642,056       719,960       (77,904 )     (11 )%
Interest expense
    (13,716 )     (12,168 )     (1,548 )     (13 )%     (26,765 )     (20,223 )     (6,542 )     (32 )%
Investment (loss) income
    (9,272 )     16,728       (26,000 )     (155 )%     19,437       30,598       (11,161 )     (36 )%
Gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net
    39,510       (4,216 )     43,726       N/M(9 )     25,472       (8,245 )     33,717       N/M (9 )
                                                                 
Income before income taxes
  $ 309,625     $ 349,799     $ (40,174 )     (11 )%   $ 660,200     $ 722,090     $ (61,890 )     (9 )%
                                                                 
Rig activity:
                                                               
Rig years:(11)
                                                               
U.S. Lower 48 Land Drilling
    228.5       255.2       (26.7 )     (10 )%     235.7       254.3       (18.6 )     (7 )%
U.S. Offshore
    17.6       18.0       (.4 )     (2 )%     17.4       16.5       .9       5 %
Alaska
    8.8       7.8       1.0       13 %     9.1       7.5       1.6       21 %
Canada
    18.5       37.9       (19.4 )     (51 )%     38.2       55.5       (17.3 )     (31 )%
International(12)
    117.1       93.2       23.9       26 %     114.4       89.7       24.7       28 %
                                                                 
Total rig years
    390.5       412.1       (21.6 )     (5 )%     414.8       423.5       (8.7 )     (2 )%
                                                                 
Rig hours:(13)
                                                               
U.S. Land Well-servicing
    291,430       318,961       (27,531 )     (9 )%     590,518       630,729       (40,211 )     (6 )%
Canada Well-servicing
    41,613       61,648       (20,035 )     (32 )%     139,201       182,872       (43,671 )     (24 )%
                                                                 
Total rig hours
    333,043       380,609       (47,566 )     (12 )%     729,719       813,601       (83,882 )     (10 )%
                                                                 


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(1) These segments include our drilling, workover and well-servicing operations, on land and offshore.
 
(2) Includes earnings (loss), net from unconsolidated affiliates, accounted for by the equity method, of $.7 million and $4.1 million for the three months ended June 30, 2007 and 2006, respectively, and $2.5 million and $4.8 million for the six months ended June 30, 2007 and 2006, respectively.
 
(3) Represents our oil and gas exploration, development and production operations.
 
(4) Includes earnings (losses), net, from unconsolidated affiliates, accounted for by the equity method of ($.8) million for the three and six months ended June 30, 2007 and $0 million for the three and six months ended June 30, 2006.
 
(5) Includes our marine transportation and supply services, drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations.
 
(6) Includes earnings (loss), net from unconsolidated affiliates, accounted for by the equity method, of $3.5 million and $5.3 million for the three months ended June 30, 2007 and 2006, respectively, and $14.2 million and $9.0 million for the six months ended June 30, 2007 and 2006, respectively.
 
(7) Represents the elimination of inter-segment transactions.
 
(8) 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.
 
(9) The percentage is so large that it is not meaningful.
 
(10) Represents the elimination of inter-segment transactions and unallocated corporate expenses.
 
(11) Excludes well-servicing rigs, which are measured in rig hours. 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 six months ended June 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
                Six Months
             
    Ended June 30,                 Ended June 30,              
    2007     2006     (Decrease)     2007     2006     (Decrease)  
(In thousands, except percentages and rig activity)  
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 426,787     $ 468,787     $ (42,000 )     (9 )%   $ 879,383     $ 895,137     $ (15,754 )     (2 )%
Adjusted income derived from operating activities
  $ 154,667     $ 212,696     $ (58,029 )     (27 )%   $ 327,593     $ 392,427     $ (64,834 )     (17 )%
Rig years
    228.5       255.2       (26.7 )     (10 )%     235.7       254.3       (18.6 )     (7 )%
 
The decrease in operating results during the three and six months ended June 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
                Six Months
             
    Ended June 30,                 Ended June 30,              
    2007     2006     Increase (Decrease)     2007     2006     Increase (Decrease)  
(In thousands, except percentages and rig activity)  
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 182,410     $ 168,841     $ 13,569       8 %   $ 364,628     $ 329,574     $ 35,054       11 %
Adjusted income derived from operating activities
  $ 40,105     $ 47,435     $ (7,330 )     (15 )%   $ 83,461     $ 93,505     $ (10,044 )     (11 )%
Rig hours
    291,430       318,961       (27,531 )     (9 )%     590,518       630,729       (40,211 )     (6 )%
 
Operating revenues and Earnings from unconsolidated affiliates increased during the three and six months ended June 30, 2007 over the prior year periods as a result of higher average dayrates, driven by the sustained level of high oil prices. The decreases in adjusted income during the three and six months ended June 30, 2007 over the prior year periods reflects lower utilization caused by inclemate weather restricting asset mobility in most markets as well higher depreciation expense related to capital expansion projects.
 
U.S. Offshore.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months
                Six Months
             
    Ended June 30,                 Ended June 30,              
    2007     2006     (Decrease)     2007     2006     Increase  
(In thousands, except percentages and rig activity)  
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 60,316     $ 62,554     $ (2,238 )     (4 )%   $ 116,091     $ 106,080     $ 10,011       9 %
Adjusted income derived from operating activities
  $ 19,206     $ 23,667     $ (4,461 )     (19 )%   $ 34,255     $ 34,121     $ 134       0 %
Rig years
    17.6       18.0       (.4 )     (2 )%     17.4       16.5       .9       5 %
 
The decrease in operating results during the three months ended June 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 rigs in early May 2007. Operating results increased for the six months ended


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June 30, 2007 as compared to the prior year periods as a result of higher average dayrates and increased utilization from platform workover drilling and barge rigs added to the fleet in late 2006 and into 2007, offsetting the lower utilization of jack-up rigs during the three months ended June 30, 2007.
 
Alaska.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months
                Six Months
             
    Ended June 30,                 Ended June 30,              
    2007     2006     Increase     2007     2006     Increase  
(In thousands, except percentages and rig activity)  
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 36,777     $ 24,912     $ 11,865       48 %   $ 84,613     $ 51,718     $ 32,895       64 %
Adjusted income derived from operating activities
  $ 8,225     $ 3,384     $ 4,841       143 %   $ 24,792     $ 7,626     $ 17,166       225 %
Rig years
    8.8       7.8       1.0       13 %     9.1       7.5       1.6       21 %
 
The increase in operating results during the three and six months ended June 30, 2007 as compared to prior year periods is primarily due to increases in average dayrates and drilling activity, driven by the sustained level of high oil prices.
 
Canada.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months
                Six Months
             
    Ended June 30,                 Ended June 30,              
    2007     2006     Decrease     2007     2006     Decrease  
(In thousands, except percentages and rig activity)  
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 75,088     $ 120,587     $ (45,499 )     (38 )%   $ 268,368     $ 347,144     $ (78,776 )     (23 )%
Adjusted income derived from operating activities
  $ (7,992 )   $ 19,873     $ (27,865 )     (140 )%   $ 45,136     $ 102,975     $ (57,839 )     (56 )%
Rig years
    18.5       37.9       (19.4 )     (51 )%     38.2       55.5       (17.3 )     (31 )%
Rig hours
    41,613       61,648       (20,035 )     (32 )%     139,201       182,872       (43,671 )     (24 )%
 
The decrease in operating results during the three and six months ended June 30, 2007 resulted primarily from 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. 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. Operating results during the three and six months ended June 30, 2007 compared to prior year periods were further negatively impacted by increased operating expenses, including depreciation due to capital expansion projects.


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International.  The results of operations for this reportable segment are as follows:
 
                                                                 
                            Six Months Ended
             
    Three Months Ended June 30,                 June 30,              
    2007     2006     Increase     2007     2006     Increase  
(In thousands, except percentages and rig activity)  
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 261,262     $ 169,147     $ 92,115       54 %   $ 485,744     $ 316,042     $ 169,702       54 %
Adjusted income derived from operating activities
  $ 85,409     $ 50,500     $ 34,909       69 %   $ 151,427     $ 87,997     $ 63,430       72 %
Rig years
    117.1       93.2       23.9       26 %     114.4       89.7       24.7       28 %
 
The increase in operating results during the three and six months ended June 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.
 
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:
 
                                                                 
                    Six Months Ended
       
    Three Months Ended June 30,           June 30,        
    2007   2006   Increase   2007   2006   (Decrease)
(In thousands, except percentages)                                
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 18,110     $ 9,703     $ 8,407       87 %   $ 31,239     $ 39,540     $ (8,301 )     (21 )%
Adjusted income derived from operating Activities
  $ 3,374     $ (584 )   $ 3,958       N/M (1)   $ 4,502     $ 12,852     $ (8,350 )     (65 )%
 
The increase in operating results during the three months ended June 30, 2007 is primarily a result of the increase in income attributable to production payment contracts when compared to the prior year period. Additionally, operating results for the three months ended June 30, 2007 over the prior year period were slightly higher due to an increase in volumes which is partially offset by the slight decrease in commodity prices.
 
Operating results decreased for the six months ended June 30, 2007 as compared to the prior year period due to the $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 due to lower gas prices and lower than expected performance of certain asset groups. Additionally, operating results are lower due to overall lower commodity prices in the first six months of 2007 and continuing higher seismic and higher general and administrative costs, including costs related to oil and gas leasing properties.
 
(1) The percentage is so large that it is not meaningful.


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Other Operating Segments
 
These operations include our marine transportation and supply services, 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:
 
                                                                 
                    Six Months Ended
       
    Three Months Ended June 30,           June 30,        
    2007   2006   Increase   2007   2006   Increase
(In thousands, except percentages)                            
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 170,484     $ 153,593     $ 16,891       11 %   $ 327,404     $ 305,296     $ 22,108       7 %
Adjusted income derived from operating activities
  $ 19,151     $ 18,469     $ 682       4 %   $ 39,959     $ 39,036     $ 923       2 %
 
The increase in our operating results during the three and six months ended June 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. These increases were partially offset by (iii) decreased margins for our marine transportation and supply services driven by the lower utilization of our smaller vessels partially offset by the increased customer demand for the larger class vessels and (iv) decreased demand for construction and logistics services.
 
On July 20, 2007, the Company entered into an Asset Purchase Agreement with an unrelated third party to sell our 20 offshore marine transportation and supply vessels and certain related assets, including its rights under a vessel construction contract. Refer to Note 12 Subsequent Event for additional information.
 
Other Financial Information
 
General and administrative expenses
 
                                                                 
                    Six Months Ended
       
    Three Months Ended June 30,           June 30,        
    2007   2006   Increase   2007   2006   Increase
(In thousands, except percentages)
 
General and administrative expenses
  $ 100,989     $ 87,830     $ 13,159       15 %   $ 215,963     $ 176,627     $ 39,336       22 %
General and administrative expenses as a percentage of operating revenues
    8.7 %     7.9 %     .8 %     10 %     8.9 %     7.7 %     1.2 %     16 %
 
General and administrative expenses increased during the three and six months ended June 30, 2007 as compared to the prior year periods primarily 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 and higher wages, and professional fees and employee related taxes in connection with the review of the Company’s stock option granting practices.


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Depreciation and amortization, and depletion expense
 
                                                                 
                    Six Months Ended
       
    Three Months Ended June 30,           June 30,        
    2007   2006   Increase   2007   2006   Increase (Decrease)
(In thousands, except percentages)
 
Depreciation and amortization expense
  $ 112,988     $ 87,946     $ 25,042       28 %   $ 218,216     $ 169,335     $ 48,881       29 %
Depletion expense
  $ 9,160     $ 7,913     $ 1,247       16 %     15,785     $ 20,930     $ (5,145 )     (25 )%
 
Depreciation and amortization expense.  Depreciation and amortization expense increased during the three and six months ended June 30, 2007 compared to the prior year periods as a result of depreciation on capital expenditures for capital expansion projects made throughout 2006 and into 2007.
 
Depletion expense.  Depletion expense increased during the three months ended June 30, 2007 compared to the prior year period as a result of higher unit-of-production depletion from higher oil and gas volumes. Depletion expense decreased during the six months ended June 30, 2007 compared to the prior year periods due to an impairment charge recorded during the first quarter of 2006 and is only partially offset by higher unit-of-production depletion from higher oil and gas production volumes from new wells coming on line in 2007.
 
Interest expense
 
                                                                 
                            Six Months Ended
             
    Three Months Ended June 30,                 June 30,              
    2007     2006     Increase     2007     2006     Increase  
(In thousands, except percentages)                                                
 
Interest expense
  $ 13,716     $ 12,168     $ 1,548       13 %   $ 26,765     $ 20,223     $ 6,542       32 %
 
Interest expense increased during the three and six months ended June 30, 2007 compared to the prior year periods primarily as a result of the additional interest expense related to the May 2006 issuance of the $2.75 billion 0.94% senior exchangeable notes due 2011. This increase was partially offset by interest expense reductions resulting from the redemption of 93% or $769.8 million of our zero coupon convertible senior debentures due 2021 on February 6, 2006.
 
Investment (loss) income
 
                                                                 
                Six Months Ended
       
    Three Months Ended June 30,           June 30,        
    2007   2006   (Decrease)   2007   2006   (Decrease)
(In thousands, except percentages)
 
Investment (loss) income
  $ (9,272 )   $ 16,728     $ (26,000 )     (155 )%   $ 19,437     $ 30,598     $ (11,161 )     (36 )%
 
Investment income for the three months ended June 30, 2007 was a net loss of $9.3 million compared to income of $16.7 million during the prior year quarter. The loss during the current quarter reflected a net loss of $19 million from the portion of our investment portfolio that is comprised of marketable equity securities that are classified as short-term investments and our actively managed funds that are classified as long-term investments. These losses were attributable to substantial losses in two of the 30 different funds classified as long-term investments partially offset by substantial gains realized from sales of our marketable equity securities. We could incur additional substantial losses in certain of these actively managed funds classified as long-term investments. This same category of investments earned income of $2.2 million during the prior year quarter. Investment income for the six months ended June 30, 2007 totaled $19.4 million compared to $30.6 million during the prior year period and included a combined $3.0 million net loss from the investment portfolio described above compared to income of $7.9 million during the prior year period.


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Gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net