e10vq
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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, 2008
 
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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o   Smaller reporting company 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 25, 2008 was 280,153,619. In addition, our subsidiary, Nabors Exchangeco (Canada) Inc., had 105,322 exchangeable shares outstanding as of July 25, 2008 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.
 
        PART I FINANCIAL INFORMATION        
      Financial Statements (Unaudited)        
        Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007     2  
        Consolidated Statements of Income for the Three and Six Months Ended June 30, 2008 and 2007     3  
        Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007     4  
        Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2008 and 2007     5  
        Notes to Consolidated Financial Statements     7  
        Report of Independent Registered Public Accounting Firm     34  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     35  
      Quantitative and Qualitative Disclosures About Market Risk     50  
      Controls and Procedures     50  
             
        PART II OTHER INFORMATION        
      Legal Proceedings     51  
      Risk Factors     52  
      Unregistered Sales of Equity Securities and Use of Proceeds     52  
      Submission of Matters to a Vote of Security Holders     53  
      Exhibits     54  
    55  
 Awareness Letter of Independent Accountants
 Certification of Chairman and CEO Pursuant to Section 302
 Certification of VP and CFO Pursuant to Section 302
 Certification of Chairman and CEO, and VP and CFO Pursuant to Section 906


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)   2008     2007  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 903,821     $ 531,306  
Short-term investments
    332,726       235,745  
Accounts receivable, net
    1,083,748       1,039,238  
Inventory
    128,893       133,786  
Deferred income taxes
    16,687       12,757  
Other current assets
    264,471       252,280  
                 
Total current assets
    2,730,346       2,205,112  
Long-term investments and other receivables
    239,866       359,534  
Property, plant and equipment, net
    7,020,941       6,632,612  
Goodwill
    363,158       368,432  
Other long-term assets
    550,333       537,692  
                 
Total assets
  $ 10,904,644     $ 10,103,382  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
Current portion of long-term debt
  $ 588,847     $ 700,000  
Trade accounts payable
    317,802       348,524  
Accrued liabilities
    324,027       348,515  
Income taxes payable
    135,004       97,093  
                 
Total current liabilities
    1,365,680       1,494,132  
Long-term debt
    3,822,285       3,306,433  
Other long-term liabilities
    270,060       246,714  
Deferred income taxes
    512,960       541,982  
                 
Total liabilities
    5,970,985       5,589,261  
                 
Commitments and contingencies (Note 8) 
               
Shareholders’ equity:
               
Common shares, par value $.001 per share:
               
Authorized common shares 800,000; issued 309,396 and 305,458, respectively
    309       305  
Capital in excess of par value
    1,761,594       1,710,036  
Accumulated other comprehensive income
    399,712       322,635  
Retained earnings
    3,783,947       3,359,080  
Less: treasury shares, at cost, 29,304 and 26,122 common shares, respectively
    (1,011,903 )     (877,935 )
                 
Total shareholders’ equity
    4,933,659       4,514,121  
                 
Total liabilities and shareholders’ equity
  $ 10,904,644     $ 10,103,382  
                 
 
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
    Six Months Ended
 
    June 30,     June 30,  
(In thousands, except per share amounts)   2008     2007     2008     2007  
 
Revenues and other income:
                               
Operating revenues
  $ 1,282,400     $ 1,134,684     $ 2,582,258     $ 2,370,697  
Earnings (losses) from unconsolidated affiliates
    (4,033 )     3,436       (8,484 )     15,877  
Investment income (loss)
    25,057       (9,272 )     51,239       19,437  
                                 
Total revenues and other income
    1,303,424       1,128,848       2,625,013       2,406,011  
                                 
Costs and other deductions:
                               
Direct costs
    740,178       637,104       1,487,948       1,321,401  
General and administrative expenses
    116,914       99,952       228,235       213,849  
Depreciation and amortization
    148,023       111,372       283,501       214,980  
Depletion
    7,343       9,160       21,028       15,785  
Interest expense
    21,676       13,733       39,785       26,785  
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
    3,158       (39,634 )     11,255       (25,749 )
                                 
Total costs and other deductions
    1,037,292       831,687       2,071,752       1,767,051  
                                 
Income from continuing operations before income taxes
    266,132       297,161       553,261       638,960  
                                 
Income tax (benefit) expense:
                               
Current
    39,759       53,973       139,052       159,827  
Deferred
    32,012       22,326       (10,658 )     1,381  
                                 
Total income tax expense
    71,771       76,299       128,394       161,208  
                                 
Income from continuing operations, net of tax
    194,361       220,862       424,867       477,752  
Income from discontinued operations, net of tax
          7,487             12,759  
                                 
Net income
  $ 194,361     $ 228,349     $ 424,867     $ 490,511  
                                 
Earnings per share:
                               
Basic from continuing operations
  $ .70     $ .79     $ 1.53     $ 1.72  
Basic from discontinued operations
          .03             .04  
                                 
Total Basic
  $ .70     $ .82     $ 1.53     $ 1.76  
                                 
Diluted from continuing operations
  $ .67     $ .77     $ 1.48     $ 1.67  
Diluted from discontinued operations
          .02             .04  
                                 
Total Diluted
  $ .67     $ .79     $ 1.48     $ 1.71  
                                 
Weighted-average number of common shares outstanding:
                               
Basic
    277,719       279,253       277,651       278,098  
Diluted
    291,454       287,898       287,407       286,356  
 
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)   2008     2007  
 
Cash flows from operating activities:
               
Net income
  $ 424,867     $ 490,511  
Adjustments to net income:
               
Depreciation and amortization
    283,501       218,216  
Depletion
    21,028       15,785  
Deferred income tax (benefit) expense
    (10,658 )     780  
Deferred financing costs amortization
    4,356       4,176  
Pension liability amortization and adjustments
    142       240  
Discount amortization on long-term debt
    1,009       974  
Amortization of loss on hedges
    263       276  
Losses (gains) on long-lived assets, net
    10,407       (29,547 )
Losses (gains) on investments, net
    (28,203 )     2,665  
Losses (gains) on derivative instruments
    (157 )     (979 )
Share-based compensation
    19,904       16,285  
Foreign currency transaction gains, net
    (725 )     (3,290 )
Equity in losses (earnings) of unconsolidated affiliates, net of dividends
    15,232       (4,291 )
Changes in operating assets and liabilities, net of effects from acquisitions:
               
Accounts receivable
    (59,492 )     88,267  
Inventory
    6,152       (24,213 )
Other current assets
    (43,555 )     (56,644 )
Other long-term assets
    (14,020 )     (127,262 )
Trade accounts payable and accrued liabilities
    (55,954 )     37,710  
Income taxes payable
    38,961       (24,811 )
Other long-term liabilities
    10,472       50,537  
                 
Net cash provided by operating activities
    623,530       655,385  
                 
Cash flows from investing activities:
               
Purchases of investments
    (190,509 )     (203,222 )
Sales and maturities of investments
    399,669       366,239  
Cash paid for acquisitions of businesses, net
          (8,391 )
Investment in unconsolidated affiliates
    (47,452 )     (8,433 )
Capital expenditures
    (743,360 )     (1,095,496 )
Proceeds from sales of assets and insurance claims
    16,998       119,447  
                 
Net cash used for investing activities
    (564,654 )     (829,856 )
                 
Cash flows from financing activities:
               
Increase in cash overdrafts
    15,771       12,042  
Proceeds from long-term debt
    575,219        
Debt issuance costs
    (4,460 )      
Proceeds from issuance of common shares
    53,587       67,824  
Reduction in long-term debt
    (171,788 )      
Repurchase of common shares
    (150,114 )      
Purchase of restricted stock
    (11,667 )     (1,811 )
Tax benefit related to the exercise of stock options
    4,771       784  
                 
Net cash provided by financing activities
    311,319       78,839  
                 
Effect of exchange rate changes on cash and cash equivalents
    2,320       3,822  
                 
Net increase (decrease) in cash and cash equivalents
    372,515       (91,810 )
Cash and cash equivalents, beginning of period
    531,306       700,549  
                 
Cash and cash equivalents, end of period
  $ 903,821     $ 608,739  
                 
 
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
                   
                      Comprehensive Income (Loss)                    
                      Unrealized
                               
                      Gains
                               
                Capital in
    (Losses) on
    Cumulative
                      Total
 
    Common Shares     Excess of
    Marketable
    Translation
          Retained
    Treasury
    Shareholders’
 
(In thousands)   Shares     Par Value     Par Value     Securities     Adjustment     Other     Earnings     Shares     Equity  
 
Balances, December 31, 2007
    305,458     $ 305     $ 1,710,036     $ 281     $ 324,647     $ (2,293 )   $ 3,359,080     $ (877,935 )   $ 4,514,121  
                                                                         
Comprehensive income (loss):
                                                                       
Net income
                                                    424,867               424,867  
Translation adjustment
                                    (29,954 )                             (29,954 )
Unrealized gains on marketable securities, net of income taxes of $723
                            107,154                                       107,154  
Less: reclassification adjustment for gains included in net income, net of income taxes of $270
                            (687 )                                     (687 )
Pension liability amortization, net of income taxes of $54
                                            88                       88  
Unrealized gain and amortization of (gains)/losses on cash flow hedges, net of income taxes of $253
                                            476                       476  
                                                                         
Total comprehensive income (loss)
                      106,467       (29,954 )     564       424,867             501,944  
                                                                         
Issuance of common shares for stock options exercised
    2,341       2       53,585                                               53,587  
Nabors Exchangeco shares exchanged
    14                                                                
Issuance of treasury shares related to conversion of notes
                    (16,146 )                                     16,146        
Repurchase of 3,650 treasury shares
                                                            (150,114 )     (150,114 )
Tax effect of exercised stock option deductions
                    5,884                                               5,884  
Restricted stock awards, net
    1,583       2       (11,669 )                                             (11,667 )
Share-based compensation
                    19,904                                               19,904  
                                                                         
Subtotal
    3,938       4       51,558                               (133,968 )     (82,406 )
                                                                         
Balances, June 30, 2008
    309,396     $ 309     $ 1,761,594     $ 106,748     $ 294,693     $ (1,729 )   $ 3,783,947     $ (1,011,903 )   $ 4,933,659  
                                                                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY (Continued)
(Unaudited)
 
                                                                         
                Accumulated Other
                   
                      Comprehensive Income (Loss)                    
                      Unrealized
                               
                      Gains
                               
                Capital in
    (Losses) on
    Cumulative
                      Total
 
    Common Shares     Excess of
    Marketable
    Translation
          Retained
    Treasury
    Shareholders’
 
(In thousands)   Shares     Par 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
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1   Nature of Operations
 
Nabors is the largest land drilling contractor in the world, with approximately 548 actively marketed land drilling rigs. We conduct oil, gas and geothermal land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South America, Mexico, the Caribbean, the Middle East, the Far East, Russia and Africa. We are also one of the largest land well-servicing and workover contractors in the United States and Canada. We actively market approximately 577 land workover and well-servicing rigs in the United States, primarily in the southwestern and western United States, and actively market approximately 172 land workover and well-servicing rigs in Canada. Nabors is a leading provider of offshore platform workover and drilling rigs, and actively markets 36 platform rigs, 13 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 51% ownership interest in a joint venture in Saudi Arabia, which owns and actively markets 9 rigs in addition to the rigs we lease to the joint venture. We also offer a wide range of ancillary well-site services, including engineering, transportation, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services in selected domestic and international markets. We provide logistics services for onshore drilling 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, pipeline handling equipment and rig reporting software. We also invest in oil and gas exploration, development and production activities and have 49% ownership interests in joint ventures in the U.S., Canada and International areas.
 
The majority of our business is conducted through our various Contract Drilling operating segments, which include our drilling, workover and well-servicing operations, on land and offshore. Our oil and gas exploration, development and production operations are included in a category labeled Oil and Gas for segment reporting purposes. Our operating segments engaged in drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are aggregated in a category labeled Other Operating Segments for segment reporting purposes.
 
During the third quarter of 2007 we sold our Sea Mar business to an unrelated third party. Accordingly, the accompanying consolidated statements of income, and certain accompanying notes to the consolidated financial statements, have been updated to retroactively reclassify the operating results of this Sea Mar business, previously included in Other Operating Segments, as a discontinued operation for all periods presented. See Note 11 Discontinued Operation for additional discussion.
 
As used in the Report, “we,” “us,” “our,” “the Company” and “Nabors” means Nabors Industries Ltd. and, where the context requires, includes our subsidiaries.
 
Note 2   Summary of Significant Accounting Policies
 
Interim Financial Information
 
The unaudited consolidated financial statements of Nabors are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain reclassifications have been made to the prior period to conform to the current period presentation, with no effect on our consolidated financial position, results of operations or cash flows. Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. Therefore, these financial statements should be read along with our Annual Report on Form 10-K for the year ended December 31, 2007. In our management’s opinion, the consolidated financial statements contain all adjustments necessary to present fairly our financial position as of June 30, 2008 and the results of our operations for the three and six months ended June 30, 2008 and 2007, and our cash flows for the six months ended June 30, 2008 and 2007, in accordance with GAAP. Interim results for the three and six months ended June 30, 2008 may not be indicative of results that will be realized for the full year ending December 31, 2008.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 (“PCAOB”). Pursuant to Rule 436(c) under the Securities Act of 1933, as amended (the “Securities Act”), this report should not be considered a part of any registration statement prepared or certified within the meanings of Sections 7 and 11 of the Securities Act.
 
Principles of Consolidation
 
Our consolidated financial statements include the accounts of Nabors, all majority-owned and 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”). Our consolidated financial statements exclude majority-owned entities for which we do not have either (1) the ability to control the operating and financial decisions and policies of that entity or (2) a controlling financial interest in a variable interest entity (“VIE”). 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 included in other long-term assets as a single amount in our consolidated balance sheets. Investments in net assets of unconsolidated affiliates accounted for using the equity method totaled $415.5 million and $383.4 million as of June 30, 2008 and December 31, 2007, respectively. 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 income in our consolidated statements of income, and our investments in these funds are included in long-term investments in our consolidated balance sheets.
 
Recent Accounting Pronouncements
 
In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. SFAS No. 157 is effective with respect to financial assets and liabilities for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS No. 157 applies prospectively to financial assets and liabilities. There is a one-year deferral for the implementation of SFAS No. 157 for nonfinancial assets and liabilities measured on a nonrecurring basis. Effective January 1, 2008, we adopted the provisions of SFAS No. 157 relating to financial assets and liabilities. The new disclosures regarding the level of pricing observability associated with financial instruments carried at fair value is provided in Note 3 to the accompanying unaudited consolidated financial statements. The adoption of SFAS No. 157 with respect to financial assets and liabilities did not have a material financial impact on our consolidated results of operations or financial condition. We are currently evaluating the impact of implementation with respect to nonfinancial assets and liabilities measured on a nonrecurring basis on our consolidated financial statements, which will be primarily limited to asset impairments including goodwill, intangible assets and other long-lived assets, assets acquired and liabilities assumed in a business combination and asset retirement obligations.
 
In February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. The adoption of SFAS No. 159 did not have a material impact on our consolidated results of operations or financial condition as we have not elected to apply the provisions to our financial instruments or other eligible items that are not required to be measured at fair value.
 
In March 2008 the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment to FASB Statement No. 133 (“SFAS No. 161”)”. This statement is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced qualitative and quantitative disclosures regarding derivative instruments, gains and losses on such instruments and their effects on an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We are currently evaluating the impact that this pronouncement may have on our consolidated financial statements.
 
In May 2008 the FASB issued Staff Position (“FSP”) APB No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”. The FSP clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”. The FSP requires that convertible debt instruments be accounted for with a liability component based on the fair value of a similar nonconvertible debt instrument and an equity component based on the excess of the initial proceeds from the convertible debt instrument over the liability component. Such excess represents a debt discount which is then amortized as additional non-cash interest expense over the convertible debt instrument’s expected life. The FSP will be effective for Nabors’ financial statements issued for fiscal years and interim periods beginning after December 15, 2008, and will be applied retrospectively to all convertible debt instruments within its scope that are outstanding for any period presented in such financial statements. We intend to adopt the FSP on January 1, 2009 on a retrospective basis and apply it to our applicable convertible debt instruments. Although we are currently evaluating the impact that this FSP will have on our consolidated financial statements, we believe that the retrospective application of the FSP will have a significant effect in reducing reported net income and diluted earnings per share for the years ended December 31, 2007 and 2008. In addition, we believe net income and diluted earnings per share is expected to be materially reduced in future years in which our $2.75 billion senior exchangeable notes due May 2011 are included in our consolidated financial statements. After adopting this FSP, we currently estimate that we will record additional non-cash interest expense, net of capitalized interest, which will reduce our pre-tax income by approximately $100-110 million and reduce net income by approximately $60-70 million for the year ended December 31, 2009.
 
Note 3   Financial Instruments
 
Effective January 1, 2008, we adopted the provisions of SFAS No. 157, “Fair Value Measurements”, which among other things, requires enhanced disclosures about assets and liabilities carried at fair value.
 
As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best information available. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The use of unobservable inputs is intended to allow for fair value determinations in situations in which there is little, if any, market activity for the asset or liability at the measurement date. We are able to classify fair value balances based on the observability of those inputs. SFAS No. 157 establishes a fair value hierarchy such that Level 1 measurements include unadjusted quoted market prices for identical assets or liabilities in an active market, Level 2 measurements include quoted market prices for identical assets or liabilities in an active market which have been adjusted for items


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets, and Level 3 measurements include those that are unobservable and of a highly subjective measure.
 
The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis as of June 30, 2008. As required by SFAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
Recurring Fair Value Measurements
 
                                 
    At Fair Value as of June 30, 2008  
(In thousands)   Level 1     Level 2     Level 3     Total  
 
Assets:
                               
Short-term investments:
                               
Available-for-sale equity securities
  $ 37,983     $ 138,035 (1)   $     $ 176,018  
Available-for-sale debt securities
    60,900       45,528             106,428  
Trading securities
          50,280 (1)           50,280  
                                 
Total investments
    98,883       233,843             332,726  
Derivative asset contract
          152             152  
 
(1) Represents our investment in a public company traded on the Hong Kong Stock Exchange for which there is a period of restriction for transferability. After the restriction period has lapsed in September 2008, the investment will be measured using Level 1 inputs.
 
Note 4   Share-Based Compensation
 
The Company has several share-based employee compensation plans, which are more fully described in Note 3 of our Annual Report on Form 10-K for the year ended December 31, 2007.
 
Total share-based compensation expense, which includes both stock options and restricted stock, totaled $10.9 million and $8.4 million for the three months ended June 30, 2008 and 2007, respectively, and $19.9 million and $16.3 million for the six months ended June 30, 2008 and 2007, respectively. Share-based compensation expense has been allocated to our various operating segments (Note 12).
 
During the six months ended June 30, 2008, the Company awarded 1,997,015 shares of restricted stock to its employees, directors and executive officers. These awards had an aggregate value at their date of grant of $62.3 million and vest over a period of three to five years.
 
Note 5   Debt
 
In May 2008 Nabors Industries, Inc. (“Nabors Delaware”), our wholly-owned subsidiary, called for redemption all of its $700 million zero coupon senior exchangeable notes due 2023 and paid cash of $171.8 million and $528.2 million to the noteholders in June 2008 and July 2008, respectively. The total amount paid to effect the redemption and related exchange was $700 million in cash and an issue of approximately 5.25 million of our common shares with a fair value of $249.8 million, the price equal to the principal amount of the notes plus the excess of the exchange value of the notes over their principal amount. Nabors Delaware was required to pay noteholders cash up to the principal amount of the notes, and at its option, consideration in the form of either cash or our common shares for any amount above the principal amount of the notes required to be paid pursuant to the terms of the applicable indenture. The number of common shares issued was equal to the amount due in excess of the principal amount of the notes divided by the average of the volume weighted average price of our common shares for the five or ten trading day period beginning on the second business day following the day the notes were


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
surrendered for exchange. The notes were exchangeable into the equivalent value of 28.5306 common shares per $1,000 principal amount of the notes. As our $700 million zero coupon senior exchangeable notes due 2023 could be put to us on June 15, 2008, the outstanding principal amount of $700 million was included in current liabilities in our balance sheet as of June 30, 2007. The redemption of the notes did not result in any gain or loss as the amount of cash paid for redemption of the notes was equal to their carrying amount. The excess of the exchange value of the notes over the carrying amount was recorded as a reduction to capital in excess of par value in our consolidated statement of changes in shareholders’ equity.
 
In June 2008 Nabors Delaware called for redemption the full $82.8 million aggregate principal amount at maturity of its zero coupon senior convertible debentures due 2021 and in July 2008, paid cash of $60.6 million; equal to the issue price of $50.4 million plus accrued original issue discount of $10.2 million. The redemption of the debentures did not result in any gain or loss as the debentures were redeemed at a price equal to their carrying value on July 7, 2008.
 
On February 20, 2008, Nabors Delaware completed a private placement of $575 million aggregate principal amount of 6.15% senior notes due 2018 with registration rights, which are unsecured and are fully and unconditionally guaranteed by us. The issue of senior notes was resold by the initial purchasers to qualified institutional buyers under Rule 144A and Regulation S of the Securities Act outside of the United States. The senior notes bear interest at a rate of 6.15% per year, payable semiannually on February 15 and August 15 of each year, beginning August 15, 2008. The senior notes will mature on February 15, 2018.
 
The senior notes are unsecured and are effectively junior in right of payment to any of Nabors Delaware’s future secured debt. The senior notes rank equally with any of Nabors Delaware’s other existing and future unsubordinated debt and are senior in right of payment to any of Nabors Delaware’s future senior subordinated debt. Our guarantee of the senior notes is unsecured and ranks equal in right of payments to all of our unsecured and unsubordinated indebtedness from time to time outstanding. The senior notes are subject to redemption by Nabors Delaware, in whole or in part, at any time at a redemption price equal to the greater of (i) 100% of the principal amount of the senior notes then outstanding to be redeemed; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest, determined in the manner set forth in the indenture. In the event of a change in control, as defined in the indenture, the holders of senior notes may require Nabors Delaware to purchase all or any part of each senior note in cash equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of purchase, except to the extent Nabors Delaware have exercised its right to redeem the senior notes.
 
Nabors Delaware intends to use the proceeds of the offering of the senior notes for general corporate purposes, including the repayment of debt.
 
On May 20, 2008, Nabors and Nabors Delaware filed a registration statement on Form S-4 under the Securities Act. The registration statement relates to the exchange offer to noteholders required under the related registration rights agreement. The registration statement has not been declared effective by the Securities and Exchange Commission. Nabors and Nabors Delaware will file a registration statement on Form S-4 under the Securities Act covering both the 6.15% Notes due 2018 issued in the February 2008 offering and the 6.15% Notes due 2018 issued in the July 2008 offering, which is described in more detail in Note 14 — Subsequent Event.
 
Note 6   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 to its tax reserves for uncertain tax positions and interest and penalties which was accounted for as an increase to other long-term liabilities and as a reduction to retained earnings at January 1, 2007. We recognize interest and penalties related to income tax matters in the income tax expense line item in our consolidated statements of income.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
We are subject to income taxes in the United States and numerous foreign jurisdictions. Internationally, income tax returns from 1995 through 2005 are currently under examination. The Company anticipates that several of these audits could be finalized within 12 months. It is reasonably possible that the amount of the unrecognized benefits with respect to certain of our unrecognized tax positions could significantly increase or decrease within 12 months. However, based on the current status of examinations, and the protocol for finalizing audits with the relevant tax authorities, which could include formal legal proceedings, it is not possible to estimate the future impact of the amount of changes, if any, to recorded uncertain tax positions at June 30, 2008.
 
The Company has recorded a deferred tax asset of approximately $98.5 million as of June 30, 2008 relating to net operating loss carryforwards that have an indefinite life in one foreign jurisdiction. A valuation allowance of approximately $94.4 million has been recognized because the Company believes it is more likely than not that substantially all of the deferred tax asset will not be realized.
 
Note 7   Common Shares
 
During the six months ended June 30, 2008 and 2007, our employees exercised vested options to acquire 2.3 million and 3.0 million of our common shares, respectively, resulting in proceeds of $53.6 million and $67.8 million, respectively.
 
During the six months ended June 30, 2008, we repurchased 3.7 million of our common shares in the open market for $150.1 million. During the six months ended June 30, 2007, there were no repurchases of common shares in the open market. From time to time, treasury shares may be reissued. When shares are reissued, we use the weighted average cost method for determining cost. The difference between the cost of the shares and the issuance price is added or deducted from capital in excess of par value on our consolidated statement of changes in shareholders’ equity.
 
In June 2008 in connection with the redemption of Nabors Delaware’s $700 million zero coupon senior exchangeable notes due 2023, we issued 0.5 million of our treasury shares with a fair value of $21.2 million, representing a portion of the shares issued to satisfy the obligation to pay the excess over the principal amount of such notes that were exchanged. In July 2008 we issued an additional 4.8 million of our treasury shares with a fair value of $228.6 million to satisfy the obligation to the remaining noteholders to pay the excess over the principal amount of such notes that were exchanged. See Note 5 for additional discussion.
 
Note 8   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.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 provide for an initial term of five years with an evergreen provision which automatically extended the agreement for an additional one-year term on each anniversary date, unless Nabors provided notice to the contrary ten days prior to such anniversary. In March 2006 the Board of Directors exercised its election to fix the expiration date of the employment agreements for Messrs. Isenberg and Petrello, and accordingly, these agreements will expire at the end of their current term at September 30, 2010.
 
In addition to a base salary, the employment agreements provide for annual cash bonuses in an amount equal to 6% and 2%, for Messrs. Isenberg and Petrello, respectively, of Nabors’ net cash flow (as defined in the respective employment agreements) in excess of 15% of the average shareholders’ equity for each fiscal year. (Mr. Isenberg’s cash bonus formula originally was set at 10% in excess of a 10% return on shareholders’ equity and he has voluntarily reduced it over time to its 6% in excess of 15% level.) Mr. Petrello’s bonus is subject to a minimum of $700,000 per year. In 17 of the last 18 years, Mr. Isenberg has agreed voluntarily to accept a lower annual cash bonus (i.e., an amount lower than the amount provided for under his employment agreement) in light of his overall compensation package. Mr. Petrello has agreed voluntarily to accept a lower annual cash bonus (i.e., an amount lower than the amount provided for under his employment agreement) in light of his overall compensation package in 14 of the last 17 years.
 
For the three months ended March 31, 2007, Messrs. Isenberg and Petrello voluntarily agreed to a reduction of the cash bonus in an amount equal to 3% and 1.5%, respectively, of Nabors’ net cash flow (as defined in their respective employment agreements). Mr. Isenberg voluntarily agreed to the same reduction for the three months ended June 30, 2007 and agreed to a $3 million reduction in the amount of his annual cash bonus for the three months ended September 30, 2007. For the remainder of 2007 through the expiration date of the employment agreement, the annual cash bonus will be 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 Amendment reducing Mr. Isenberg’s bonus percentage as described above. If, by way of example, these provisions had applied at June 30, 2008, Mr. Isenberg would have been entitled to a payment of approximately $264 million, subject to a “true-up” equal to the amount of cash bonus he would have earned under the formula during the remaining term of the agreement, based upon actual results, but the payment would not be less than approximately $264 million. Similarly, with respect to Mr. Petrello, had these provisions applied at June 30, 2008, Mr. Petrello would have been entitled to a payment of approximately $103 million, subject to a “true-up” equal to the amount of cash bonus he would have earned under the formula during the remaining term of the agreement, based upon actual results, but the payment would not be less than approximately $103 million. These


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
payment amounts are based on historical data and are not intended to be estimates of future payments required under the agreements. Depending upon future operating results, the true-up could result in the payment of amounts which are significantly higher. The Company does not have insurance to cover its obligations in the event of death, disability, or termination without cause for either Messrs. Isenberg or Petrello and the Company has not recorded an expense or accrued a liability relating to these potential obligations. 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 value of unvested restricted stock was approximately $64 million and $33 million, respectively, as of June 30, 2008. Neither Messrs. Isenberg nor Petrello had unvested stock options as of June 30, 2008. Estimates of the cash value of Nabors’ obligations to Messrs. Isenberg and Petrello under (c), (d) and (e) above are included in the payment amounts above.
 
As noted above in March 2006 the Board of Directors exercised its election to fix the expiration date of the employment agreements for Messrs. Isenberg and Petrello such that each of these agreements expires at the end of their respective current term at September 30, 2010. Messrs. Isenberg and Petrello have informed the Board of Directors that they have reserved their rights under their employment agreements with respect to the notice setting the expiration dates of their employment agreements, including whether such notice could trigger an acceleration of certain payments pursuant to their employment agreements.
 
Termination in the event of a Change in Control.  In the event that Messrs. Isenberg’s or Petrello’s termination of employment is related to a Change in Control (as defined in their respective employment agreements), they would be entitled to receive a cash amount equal to the greater of (a) one dollar less than the amount that would constitute an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code, or (b) the cash amount that would be due in the event of a termination without cause, as described above. If, by way of example, there was a change of control event that applied on June 30, 2008, then the payments to Messrs. Isenberg and Petrello would be approximately $264 million and $103 million, respectively. These payment amounts are based on historical data and are not intended to be estimates of future payments required under the agreements. Depending upon future operating results, the true-up could result in the payment of amounts which are significantly higher but the payment would not be less than $264 million and $103 million, respectively. In addition, they would receive (a) any unvested restricted stock outstanding, which shall immediately and fully vest; (b) any unvested outstanding stock options, which shall immediately and fully vest; (c) any amounts earned, accrued or owing to the executive but not yet paid (including executive benefits, life insurance, disability benefits 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 value of unvested restricted stock was approximately $64 million and $33 million, respectively, as of June 30, 2008. Neither Messrs. Isenberg nor Petrello had unvested stock options as of June 30, 2008. 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 five 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, 2008, Mr. Isenberg would have received 3,366,666 options valued at approximately $52 million and Mr. Petrello would have received 1,683,332 options


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
valued at approximately $26 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, 2008, and assuming that the excise tax was applicable to the transaction, then the additional payments to Messrs. Isenberg and Petrello for the gross-up would be up to approximately $117 million and $48 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
 
Oil and Gas Joint Ventures
 
On September 22, 2006, we entered into an agreement with First Reserve Corporation to form a new joint venture, NFR Energy LLC (“NFR”), to invest in oil and gas exploration opportunities worldwide. First Reserve Corporation is a private equity firm specializing in the energy industry. Each party initially made a non-binding commitment to fund its proportionate share of $1.0 billion in equity. During 2007, joint venture operations in the U.S., Canada and International areas, were divided among three separate joint venture entities, including NFR, Stone Mountain Ventures Partnership (“Stone Mountain”) and Remora Energy International LP (“Remora”), respectively. We hold a 49% ownership interest in these joint ventures. Each joint venture pursues development and exploration projects with both existing customers of ours and with other operators in a variety of forms including operated and non-operated working interests, joint ventures, farm-outs and acquisitions. As of June 30, 2008, we had made capital contributions of approximately $320.3 million to our joint venture operations with First Reserve.
 
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 estimates 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 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


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
expenses in 2004, 2005, 2006, 2007 and 2008. It is likely that the SAT will propose the disallowance of these deductions upon audit of NDIL’s Mexican branch’s 2004, 2005, 2006, 2007 and 2008 tax years.
 
Self-Insurance Accruals
 
We are self-insured for certain losses relating to workers’ compensation, employers’ liability, general liability, automobile liability and property damage. Effective April 1, 2008, with our insurance renewal, certain changes have been made to our self-insured retentions. Automobile liability is subject to a $1.0 million per occurrence deductible. Our hurricane coverage for U.S. Gulf of Mexico exposures is subject to a $10.0 million deductible. We are insured for $55.0 million over the deductible at 85.5%. Accordingly, we are self-insuring 14.5% of this exposure.
 
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 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 alleged that stock options were priced retroactively and were improperly accounted for, and alleged various causes of action based on that assertion. The complaint sought, 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 made substantially the same allegations against the same defendants and sought the same elements of damages. The two purported derivative actions were consolidated into one proceeding. On December 31, 2007, the Company and the individual defendants agreed with the plaintiffs-shareholders to settle the derivative action. Under the terms of the proposed settlement, the Company and the individual defendants have implemented or will implement certain corporate governance reforms and adopt certain modifications to our equity award policy with no financial accounting impact and our Compensation Committee charter. The Company and its insurers have agreed to pay up to $2.85 million to plaintiffs’ counsel for their attorneys’ fees and the reimbursement of their expenses and costs. The Court granted preliminary approval of the settlement on March 13, 2008. On May 14, 2008, following shareholder notification, the Court granted final approval of the proposed settlement.
 
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. Our Audit Committee of the Board of Directors has engaged outside counsel to review certain transactions with this vendor, which provides freight forwarding and customs clearance services. Both the U.S. Securities and Exchange Commission and the U.S. Department of Justice have been advised of the Company’s investigation. The ultimate outcome of this review or the effect of implementing any further measures which may be necessary to ensure full compliance with the applicable laws cannot be determined at this time.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Off-Balance Sheet Arrangements (Including Guarantees)
 
We are a party to certain transactions, agreements or other contractual arrangements defined as “off-balance sheet arrangements” that could have a material future effect on our financial position, results of operations, liquidity and capital resources. The most significant of these off-balance sheet arrangements involve agreements and obligations in which we provide financial or performance assurance to third parties. Certain of these agreements serve as guarantees, including standby letters of credit issued on behalf of insurance carriers in conjunction with our workers’ compensation insurance program and other financial surety instruments such as bonds. In addition, we have provided indemnifications to certain third parties which serve as guarantees. These guarantees include indemnification provided by Nabors to our share transfer agent and our insurance carriers. We are not able to estimate the potential future maximum payments that might be due under our indemnification guarantees.
 
Management believes the likelihood that we would be required to perform or otherwise incur any material losses associated with any of these guarantees is remote. The following table summarizes the total maximum amount of financial and performance guarantees issued by Nabors:
 
                                         
    Maximum Amount  
    Remainder
                         
(In thousands)   of 2008     2009     2010     Thereafter     Total  
 
Financial standby letters of credit and other financial surety instruments
  $ 97,228     $ 106,425     $ 2,028     $     $ 205,681  
Contingent consideration in acquisition
          1,417       1,417       1,416       4,250  
                                         
Total
  $ 97,228     $ 107,842     $ 3,445     $ 1,416     $ 209,931  
                                         


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 9   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
    Six Months Ended
 
    June 30,     June 30,  
(In thousands, except per share amounts)   2008     2007     2008     2007  
 
Net income (numerator):
                               
Income from continuing operations, net of
tax — basic
  $ 194,361     $ 220,862     $ 424,867     $ 477,752  
Add interest expense on assumed conversion of our zero coupon convertible/exchangeable senior debentures/notes, net of tax:
                               
$2.75 billion due 2011(1)
                       
$82.8 million due 2021(2)
                       
$700 million due 2023(3)
                       
                                 
Adjusted income from continuing operations, net of tax — diluted
    194,361       220,862       424,867       477,752  
Income from discontinued operations, net of tax
          7,487             12,759  
                                 
Total adjusted net income
  $ 194,361     $ 228,349     $ 424,867     $ 490,511  
                                 
Earnings per share:
                               
Basic from continuing operations
  $ .70     $ .79     $ 1.53     $ 1.72  
Basic from discontinued operations
          .03             .04  
                                 
Total Basic
  $ .70     $ .82     $ 1.53     $ 1.76  
                                 
Diluted from continuing operations
  $ .67     $ .77     $ 1.48     $ 1.67  
Diluted from discontinued operations
          .02             .04  
                                 
Total Diluted
  $ .67     $ .79     $ 1.48     $ 1.71  
                                 
Shares (denominator):
                               
Weighted-average number of shares
outstanding — basic(4)
    277,719       279,253       277,651       278,098  
Net effect of dilutive stock options, warrants and restricted stock awards based on the treasury stock method
    8,606       8,645       7,191       8,258  
Assumed conversion of our zero coupon convertible/exchangeable senior debentures/notes:
                               
$2.75 billion due 2011(1)
                       
$82.8 million due 2021(2)
                       
$700 million due 2023(3)
    5,129             2,565        
                                 
Weighted-average number of shares outstanding — diluted
    291,454       287,898       287,407       286,356  
                                 
 
(1) Diluted earnings per share for the three and six months ended June 30, 2008 and 2007 do not include any incremental shares issuable upon exchange of the $2.75 billion 0.94% senior exchangeable notes due 2011. 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


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
amount of the notes exchanged. We would only issue an incremental number of shares upon exchange of these notes. Such shares are only included in the calculation of the weighted-average number of shares outstanding in our diluted earnings per share calculation, when our stock price exceeds $45.83 as of the last trading day of the quarter and the average price of our shares for the ten consecutive trading days beginning on the third business day after the last trading day of the quarter exceeds $45.83, which did not occur for the three and six months ended June 30, 2008 and 2007.
 
(2) Diluted earnings per share for the three and six months ended June 30, 2008 and 2007 excludes approximately 1.2 million potentially dilutive shares initially issuable upon the conversion of the $82.8 million aggregate principal amount at maturity for the zero coupon convertible senior debentures due 2021. The maximum number of shares required to be issued upon conversion would equate to the excess of the conversion value of the debentures over their principal amount. 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 $52. In June 2008 Nabors Delaware called for redemption of the full $82.8 million aggregate principal amount at maturity of its zero coupon senior convertible debentures due 2021 and in July 2008, paid cash of $60.6 million; an amount equal to the issue price of $50.4 million plus accrued original issue discount of $10.2 million.
 
(3) Diluted earnings per share for the three and six months ended June 30, 2008 reflect the conversion of the $700 million zero coupon senior exchangeable notes due 2023 resulting in the inclusion of the incremental number of shares that were required to be issued upon the exchange of these notes. The number of shares issued upon exchange equated to the excess of the exchange value of the notes over their principal amount, as Nabors Delaware was required to pay cash up to the principal amount of the notes exchanged. Because the conversion was partially completed in June 2008, only .5 million of our treasury shares actually issued in June 2008 were included in the calculation of the weighted-average basic shares outstanding for the three and six months ended June 30, 2008, resulting in an incremental .121 million weighted-average basic shares outstanding. For the remaining shares that were issued in July 2008 we included the dilutive effect that, when added to the shares included in basic shares outstanding, gives effect to the entire 5.25 million shares to be issued related to the conversion of the $700 million zero coupon senior exchangeable notes due 2023 in diluted shares outstanding. Diluted earnings per share for the three and six months ended June 30, 2007 does not include any incremental shares issuable upon exchange of the $700 million zero coupon senior exchangeable notes as the price of our shares did not exceed $35.05 on June 30, 2007.
 
(4) Includes the following weighted-average number of common shares of Nabors and weighted-average number of exchangeable shares of Nabors (Canada) Exchangeco Inc., respectively: 277.6 million and .1 million shares for the three months ended June 30, 2008; 279.2 million and .1 million shares for the three months ended June 30, 2007; 277.6 million and .1 million shares for the six months ended June 30, 2008; and 277.9 million and .2 million shares for the six months ended June 30, 2007. 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 1,000,750 and 4,322,513 shares during the three months ended June 30, 2008 and 2007, respectively, and 3,352,153 and 4,642,775 shares during the six months ended June 30, 2008 and 2007, 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


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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.
 
Note 10   Supplemental Balance Sheet and Income Statement Information
 
Our cash and cash equivalents, short-term and long-term investments and other receivables consist of the following:
 
                 
    June 30,
    December 31,
 
(In thousands)   2008     2007  
 
Cash and cash equivalents
  $ 903,821     $ 531,306  
Short-term investments
    332,726       235,745  
Long-term investments and other receivables
    239,866       359,534  
Other current assets
    34,429       53,054  
                 
Total
  $ 1,510,842     $ 1,179,639  
                 
 
As of June 30, 2008, our short-term investments consist of investments in available-for-sale marketable debt and equity securities of $282.4 million and trading securities of $50.3 million and our long-term investments consist of investments in non-marketable securities accounted for by the equity method and oil and gas financing receivables. Earnings associated with our oil and gas financing receivables are recognized as operating revenues. The June 30, 2008 other current assets amount represents $34.4 million in cash proceeds receivable from brokers from the sale of certain investment securities. During the three months ended June 30, 2008, we recognized investment income of $13.3 million in unrealized gains on our trading securities held at June 30, 2008. As of December 31, 2007, our short-term investments consist entirely of investments in available-for-sale marketable debt securities while our long-term investments consist of investments in non-marketable securities and oil and gas financing receivables. The December 31, 2007 other current assets amount represents $53.1 million in cash proceeds receivable from brokers from the sale of certain investment securities.
 
In March 2008 our investment in a privately-held company became a marketable equity security subsequent to a public offering on the Hong Kong Stock Exchange. Accordingly, we have accounted for the marketable equity security in accordance with the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” We have classified $50.3 million of these securities as trading securities and $138.0 million of these securities as available-for-sale based on our investment strategy.
 
Accrued liabilities include the following:
 
                 
    June 30,
    December 31,
 
(In thousands)   2008     2007  
 
Accrued compensation
  $ 131,557     $ 141,473  
Deferred revenue
    73,403       91,071  
Other taxes payable
    25,009       32,539  
Workers’ compensation liabilities
    31,427       31,427  
Interest payable
    26,706       13,165  
Warranty accrual
    8,057       8,602  
Litigation reserves
    4,034       5,083  
Other accrued liabilities
    23,834       25,155  
                 
    $ 324,027     $ 348,515  
                 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Investment income (loss) includes the following:
 
                 
    Six Months Ended
 
    June 30,  
(In thousands)   2008     2007  
 
Interest income
  $ 23,036     $ 22,417  
Gains (losses) on marketable and non-marketable securities, net
    28,203       (2,980 )
                 
    $ 51,239     $ 19,437  
                 
 
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net includes the following:
 
                 
    Six Months Ended
 
    June 30,  
(In thousands)   2008     2007  
 
Losses (gains) on sales, retirements and involuntary conversions of long-lived assets
  $ 10,535     $ (29,830 )
Litigation reserves
    1,715       7,963  
Foreign currency transaction losses (gains)
    (725 )     (3,289 )
(Gains) losses on derivative instruments
    (157 )     (977 )
Other
    (113 )     384  
                 
    $ 11,255     $ (25,749 )
                 
 
Comprehensive income for the three and six months ended June 30, 2008 totaled $231.0 million and $501.9 million, respectively, while comprehensive income for the three and six months ended June 30, 2007 totaled $273.0 million and $546.9 million, respectively.
 
Note 11   Discontinued Operation
 
In August 2007, we sold our Sea Mar business which had previously been included in Other Operating Segments to an unrelated third party for a cash purchase price of $194.3 million, resulting in a pre-tax gain of $49.5 million. The assets included 20 offshore supply vessels and certain related assets, including its right under a vessel construction contract. The operating results of this business for all periods presented are reported as discontinued operations in the accompanying unaudited consolidated statements of income and the respective accompanying notes to the consolidated financial statements. Our condensed statements of income from discontinued operations related to the Sea Mar business for the three and six months ended June 30, 2008 and 2007 were as follows:
 
Condensed Statements of Income
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
(In thousands)   2008     2007     2008     2007  
 
Revenues from discontinued operations
  $      —     $ 28,089     $      —     $ 52,719  
                                 
Income from discontinued operations
  $     $ 12,464     $     $ 21,240  
Income tax expense
          4,977             8,481  
                                 
Income from discontinued operations, net of tax
  $     $ 7,487     $     $ 12,759  
                                 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 12   Segment Information
 
The following table sets forth financial information with respect to our reportable segments:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
(In thousands)   2008     2007     2008     2007  
 
Operating revenues and Earnings from unconsolidated affiliates from continuing operations(1):
                               
Contract Drilling(2):
                               
U.S. Lower 48 Land Drilling
  $ 438,848     $ 426,787     $ 845,909     $ 879,383  
U.S. Land Well-servicing
    182,222       182,410       353,363       364,628  
U.S. Offshore
    65,723       60,316       117,178       116,091  
Alaska
    45,114       36,777       99,483       84,613  
Canada
    67,782       75,088       246,634       268,368  
International
    342,892       261,262       646,464       485,744  
                                 
Subtotal Contract Drilling(3)
    1,142,581       1,042,640       2,309,031       2,198,827  
Oil and Gas(4)(5)
    11,352       18,110       25,392       31,239  
Other Operating Segments(6)(7)
    172,865       140,024       338,647       270,374  
Other reconciling items(8)
    (48,431 )     (62,654 )     (99,296 )     (113,866 )
                                 
Total
  $ 1,278,367     $ 1,138,120     $ 2,573,774     $ 2,386,574  
                                 
Adjusted income (loss) derived from operating activities from continuing operations(1)(9):
                               
Contract Drilling:
                               
U.S. Lower 48 Land Drilling
  $ 134,322     $ 154,667     $ 261,193     $ 327,593  
U.S. Land Well-servicing
    31,468       40,105       61,854       83,461  
U.S. Offshore
    17,983       19,206       24,441       34,255  
Alaska
    13,466       8,225       31,249       24,792  
Canada
    (14,326 )     (7,992 )     27,647       45,136  
International
    101,752       85,409       192,402       151,427  
                                 
Subtotal Contract Drilling(3)
    284,665       299,620       598,786       666,664  
Oil and Gas(4)(5)
    (1,645 )     3,374       (6,497 )     4,502  
Other Operating Segments(6)
    19,006       6,739       31,440       18,333  
                                 
Total segment adjusted income derived from operating activities
    302,026       309,733       623,729       689,499  
Other reconciling items(10)
    (36,117 )     (29,201 )     (70,667 )     (68,940 )
                                 
Adjusted income (loss) derived from operating activities from continuing operations
    265,909       280,532       553,062       620,559  
Interest expense
    (21,676 )     (13,733 )     (39,785 )     (26,785 )
Investment income (loss)
    25,057       (9,272 )     51,239       19,437  
(Losses) gains on sales of long-lived assets, impairment charges and other income (expense), net
    (3,158 )     39,634       (11,255 )     25,749  
                                 
Income from continuing operations before income taxes(1)
  $ 266,132     $ 297,161     $ 553,261     $ 638,960  
                                 
 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                 
    June 30,
    December 31,
 
(In thousands)   2008     2007  
 
Total assets:
               
Contract Drilling:(11) 
               
U.S. Lower 48 Land Drilling
  $ 2,597,019     $ 2,544,629  
U.S. Land Well-servicing
    736,681       725,845  
U.S. Offshore
    479,563       452,505  
Alaska
    314,865       283,121  
Canada
    1,273,307       1,398,363  
International
    2,947,148       2,577,057  
                 
Subtotal Contract Drilling
    8,348,583       7,981,520  
Oil and Gas(12)
    844,049       646,837  
Other Operating Segments(13)
    584,871       610,041  
Other reconciling items(10)
    1,127,141       864,984  
                 
Total assets
  $ 10,904,644     $ 10,103,382  
                 
 
(1) All segment information excludes the Sea Mar business, which has been reclassified as a discontinued operation.
 
(2) These segments include our drilling, workover and well-servicing operations, on land and offshore.
 
(3) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $2.8 million and $.7 million for the three months ended June 30, 2008 and 2007, respectively, and $9.6 million and $2.5 million for the six months ended June 30, 2008 and 2007, respectively.
 
(4) Represents our oil and gas exploration, development and production operations.
 
(5) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $(6.7) million and $(.8) million for the three months ended June 30, 2008 and 2007, respectively, and $(24.6) million and $(.8) million for the six months ended June 30, 2008 and 2007, respectively.
 
(6) Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations.
 
(7) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $(.1) million and $3.5 million for the three months ended June 30, 2008 and 2007, respectively, and $6.6 million and $14.2 million for the six months ended June 30, 2008 and 2007, respectively.
 
(8) Represents the elimination of inter-segment transactions.
 
(9) Adjusted income derived from operating activities is computed by: subtracting direct costs, general and administrative expenses, and 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 (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 from continuing operations, which is a GAAP measure, is provided within the above table.
 
(10) Represents the elimination of inter-segment transactions and unallocated corporate expenses, assets and capital expenditures.

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
(11) Includes $59.3 million and $47.3 million of investments in unconsolidated affiliates accounted for by the equity method as of June 30, 2008 and December 31, 2007, respectively, and $21.4 million of investments in unconsolidated affiliates accounted for by the cost method as of December 31, 2007.
 
(12) Includes $292.1 million and $274.1 million of investments in unconsolidated affiliates accounted for by the equity method as of June 30, 2008 and December 31, 2007, respectively.
 
(13) Includes $64.1 million and $62.0 million of investments in unconsolidated affiliates accounted for by the equity method as of June 30, 2008 and December 31, 2007, respectively.
 
Note 13   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 statements present 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, 2008 and December 31, 2007, statements of income for each of the three and six month periods ended June 30, 2008 and 2007, and the consolidating statements of cash flows for the six month periods ended June 30, 2008 and 2007 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, 2008  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
ASSETS
Current assets:
                                               
Cash and cash equivalents
  $ 18,850     $ 2     $ 22     $ 884,947     $     $ 903,821  
Short-term investments
                      332,726             332,726  
Accounts receivable, net
                      1,083,748             1,083,748  
Inventory
                      128,893             128,893  
Deferred income taxes
                      16,687             16,687  
Other current assets
    174       1,058       376       262,863             264,471  
                                                 
Total current assets
    19,024       1,060       398       2,709,864             2,730,346  
Long-term investments and other receivables
                      239,866             239,866  
Property, plant and equipment, net
                      7,020,941             7,020,941  
Goodwill
                      363,158             363,158  
Intercompany receivables
    405,039       1,572,190             19,918       (1,997,147 )      
Investments in affiliates
    4,513,456       4,645,402       370,883       2,681,132       (11,795,357 )     415,516  
Other long-term assets
          22,562       447       111,808             134,817  
                                                 
Total assets
  $ 4,937,519     $ 6,241,214     $ 371,728     $ 13,146,687     $ (13,792,504 )   $ 10,904,644  
                                                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
                                               
Current portion of long-term debt
  $     $ 588,733     $     $ 114     $     $ 588,847  
Trade accounts payable
    1       24             317,777             317,802  
Accrued liabilities
    3,859       22,215       4,150       293,803             324,027  
Income taxes payable
          81,385       5,273       48,346             135,004  
                                                 
Total current liabilities
    3,860       692,357       9,423       660,040             1,365,680  
Long-term debt
          3,596,967       224,695       623             3,822,285  
Other long-term liabilities
          3,655             266,405             270,060  
Deferred income taxes
          15,131       73       497,756             512,960  
Intercompany payable
                (161,702 )     2,158,849       (1,997,147 )      
                                                 
Total liabilities
    3,860       4,308,110       72,489       3,583,673       (1,997,147 )     5,970,985  
                                                 
Shareholders’ equity
    4,933,659       1,933,104       299,239       9,563,014       (11,795,357 )     4,933,659  
                                                 
Total liabilities and shareholders’ equity
  $ 4,937,519     $ 6,241,214     $ 371,728     $ 13,146,687     $ (13,792,504 )   $ 10,904,644  
                                                 
 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    December 31, 2007  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
ASSETS
Current assets:
                                               
Cash and cash equivalents
  $ 10,659     $ 2,753     $ 4     $ 517,890     $     $ 531,306  
Short-term investments
                      235,745             235,745  
Accounts receivable, net
                      1,039,238             1,039,238  
Inventory
                      133,786             133,786  
Deferred income taxes
                      12,757             12,757  
Other current assets
    136       1,039       376       250,729             252,280  
                                                 
Total current assets
    10,795       3,792       380       2,190,145             2,205,112  
Long-term investments and other receivables
                      359,534             359,534  
Property, plant and equipment, net
                      6,632,612             6,632,612  
Goodwill
                      368,432             368,432  
Intercompany receivables
    361,832       1,224,222             19,918       (1,605,972 )      
Investments in affiliates
    4,148,256       4,429,139       304,450       2,306,797       (10,783,800 )     404,842  
Other long-term assets
          22,180       638       110,032             132,850  
                                                 
Total assets
  $ 4,520,883     $ 5,679,333     $ 305,468     $ 11,987,470     $ (12,389,772 )   $ 10,103,382  
                                                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
                                               
Current portion of long-term debt
  $     $ 700,000     $     $     $     $ 700,000  
Trade accounts payable
    2       24             348,498             348,524  
Accrued liabilities
    6,760       8,877       4,151       328,727             348,515  
Income taxes payable
          71,761       2,411       22,921             97,093  
                                                 
Total current liabilities
    6,762       780,662       6,562       700,146             1,494,132  
Long-term debt
          3,081,871       224,562                   3,306,433  
Other long-term liabilities
          1,900             244,814             246,714  
Deferred income taxes
          15,131       16       526,835             541,982  
Intercompany payable
                193       1,605,779       (1,605,972 )      
                                                 
Total liabilities
    6,762       3,879,564       231,333       3,077,574       (1,605,972 )     5,589,261  
                                                 
Shareholders’ equity
    4,514,121       1,799,769       74,135       8,909,896       (10,783,800 )     4,514,121  
                                                 
Total liabilities and shareholders’ equity
  $ 4,520,883     $ 5,679,333     $ 305,468     $ 11,987,470     $ (12,389,772 )   $ 10,103,382  
                                                 

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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, 2008  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
Revenues and other income:
                                               
Operating revenues
  $     $     $     $ 1,282,400     $     $ 1,282,400  
Earnings (losses) from unconsolidated affiliates
                      (4,033 )           (4,033 )
Earnings from consolidated affiliates
    198,280       105,611       3,637       111,066       (418,594 )      
Investment income (loss)
    52                   25,005             25,057  
Intercompany interest income
    1,000       17,039                   (18,039 )      
                                                 
Total revenues and other income
    199,332       122,650       3,637       1,414,438       (436,633 )     1,303,424  
                                                 
Costs and other deductions:
                                               
Direct costs
                      740,178             740,178  
General and administrative expenses
    4,971       234             111,995       (286 )     116,914  
Depreciation and amortization
          150             147,873             148,023  
Depletion
                      7,343             7,343  
Interest expense
          21,621       2,860       (2,805 )           21,676  
Intercompany interest expense
                2,234       15,805       (18,039 )      
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
          (1,544 )     (7,146 )     11,562       286       3,158  
                                                 
Total costs and other deductions
    4,971       20,461       (2,052 )     1,031,951       (18,039 )     1,037,292  
                                                 
Income from continuing operations before income taxes
    194,361       102,189       5,689       382,487       (418,594 )     266,132  
Income tax (benefit) expense
          (1,266 )     1,820       71,217             71,771  
                                                 
Income from continuing operations, net of tax
    194,361       103,455       3,869       311,270       (418,594 )     194,361  
Income from discontinued operations, net of tax
                                   
                                                 
Net income
  $ 194,361     $ 103,455     $ 3,869     $ 311,270     $ (418,594 )   $ 194,361  
                                                 
 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Three Months Ended June 30, 2007  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
Revenues and other income:
                                               
Operating revenues
  $     $     $     $ 1,134,684     $     $ 1,134,684  
Earnings from unconsolidated affiliates
                      3,436             3,436  
Earnings from consolidated affiliates
    223,955       52,162       3,644       62,874       (342,635 )      
Investment income (loss)
    107       36             (9,415 )           (9,272 )
Intercompany interest income
    667       21,263       1             (21,931 )      
                                                 
Total revenues and other income
    224,729       73,461       3,645       1,191,579       (364,566 )     1,128,848  
                                                 
Costs and other deductions:
                                               
Direct costs
                      637,104             637,104  
General and administrative expenses
    3,867       133             96,096       (144 )     99,952  
Depreciation and amortization
          150             111,222             111,372  
Depletion
                      9,160             9,160  
Interest expense
          12,776       2,872       (1,915 )           13,733  
Intercompany interest expense
                      21,931       (21,931 )      
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
          (941 )           (38,837 )     144       (39,634 )
                                                 
Total costs and other deductions
    3,867       12,118       2,872       834,761       (21,931 )     831,687  
                                                 
Income from continuing operations before income taxes
    220,862       61,343       773       356,818       (342,635 )     297,161  
Income tax (benefit) expense
          3,397       247       72,655             76,299  
                                                 
Income from continuing operations, net of tax
    220,862       57,946       526       284,163       (342,635 )     220,862  
Income from discontinued operations, net of tax
    7,487       7,487             14,974       (22,461 )     7,487  
                                                 
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)
 
                                                 
    Six Months Ended June 30, 2008  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
Revenues and other income:
                                               
Operating revenues
  $     $     $     $ 2,582,258     $     $ 2,582,258  
Earnings (losses) from unconsolidated affiliates
                      (8,484 )           (8,484 )
Earnings from consolidated affiliates
    432,054       244,816       11,981       254,743       (943,594 )      
Investment income (loss)
    194       127             50,918             51,239  
Intercompany interest income
    2,000       36,842                   (38,842 )      
                                                 
Total revenues and other income
    434,248       281,785       11,981       2,879,435       (982,436 )     2,625,013  
                                                 
Costs and other deductions:
                                               
Direct costs
                      1,487,948             1,487,948  
General and administrative expenses
    9,381       274       29       219,008       (457 )     228,235  
Depreciation and amortization
          300             283,201             283,501  
Depletion
                      21,028             21,028  
Interest expense
          38,883       5,720       (4,818 )           39,785  
Intercompany interest expense
                        38,842       (38,842 )      
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
          (132 )     (4,214 )     15,144       457       11,255  
                                                 
Total costs and other deductions
    9,381       39,325       1,535       2,060,353       (38,842 )     2,071,752  
                                                 
Income from continuing operations before income taxes
    424,867       242,460       10,446       819,082       (943,594 )     553,261  
Income tax (benefit) expense
          (872 )     3,342       125,924             128,394  
                                                 
Income from continuing operations, net of tax
    424,867       243,332       7,104       693,158       (943,594 )     424,867  
Income from discontinued operations, net of tax
                                   
                                                 
Net income
  $ 424,867     $ 243,332     $ 7,104     $ 693,158     $ (943,594 )   $ 424,867  
                                                 
 

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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
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
Revenues and other income:
                                               
Operating revenues
  $     $     $     $ 2,370,697     $     $ 2,370,697  
Earnings from unconsolidated affiliates
                      15,877             15,877  
Earnings from consolidated affiliates
    484,696       204,587       10,265       223,210       (922,758 )      
Investment income (loss)
    334       57             19,046             19,437  
Intercompany interest income
    1,656       40,664       1             (42,321 )      
                                                 
Total revenues and other income
    486,686       245,308       10,266       2,628,830       (965,079 )     2,406,011  
                                                 
Costs and other deductions:
                                               
Direct costs
                      1,321,401             1,321,401  
General and administrative expenses
    8,519       13       2       205,629       (314 )     213,849  
Depreciation and amortization
          300             214,680             214,980  
Depletion
                      15,785             15,785  
Interest expense
          25,555       5,732       (4,502 )           26,785  
Intercompany interest expense
    415                   41,906       (42,321 )      
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net
          (966 )           (25,097 )     314       (25,749 )
                                                 
Total costs and other deductions
    8,934       24,902       5,734       1,769,802       (42,321 )     1,767,051  
                                                 
Income from continuing operations before income taxes
    477,752       220,406       4,532       859,028       (922,758 )     638,960  
Income tax (benefit) expense
          5,853       1,450       153,905             161,208  
                                                 
Income from continuing operations, net of tax
    477,752       214,553       3,082       705,123       (922,758 )     477,752  
Income from discontinued operations, net of tax
    12,759       12,759             25,518       (38,277 )     12,759  
                                                 
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)
 
Condensed Consolidating Statements of Cash Flows
 
                                                 
    Six Months Ended June 30, 2008  
          Nabors
          Other
             
    Nabors
    Delaware
    Nabors
    Subsidiaries
             
    (Parent/
    (Issuer/
    Holdings
    (Non-
    Consolidating
    Consolidated
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
Net cash provided by (used for) operating activities
  $ (25,929 )   $ (168,066 )   $ (163,530 )   $ 1,139,181     $ (158,126 )   $ 623,530  
                                                 
Cash flows from investing activities:
                                               
Purchases of investments
                      (190,509 )           (190,509 )
Sales and maturities of investments
                          399,669             399,669  
Investment in unconsolidated affiliates
                      (47,452 )           (47,452 )
Capital expenditures
                      (743,360 )           (743,360 )
Proceeds from sales of assets and insurance claims
                      16,998             16,998  
Cash paid for investments in consolidated affiliates
    (7,800 )     (150,626 )           (163,548 )     321,974        
                                                 
Net cash provided by (used for) investing activities
    (7,800 )     (150,626 )           (728,202 )     321,974       (564,654 )
                                                 
Cash flows from financing activities:
                                               
Increase in cash overdrafts
                      15,771             15,771  
Proceeds from long-term debt
          575,219                         575,219  
Debt issuance costs
          (4,460 )                       (4,460 )
Proceeds from issuance of common shares
    53,587                               53,587  
Reduction in long-term debt
          (171,788 )                       (171,788 )
Repurchase of common shares
          (87,800 )           (62,314 )           (150,114 )
Purchase of restricted stock
    (11,667 )                             (11,667 )
Tax benefit related to the exercise of stock options
          4,771                         4,771  
Proceeds from parent contributions
                163,548       158,426       (321,974 )      
Cash dividends paid
                      (158,126 )     158,126        
                                                 
Net cash (used for) provided by financing activities
    41,920       315,942       163,548       (46,243 )     (163,848 )     311,319  
                                                 
Effect of exchange rate changes on cash and cash equivalents
                      2,320             2,320  
                                                 
Net (decrease) increase in cash and cash equivalents
    8,191       (2,750 )     18       367,056             372,515  
Cash and cash equivalents, beginning of period
    10,659       2,753       4       517,890             531,306  
                                                 
Cash and cash equivalents, end of period
  $ 18,850     $ 3     $ 22     $ 884,946     $     $ 903,821  
                                                 


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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
 
(In thousands)   Guarantor)     Guarantor)     (Issuer)     Guarantors)     Adjustments     Total  
 
Net cash provided by (used for) 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 )
Investment in unconsolidated affiliates
                          (8,433 )           (8,433 )
Capital expenditures
                      (1,095,496 )           (1,095,496 )
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 provided by (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  
Purchase of restricted stock
    (1,811 )                             (1,811 )
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        
                                                 
Net cash (used for) provided by 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  
                                                 


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 14   Subsequent Event
 
On July 17, 2008, Nabors Delaware completed a private placement of $400 million aggregate principal amount of 6.15% senior notes due 2018 with registration rights, which are unsecured and are fully and unconditionally guaranteed by us. These new senior notes were an additional issuance under the indenture pursuant to which Nabors Delaware issued $575 million 6.15% senior notes due 2018 on February 20, 2008 and are subject to the same rates, terms and conditions and together will be treated as a single class of debt securities under the indenture. The $400 million aggregate principal amount of 6.15% senior notes due 2018 was resold by the initial purchasers to qualified institutional buyers under Rule 144A of the Securities Act. The senior notes bear interest at a rate of 6.15% per year, payable semiannually on February 15 and August 15 of each year, beginning August 15, 2008. The senior notes will mature on February 15, 2018. We intend to use the proceeds of the offering for general corporate purposes.
 
We and Nabors Delaware intend to file a registration statement with the SEC with respect to an offer to exchange the notes for other notes which will be registered and have terms substantially identical in all material respects to these notes pursuant to the applicable registration rights agreement, within 50 days following the original issue date of the notes.


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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, 2008, and the related consolidated statements of income for each of the three-month and six-month periods ended June 30, 2008 and 2007, and the consolidated statements of cash flows and of changes in shareholders’ equity for the six-month periods ended June 30, 2008 and 2007. This interim financial information is the responsibility of the Company’s management.
 
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
 
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2007, and the related consolidated statements of income, of cash flows, and of changes in shareholders’ equity for the year then ended (not presented herein), and in our report dated February 28, 2008, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2007, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
 
Houston, Texas
July 31, 2008


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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 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, 2007 filed with the SEC on February 28, 2008, under Part 1, Item 1A, “Risk Factors.”
 
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” “the Company,” or “Nabors” means Nabors Industries Ltd. and, where the context requires, includes our subsidiaries.
 
Management Overview
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of our operations and our financial condition. This information is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements.
 
Nabors is the largest land drilling contractor in the world, with approximately 548 actively marketed land drilling rigs. We conduct oil, gas and geothermal land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South America, Mexico, the Caribbean, the Middle East, the Far East, Russia and Africa. We are also one of the largest land well-servicing and workover contractors in the United States and Canada. We actively market approximately 577 land workover and well-servicing rigs in the United States, primarily in the southwestern and western United States, and actively market approximately 172 land workover and well-servicing rigs in Canada. Nabors is a leading provider of offshore platform workover and drilling rigs, and actively markets 36 platform rigs, 13 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 51% ownership interest in a joint venture in Saudi Arabia, which owns and actively markets 9 rigs in addition to the rigs we lease to the joint venture. We also offer a wide


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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 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, pipeline handling equipment and rig reporting software. We also invest in oil and gas exploration, development and production activities and have 49% ownership interests in joint ventures in the U.S., Canada and International areas.
 
The majority of our business is conducted through our various Contract Drilling operating segments, which include our drilling, workover and well-servicing operations, on land and offshore. Our oil and gas exploration, development and production operations are included in a category labeled Oil and Gas for segment reporting purposes. Our operating segments engaged in drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are aggregated in a category labeled Other Operating Segments for segment reporting purposes.
 
Our businesses depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Therefore, a sustained increase or decrease in the price of natural gas or oil, which could have a material impact on exploration, development and production activities, could also materially affect our financial position, results of operations and cash flows.
 
Natural gas prices are the primary drivers of our U.S. Lower 48 Land Drilling and Canadian drilling operations, while oil prices are the primary driver of our Alaskan, International, U.S. Offshore (Gulf of Mexico), Canadian Well-servicing and U.S. Land Well-servicing operations. The Henry Hub natural gas spot price (per Bloomberg) averaged $8.31 per million cubic feet (mcf) during the period from July 1, 2007 through June 30, 2008, up from a $6.87 per mcf average during the period from July 1, 2006 through June 30, 2007. West Texas intermediate spot oil prices (per Bloomberg) averaged $96.97 per barrel during the period from July 1, 2007 through June 30, 2008, up from a $63.40 per barrel average during the period from July 1, 2006 through June 30, 2007.
 
Operating revenues and earnings from unconsolidated affiliates for the three months ended June 30, 2008 totaled $1.3 billion, representing an increase of $140.2 million, or 12% as compared to the three months ended June 30, 2007 and $2.6 billion for the six months ended June 30, 2008, representing an increase of $187.2 million, or 8% as compared to the six months ended June 30, 2007. Adjusted income derived from operating activities and net income for the three months ended June 30, 2008 totaled $265.9 million and $194.4 million ($.67 per diluted share), respectively, representing decreases of 5% and 15%, respectively, compared to the three months ended June 30, 2007. Adjusted income derived from operating activities and net income for the six months ended June 30, 2008 totaled $553.1 million and $424.9 million ($1.48 per diluted share), respectively, representing decreases of 11% and 13%, respectively, compared to the six months ended June 30, 2007.
 
The decrease in our adjusted income derived from operating activities during the three and six months ended June 30, 2008 as compared to the three and six months ended June 30, 2007 related primarily to our U.S. Lower 48 Land Drilling, Canada Drilling and Well-servicing, U.S. Offshore and our U.S. Land Well-servicing operations, where activity levels have decreased despite higher natural gas prices and higher oil prices. Operating results were further negatively impacted by higher levels of depreciation expense due to our capital expenditures. Partially offsetting the decreases in our adjusted income derived from operating activities were the increases in operating results from our International operations, driven by continuing high oil prices.
 
Our operating results for 2008 are expected to approximate the levels realized during 2007. We expect our International operations to show substantial increases resulting from the deployment of additional rigs under long-term contracts and the renewal of existing contracts at higher current market rates. However, our North American natural gas driven operations are expected to decrease. In our U.S. Lower 48 Land Drilling operations, we expect a significant number of expiring term contracts for older rigs to rollover in 2008 at lower margins. These decreases should be partially offset by the remaining new rig deployments at higher margins and improved margins of the previously deployed new rigs. We expect our Canadian operations to decrease as a result of the depressed market conditions there.


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The following tables set forth certain information with respect to our reportable segments and rig activity:
 
                                                                 
    Three Months Ended
                Six Months Ended
             
    June 30,     Increase
    June 30,     Increase
 
(In thousands, except percentages and rig activity)   2008     2007     (Decrease)     2008     2007     (Decrease)  
 
Reportable segments:
                                                               
Operating revenues and Earnings from unconsolidated affiliates from continuing operations(1) :
                                                               
Contract Drilling:(2)
                                                               
U.S. Lower 48 Land Drilling
  $ 438,848     $ 426,787     $ 12,061       3 %   $ 845,909     $ 879,383     $ (33,474 )     (4 )%
U.S. Land Well-servicing
    182,222       182,410       (188 )     (0 )%     353,363       364,628       (11,265 )     (3 )%
U.S. Offshore
    65,723       60,316       5,407       9 %     117,178       116,091       1,087       1 %
Alaska
    45,114       36,777       8,337       23 %     99,483       84,613       14,870       18 %
Canada
    67,782       75,088       (7,306 )     (10 )%     246,634       268,368       (21,734 )     (8 )%
International
    342,892       261,262       81,630       31 %     646,464       485,744       160,720       33 %
                                                                 
Subtotal Contract Drilling(3)
    1,142,581       1,042,640       99,941       10 %     2,309,031       2,198,827       110,204       5 %
Oil and Gas(4)(5)
    11,352       18,110       (6,758 )     (37 )%     25,392       31,239       (5,847 )     (19 )%
Other Operating Segments(6)(7)
    172,865       140,024       32,841       23 %     338,647       270,374       68,273       25 %
Other reconciling items(8)
    (48,431 )     (62,654 )     14,223       23 %     (99,296 )     (113,866 )     14,570       13 %
                                                                 
Total
  $ 1,278,367     $ 1,138,120     $ 140,247       12 %   $ 2,573,774     $ 2,386,574     $ 187,200       8 %
                                                                 
Adjusted income (loss) derived from operating activities from continuing operations(1)(9):
                                                               
Contract Drilling:
                                                               
U.S. Lower 48 Land Drilling
  $ 134,322     $ 154,667     $ (20,345 )     (13 )%   $ 261,193     $ 327,593     $ (66,400 )     (20 )%
U.S. Land Well-servicing
    31,468       40,105       (8,637 )     (22 )%     61,854       83,461       (21,607 )     (26 )%
U.S. Offshore
    17,983       19,206       (1,223 )     (6 )%     24,441       34,255       (9,814 )     (29 )%
Alaska
    13,466       8,225       5,241       64 %     31,249       24,792       6,457       26 %
Canada
    (14,326 )     (7,992 )     (6,334 )     (79 )%     27,647       45,136       (17,489 )     (39 )%
International
    101,752       85,409       16,343       19 %     192,402       151,427       40,975       27 %
                                                                 
Subtotal Contract Drilling(3)
    284,665       299,620       (14,995 )     (5 )%     598,786       666,664       (67,878 )     (10 )%
Oil and Gas(4)(5)
    (1,645 )     3,374       (5,019 )     (149 )%     (6,497 )     4,502       (10,999 )     (244 )%
Other Operating Segments(6)
    19,006       6,739       12,267       182 %     31,440       18,333       13,107       71 %
Other reconciling items(10)
    (36,117 )     (29,201 )     (6,916 )     (24 )%     (70,667 )     (68,940 )     (1,727 )     (3 )%
                                                                 
Total
    265,909       280,532       (14,623 )     (5 )%     553,062       620,559       (67,497 )     (11 )%
Interest expense
    (21,676 )     (13,733 )     (7,943 )     (58 )%     (39,785 )     (26,785 )     (13,000 )     (49 )%
Investment income (loss)
    25,057       (9,272 )     34,329       370 %     51,239       19,437       31,802       164 %
(Losses) gains on sales of long-lived assets, impairment charges and other income (expense), net
    (3,158 )     39,634       (42,792 )     (108 )%     (11,255 )     25,749       (37,004 )     (144 )%
                                                                 
Income from continuing operations before income taxes
  $ 266,132     $ 297,161     $ (31,029 )     (10 )%   $ 553,261     $ 638,960     $ (85,699 )     (13 )%
                                                                 
Rig activity:
                                                               
Rig years:(11)
                                                               
U.S. Lower 48 Land Drilling
    242.3       228.5       13.8       6 %     234.0       235.7       (1.7 )     (1 )%
U.S. Offshore
    17.1       17.6       (0.5 )     (3 )%     16.6       17.4       (0.8 )     (5 )%
Alaska
    10.4       8.8       1.6       18 %     10.5       9.1       1.4       15 %
Canada
    16.9       18.5       (1.6 )     (9 )%     33.1       38.2       (5.1 )     (13 )%
International(12)
    121.5       117.1       4.4       4 %     119.6       114.4       5.2       5 %
                                                                 
Total rig years
    408.2       390.5       17.7       5 %     413.8       414.8       (1.0 )     0 %
                                                                 
Rig hours: (13)
                                                               
U.S. Land Well-servicing
    272,101       291,430       (19,329 )     (7 )%     531,578       590,518       (58,940 )     (10 )%
Canada Well-servicing
    40,257       41,613       (1,356 )     (3 )%     119,394       139,201       (19,807 )     (14 )%
                                                                 
Total rig hours
    312,358       333,043       (20,685 )     (6 )%     650,972       729,719       (78,747 )     (11 )%
                                                                 
 
(1) All segment information excludes the Sea Mar business, which has been classified as a discontinued operation.
 
(2) These segments include our drilling, workover and well-servicing operations, on land and offshore.


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(3) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $2.8 million and $.7 million for the three months ended June 30, 2008 and 2007, respectively, and $9.6 million and $2.5 million for the six months ended June 30, 2008 and 2007, respectively.
 
(4) Represents our oil and gas exploration, development and production operations.
 
(5) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $(6.7) million and $(.8) million for the three months ended June 30, 2008 and 2007, respectively, and $(24.6) million and $(.8) million for the six months ended June 30, 2008 and 2007, respectively.
 
(6) Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations.
 
(7) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $(.1) million and $3.5 million for the three months ended June 30, 2008 and 2007, respectively, and $6.6 million and $14.2 million for the six months ended June 30, 2008 and 2007, respectively.
 
(8) Represents the elimination of inter-segment transactions.
 
(9) Adjusted income derived from operating activities is computed by: subtracting direct costs, general and administrative expenses, and 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 from continuing operations before income taxes, which is a GAAP measure, is provided within the above table.
 
(10) Represents the elimination of inter-segment transactions and unallocated corporate expenses.
 
(11) Excludes well-servicing rigs, which are measured in rig hours. Includes our equivalent percentage ownership of rigs owned by unconsolidated affiliates. Rig years represent a measure of the number of equivalent rigs operating during a given period. For example, one rig operating 182.5 days during a 365-day period represents 0.5 rig years.
 
(12) International rig years include our equivalent percentage ownership of rigs owned by unconsolidated affiliates which totaled 4.0 years during the three and six months ended June 30, 2008 and 2007.
 
(13) Rig hours represents the number of hours that our well-servicing rig fleet operated during the year.
 
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.
 
U.S. Lower 48 Land Drilling.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months Ended
                Six Months Ended
             
    June 30,     Increase
    June 30,     Increase
 
    2008     2007     (Decrease)     2008     2007     (Decrease)  
(In thousands, except percentages and rig activity)                                                
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 438,848     $ 426,787     $ 12,061       3 %   $ 845,909     $ 879,383     $ (33,474 )     (4 )%
Adjusted income derived from operating activities
  $ 134,322     $ 154,667     $ (20,345 )     (13 )%   $ 261,193     $ 327,593     $ (66,400 )     (20 )%
Rig years
    242.3       228.5       13.8       6 %     234.0       235.7       (1.7 )     (1 )%


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The decrease in operating results during the three months ended June 30, 2008 compared to the prior year period is due to higher drilling rig operating costs and an increase in depreciation expense related to capital expansion projects. The decrease is only partially offset by increases in drilling activity and slightly higher average dayrates due to rising natural gas prices.
 
The decrease in operating results during the six months ended June 30, 2008 compared to the prior year period is due to higher drilling rig operating costs, as discussed above, and slightly lower drilling activity and lower average dayrates.
 
U.S. Land Well-servicing.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months Ended
                Six Months Ended
             
    June 30,     Increase
    June 30,     Increase
 
    2008     2007     (Decrease)     2008     2007     (Decrease)  
(In thousands, except percentages and rig activity)                                                
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 182,222     $ 182,410     $ (188 )     (0 )%   $ 353,363     $ 364,628     $ (11,265 )     (3 )%
Adjusted income derived from operating activities
  $ 31,468     $ 40,105     $ (8,637 )     (22 )%   $ 61,854     $ 83,461     $ (21,607 )     (26 )%
Rig hours
    272,101       291,430       (19,329 )     (7 )%     531,578       590,518       (58,940 )     (10 )%
 
Operating results decreased during the three and six months ended June 30, 2008 over the prior year periods due to lower rig utilization, higher operating costs and higher depreciation expense related to capital expansion projects completed during 2007. These decreases were partially offset by slightly higher dayrates and improved earnings derived from our fluid transportation and rental and fishing services.
 
U.S. Offshore.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months Ended
                Six Months Ended
             
    June 30,     Increase
    June 30,     Increase
 
    2008     2007     (Decrease)     2008     2007     (Decrease)  
(In thousands, except percentages and rig activity)                                                
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 65,723     $ 60,316     $ 5,407       9 %   $ 117,178     $ 116,091     $ 1,087       1 %
Adjusted income derived from operating activities
  $ 17,983     $ 19,206     $ (1,223 )     (6 )%   $ 24,441     $ 34,255     $ (9,814 )     (29 )%
Rig years
    17.1       17.6       (0.5 )     (3 )%     16.6       17.4       (0.8 )     (5 )%
 
Operating revenues and Earnings from unconsolidated affiliates increased during the three and six months ended June 30, 2008 as compared to the prior year periods as a result of sustained higher oil prices and increased utilization for our MASE and Platform Workover Drilling rigs partially offset by lower average dayrates and utilization of our jackup and barge rigs.
 
Adjusted income derived from operating activities decreased during the three and six months ended June 30, 2008 as compared to the prior year periods primarily as a result of increased depreciation expense relating to new rigs added to the fleet in early 2007.


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Alaska.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months Ended
                Six Months Ended
             
    June 30,     Increase
    June 30,     Increase
 
    2008     2007     (Decrease)     2008     2007     (Decrease)  
(In thousands, except percentages and rig activity)                                                
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 45,114     $ 36,777     $ 8,337       23 %   $ 99,483     $ 84,613     $ 14,870       18 %
Adjusted income derived from operating activities
  $ 13,466     $ 8,225     $ 5,241       64 %   $ 31,249     $ 24,792     $ 6,457       26 %
Rig years
    10.4       8.8       1.6       18 %     10.5       9.1       1.4       15 %
 
The increase in operating results during the three and six months ended June 30, 2008 as compared to the prior year periods is primarily due to increases in average dayrates, driven by higher oil prices. Drilling activity levels have increased as a result of increased customer demand and the deployment and utilization of additional rigs added in late 2007.
 
Canada.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months Ended
                Six Months Ended
             
    June 30,     Increase
    June 30,     Increase
 
    2008     2007     (Decrease)     2008     2007     (Decrease)  
(In thousands, except percentages and rig activity)                                                
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 67,782     $ 75,088     $ (7,306 )     (10 )%   $ 246,634     $ 268,368     $ (21,734 )     (8 )%
Adjusted (loss) income derived from operating activities
  $ (14,326 )   $ (7,992 )   $ (6,334 )     (79 )%   $ 27,647     $ 45,136     $ (17,489 )     (39 )%
Rig years
    16.9       18.5       (1.6 )     (9 )%     33.1       38.2       (5.1 )     (13 )%
Rig hours
    40,257       41,613       (1,356 )     (3 )%     119,394       139,201       (19,807 )     (14 )%
 
The decrease in operating results during the three and six months ended June 30, 2008 as compared to the prior year periods resulted from an overall decrease in drilling and well-servicing dayrates and activity due to lower customer demand for drilling and well-servicing operations. Our operating results for the three and six months ended June 30, 2008 were further negatively impacted by proposed changes to the Alberta royalty and tax regime causing customers to assess the impact of such changes. The continued strengthening of the Canadian dollar versus the U.S. dollar positively impacted operating results in both current and prior year quarter when translated to U.S. dollar equivalents, but negatively impacted demand for our services as much of our customers revenue is denominated in U.S. dollars while their costs are denominated in Canadian dollars. Additionally, operating results were negatively impacted by increased depreciation expense related to capital expansion projects completed during 2007.


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International.  The results of operations for this reportable segment are as follows:
 
                                                                 
    Three Months Ended
                Six Months Ended
             
    June 30,     Increase
    June 30,     Increase
 
    2008     2007     (Decrease)     2008     2007     (Decrease)  
(In thousands, except percentages and rig activity)                                                
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 342,892     $ 261,262     $ 81,630       31 %   $ 646,464     $ 485,744     $ 160,720       33 %
Adjusted income derived from operating activities
  $ 101,752     $ 85,409     $ 16,343       19 %   $ 192,402     $ 151,427     $ 40,975       27 %
Rig years
    121.5       117.1       4.4       4 %     119.6       114.4       5.2       5 %
 
The increase in operating results during the three and six months ended June 30, 2008 as compared to the prior year periods resulted from increases in average dayrates and drilling activities, reflecting strong customer demand for drilling services, stemming from higher oil prices. The increases in operating results were also positively impacted from an expansion of our rig fleet and continuing 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:
 
                                                                 
    Three Months Ended
                Six Months Ended
             
    June 30,     Increase
    June 30,     Increase
 
    2008     2007     (Decrease)     2008     2007     (Decrease)  
(In thousands, except percentages and rig activity)                                                
 
Operating revenues and Earnings from unconsolidated affiliates
  $ 11,352