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Nabors Industries
                                            $35.60 - BUY


CREDIT AGRICOLE GROUP

Mark S. Urness
                                             Riding the Rebound
mark.urness@us.calyon.com
212 408-5683                                 • Nabors Industries currently reigns as the industry's largest provider of
                                               land-based contract drilling services, with a fleet of approximately 550
                                               land drilling rigs operating around the globe.
Shreyans Jain
                                             • We believe NBR is well positioned to benefit from the current North
shreyans.jain@us.calyon.com
212 408-5707                                   American land drilling recovery, as well as growing demand for its rigs
                                               internationally.
                                             • We reiterate our BUY rating on the shares of NBR and 12-month price
Zachary F. Sadow                               target of $50.
zachary.sadow@us.calyon.com
212 261-3485
                                             U.S. Land Drilling Rebounding. The U.S. land drilling market is in the
                                             middle of a turnaround. The market has experienced significant firming
                                             over the past few months and we believe that the prospects for an
                                             ever-improving 2H08 continue. We believe that continued strength in oil
                                             and gas prices coupled with a developing interest in shale plays will
                                             sustain the U.S. land drilling rebound.


                                             • Strong in Canada and Alaska. We believe the scenario in Canada
                                               and Alaska is improving as well. NBR is ready to capitalize on this
                                               trend led by its sizable fleet in Canada. We believe that the current
                                               increasing Canadian rig count coupled with improving activity and day
                                               rates bodes well for NBR.
                                             • International Drilling Offers Substantial Growth. NBR continues
                                               to deploy its strategy of extending its presence in the booming
                                               international market. It has built its international fleet to
                                               approximately 140 units, continues to be the largest land driller in
September 2, 2008 Company Update               Saudi Arabia, and has been steadily achieving attractive day rates and
                                               margins. We expect NBR to increase operating income in this segment
USA                                            by 39% in 2008.
Oil Services & Equipment                     • Quality Driving Strong Visibility. Strong demand for NBR's rigs,
Reuters                     NBR                highlighted by its Pace Rigs, has stemmed from a need for high
Bloomberg                   NBR                quality rigs to drill in the various complex shale plays. The emergence
                                               of these shale plays has allowed NBR to achieve earnings visibility and
Priced on 09/01/2008                           continue to win term contracts. In 2Q08 NBR signed more than 20
S&P                         1,283              term contracts and has 15 to 20 prospective term contracts in sight.
12M hi/lo                   $50.58/$23.61
                                             • 40% Upside Potential. The shares are trading at 8.6x our 2009 EPS
12M price target            $50.00
                                               estimate, a discount to the peer group average of 9.6x. We believe
±% potential                +40%
                                               that the shares of NBR should trade at a 25% premium versus the
                                               land drilling group. In our opinion, a 12x P/E applied to the 2009 EPS
Target set on               08/20/2008
                                               estimate of $4.15 is a fair valuation for the stock. We are reiterating
Shares in issue (m)         280                our BUY rating on the shares of Nabors Industries with a $50 price
Free float (est)(m)         274                target.

Market Cap (m)              $9,968
                                              Financials
3M avg. daily vol.(000)     7,960,470         Dec Yr               06A         07A           08E         09E
                                              EPS                 $3.58       $3.17        $3.25       $4.15      --
                                              P/E                  9.9x       11.2x        11.0x        8.6x     NM




                   The group of companies that comprise CLSA are affiliates of Calyon Securities (USA) Inc.
                                           See important disclosures on page 25.
Oilfield Services & Equipment
 in association with                           Nabors Industries                                  Rating: BUY         PT: $50

                                                                              Riding the Rebound
                                               Nabors Industries currently reigns as the industry’s largest provider of
Mark S. Urness
mark.urness@us.calyon.com
                                               land-based contract drilling services, with a fleet of approximately 550
(212) 408-5683                                 land drilling rigs operating around the globe, and a large position in the
                                               workover and well-servicing market, with a fleet of approximately 750
Shreyans Jain                                  well-servicing rigs primarily located in the U.S. and Canada. We believe
shreyans.jain@us.calyon.com
                                               NBR is well positioned to benefit from the current North American land
(212) 408-5707
                                               drilling recovery. We reiterate our BUY rating on the shares of NBR and
Zachary F. Sadow                               12-month price target of $50.
zachary.sadow@us.calyon.com
(212) 261-3485
                                                U.S. Land Drilling Rebounding. The U.S. land drilling market is in the middle of a
                                                  robust recovery. The market has experienced significant firming over the past few
                                                  months and we believe that the prospects for an ever-improving 2H08 continue.
                                                  Reflecting the rebound is a steady increase in the U.S. land rig count and an increase in
                                                  NBR’s working rig count in the U.S. Lower 48. We believe that continued strength in oil
                                                  and gas prices coupled with a developing interest in shale plays will sustain the U.S.
2 September 2008                                  land drilling recovery.
                                                Strong in Canada and Alaska. We believe the scenario in Canada and Alaska is
USA                                               improving as well. NBR is ready to capitalize on this trend led by its sizable fleet in
                                                  Canada. While Canada and Alaska had a sequentially weak quarter in 2Q08, we see the
Oil Services & Equipment                          trend as already improving. We believe that the currently increasing Canadian rig count
Ticker           NBR
                                                  coupled with improving activity and day rates bodes well for NBR.
Price (07/27/08) $37.16
                                                International Drilling Offers Substantial Growth. NBR continues to execute its
12M hi/lo        $23.61 / $50.58
                                                  strategy of extending its presence in the booming international markets. It has built its
12M price target        $50                       international fleet to approximately 140 units, continues to be the largest land driller in
±% potential            +34%                      Saudi Arabia and has been steadily achieving attractive day rates and margins.
Target set on           27 August 2008
                                                  Contributions from new land rigs should support substantial international revenue
Shares Out.             285.7m                    growth during the next 18 months. We expect NBR to increase operating income in this
Market cap              US $10,618m               segment by 39% in 2008.
3M Avg. volume          8,042,730
                                                Quality Driving Strong Visibility. Strong demand for NBR’s rigs, highlighted by its
                                                  Pace Rigs, stems from a need for high quality rigs to drill in the various complex shale
                                                  plays. The emergence of these shale plays has allowed NBR to achieve earnings
                                                  visibility and continue to win term contracts. In 2Q08 NBR signed more than 20 term
                                                  contracts and has 15 to 20 prospective term contracts in sight.
                                                Over 30% Upside Potential. The shares are trading at 8.9x our 2009 EPS estimate,
                                                  a discount to the peer group average of 9.6x. In addition, at 5.8x estimated 2009 cash
                                                  flow/share, the stock is trading at par with comparable land drillers. With its
                                                  technologically superior fleet of rigs and a diversified business mix, NBR has greater
                                                  earnings visibility than the average land driller. As a result, we believe that NBR should
                                                  trade at a 25% premium versus the land drilling group. In our opinion, a 12x P/E
                                                  applied to the 2009 EPS estimate of $4.15 is a fair valuation for the company. We are
                                                  reiterating our BUY rating on the shares of Nabors Industries with a $50 price target.

Stock performance (%)
                       1M      3M        12M    Financials
Absolute           -4.7%    -13.4%    21.6%     Year to 31 Dec                                      05A       06A       07A       08E       09E
Relative           -3.6%     -4.8%    34.7%
                                                Total Revenues ($ Mill)                           3,460.9   4,840.7   5,009.3   5,340.8   6,176.9
6.0
                                                Revenue Growth                                       45%       40%        3%        7%       16%
5.0
           NBR                                  Operating Income ($ Mill)                           879.8    1491.9    1237.3    1259.2    1714.9
           SPX
4.0
                                                Net Income ($ Mill)                                 659.7    1059.0     930.7     943.2    1225.4
3.0
                                                EPS Operating ($)                                   $2.03     $3.58     $3.17     $3.25     $4.15
2.0                                             P/E                                                 18.2x     10.3x     11.7x     11.4x      8.9x
1.0                                             Cash Flow Per Share ($)                              3.08      4.92      4.70      5.32      6.39
0.0                                             P/CF                                                12.1x      7.5x      7.9x      6.9x      5.8x
   Jul-98
  Jan-99
   Jul-99
  Jan-00
   Jul-00
  Jan-01
   Jul-01
  Jan-02
   Jul-02
  Jan-03
   Jul-03
  Jan-04
   Jul-04
  Jan-05
   Jul-05
  Jan-06
   Jul-06
  Jan-07
   Jul-07
  Jan-08
   Jul-08




                                                EBIT Margin                                          25%       31%       25%       24%       28%
                                                Source: Calyon Securities (USA) Inc., Bloomberg


Source: FactSet



       2                                                mark.urness@us.calyon.com                                         02 September 2008
Riding the Rebound                                                            Nabors Industries - BUY



                    Contents
                    Executive Summary ............................................................................... 4

                    Company Snapshot ................................................................................ 5

                    Riding the Rebound ............................................................................... 6

                    Attractive Industry Fundamentals.......................................................... 9

                    Natural Gas Market to Remain Tight in ‘08 ........................................... 11

                    Strong Financials & Appealing Valuation .............................................. 13

                    Risks ................................................................................................... 15

                    Charts & Tables ................................................................................... 16

                    All prices quoted herein are as at close of business 27th August 2008, unless otherwise stated


                              Other Recent Reports




02 September 2008           mark.urness@us.calyon.com                                                                      3
Riding the Rebound                                       Nabors Industries - BUY



                              Executive Summary
                              We are reiterating our BUY rating on the shares of Nabors Industries
                              with a $50 price target.

     The U.S. land drilling   U.S. Land Drilling Rebounding. The U.S. land drilling market is in the middle
    market is in the middle   of a robust recovery. The market has experienced significant firming over the
             of a recovery.
                              past few months and we believe that the prospects for an ever-improving 2H08
                              continue. Reflecting the rebound is a steady increase in the U.S. land rig count
                              and an increase in NBR’s working rig count in the U.S. Lower 48. We believe that
                              continued strength in oil and gas prices coupled with a developing interest in the
                              shale plays will sustain the U.S. land drilling recovery.

                              Strong in Canada and Alaska. We believe the scenario in Canada and Alaska is
                              improving as well. NBR is ready to capitalize on this trend led by its sizable fleet
                              in Canada. While Canada and Alaska had a sequentially weak quarter in 2Q08,
                              we see the trend as already improving. We believe that the current increasing
                              Canadian rig count coupled with improving activity and day rates bodes well for
                              NBR.

NBR continues to execute      International Drilling Offers Substantial Growth. NBR continues to execute
 its strategy of extending    its strategy of extending its presence in the booming international markets. It
        its presence in the
                              has built its international fleet to approximately 140 units, continues to be the
    booming international
                  markets.    largest land driller in Saudi Arabia and has been steadily achieving attractive day
                              rates and margins. Contributions from new land rigs should support substantial
                              international revenue growth during the next 18 months. We expect NBR to
                              increase operating income in this segment by 39% in 2008.

                              Quality Driving Strong Visibility. Strong demand for NBR’s rigs, highlighted by
                              its Pace Rigs, has stemmed from a need for high quality rigs to drill in the various
                              complex shale plays. The emergence of these shale plays has allowed NBR to
                              achieve earnings visibility and continue to win term contracts. In 2Q08 NBR
                              signed more than 20 term contracts and has 15 to 20 prospective term contracts
                              in sight.

    We are reiterating our    Over 30% Upside Potential. The shares are trading at 8.9x our 2009 EPS
 BUY rating on the shares     estimate, a discount to the peer group average of 9.6x. In addition, at 5.8x
of Nabors Industries with
                              estimated 2009 cash flow/share, the stock is trading at par with comparable land
       a $50 price target.
                              drillers. With its technologically superior fleet of rigs and a diversified business
                              mix, NBR has greater earnings visibility than the average land driller. As a result,
                              we believe that NBR should trade at a 25% premium versus the land drilling
                              group. In our opinion, a 12x P/E applied to the 2009 EPS estimate of $4.15 is a
                              fair valuation for the company. We are reiterating our BUY rating on the shares of
                              Nabors Industries with a $50 price target.




4                                   mark.urness@us.calyon.com                             02 September 2008
Riding the Rebound                                                                   Nabors Industries - BUY



                                                       Company Snapshot
                                                       Current Operations
                                                       Nabors Industries operates the largest land drilling fleet in North America with
                                                       approximately 550 land rigs and 750 land workover rigs. The company operates
                                                       a fleet of approximately 140 land rigs in a variety of international markets,
                                                       highlighted by its incumbent position as the largest land driller in Saudi Arabia.
                                                       NBR also operates an offshore fleet consisting of 36 platform rigs, 13 jackups and
                                                       four barge rigs in the Gulf of Mexico and various international locations. NBR’s
                                                       well servicing segment is comprised of comprehensive oilfield hauling,
                                                       engineering, construction and project management services as well as
                                                       manufacturing of top drives and instrumentation systems. In 2007, revenues
                                                       derived internationally from drilling and related services encompassed 21% of
                                                       total revenues.
Figure 1

2007 North America Revenue and Operating Income

                                                     Revenues                                                                      Operating Income
                              Manufac,                                                                                Manufac,
                             Logistics &                                                                             Logistics &    Oil and Gas
                               other           Oil and Gas                                                             other             4%
                                12%                 3%                                                                  4%

                                                                                               International
                                                                                                   24%

             International
                 21%
                                                                     North America                                                                    North America
                                                                          64%                                                                              68%

   *Exceludes $219.4 M M deduction for Other                                         *Exceludes $136.5 M M deduction for Other


Source: Company reports


                                                       Background
                                                       Since 1987, NBR has grown into the world’s largest provider of land drilling
                                                       contract services. NBR has stretched its reach to include operations in most of
                                                       the major oil and gas producing regions in the world. The company has also
                                                       increased its scope since 1987 to incorporate offshore drilling, U.S. land well-
                                                       servicing and workover activities.

Figure 2

2007 Revenue and Operating Income

                                                  Revenues
                                                                                                                            Operating Income

                              C anada
                                                                                                            Alaska        C anada
             Alaska             16%
                                                                                                              4%             9%
               5%
      U.S. Offshore                                                                         U.S. Offshore
           6%                                                                                    6%



                                                                                          U.S. Land Well-
                                                                                            Servicing                                                       U.S. Land
               U.S. Land Well-                                       U.S. Land                 17%                                                           Drilling
                 Servicing                                            Drilling                                                                                64%
                    21%                                                52%




Source: Company reports




   02 September 2008                                            mark.urness@us.calyon.com                                                                               5
Riding the Rebound                                                     Nabors Industries - BUY



                                 Riding the Rebound
                                 We believe that NBR is well positioned to capitalize on the firming North
                                 American land drilling market.

                                 Land Drilling
Nabors has over 550 land         Nabors has over 550 land drilling rigs, with about 435 units (79%) located in
            drilling rigs.       North America, the largest land drilling market in the world. The remaining rigs
                                 are spread across South America, Mexico, the Caribbean, the Middle East, Far
                                 East, Russia and Africa. Out of the 336 rigs located in the U.S. Lower 48, 242 are
                                 actively marketed and 94 are stacked in inventory.

                                 Figure 3

                                 NBR: North American Land Drilling Fleet




                                                               C anada
                                                                 19%
                                                     Alaska
                                                       4%




                                                                                                       Lower 48
                                                                                                         77%




                                 Source: Company reports and Calyon Securities (USA) estimates


       We believe that land-     We believe that land-drilling activity in North America is in the middle of a
    drilling activity in North   recovery. The current elevated prices of oil and gas coupled with developing
    America is in the middle
                                 interest in shale plays have stimulated North American drilling activity. The
               of a recovery.
                                 firming U.S. land drilling market is evidenced by the steady increase in the U.S.
                                 land rig count and an increase in NBR’s working rig count.

                                 Figure 4

                                 NBR Working Rig Count and Utilization

                                   245                               Lower 48 Drilling                                     82%

                                                                                                                           80%
                                   240                                  Rigs Working     Utilization
                                                                                                                           78%

                                   235                                                                                     76%

                                                                                                                           74%
                                   230
                                                                                                                           72%

                                   225
                                                                                                                           70%

                                                                                                                           68%
                                   220

                                                                                                                           66%
                                   215
                                                                                                                           64%


                                   210                                                                                     62%
                                              1Q07            2Q07              3Q07          4Q07     1Q08         2Q08


                                 Source: Company reports




6                                           mark.urness@us.calyon.com                                         02 September 2008
Riding the Rebound                                                     Nabors Industries - BUY



                              We expect that land-drilling activity in North America will remain robust over the
  Volatility in natural gas
                              next year as E&P customers continue to drill more in an effort to capitalize on
     prices is a cause for    high oil and gas prices. Volatility in natural gas prices is a cause for some
            some concern.     concern, as it relates to customers’ propensity to spend as well as equity
                              valuations in the drilling sector. However, we are seeing evidence that the E&Ps
                              will drill through any near-term price weakness with confidence in the long-term
                              fundamentals.

                              Our model assumes Nabors will average 248 active rigs in the Lower-48 states
                              this year, another 31 in Canada, and 11 in Alaska. We expect the average size of
                              the fleet in the Lower-48 to move up to 338 while remaining at 81 in Canada and
                              20 in Alaska.

                              Figure 5

                              Total and Active North American Land Drilling Fleet – 2008E

                                350.0                                                                                338


                                300.0
                                                 Active Rigs        # of Rigs
                                                                                                            248
                                250.0


                                200.0


                                150.0


                                100.0                                                           81


                                  50.0                                            31
                                                               19
                                                 11
                                   0.0
                                                      Alaska                           Canada                 Lower 48


                              Source: Company reports and Calyon Securities (USA) estimates


                              Workover and Well Servicing
       We see continued       NBR has more than 735 workover rigs in North America, primarily located in
     strength in the well     Texas, California, and Western Canada. Though not as profitable as the land
   service and workover
                              drilling business, the workover and well-servicing business does have high
                 activity.
                              operating margins, which came in at 17.3% in 2Q08 versus U.S. land drilling
                              which came in at 30.6%. Going forward, we see continued strength in well
                              service and workover activity, as sustained high oil prices lead to increased repair
                              and maintenance of mechanically pumped wells. In addition, NBR Well Services
                              continues to expand in the rapidly growing Rocky Mountains region.

                              Operating in a Fragmented Industry
                              Although the land-drilling industry is more consolidated today than in the past,
                              we continue to characterize it as fragmented. We estimate that the top eight
                              players accounted for roughly half of overall land-drilling revenues in 2007.
                              Nabors, with about 12% of the market by our estimates, is the only company on
                              this list, apart from PTEN, with more than a 10% share. According to Spears &
                              Associates, the total land-based drilling revenues reached $20.4 billion in 2007.




02 September 2008                        mark.urness@us.calyon.com                                                         7
Riding the Rebound                                                                                                Nabors Industries - BUY


                                                    Figure 6

                                                    Top Five U.S. Land Drilling Marketed Rigs



                                                                                          Grey Wolf, 108
                                                                                                                                                                            Nabors, 286
                                                                              Unit, 110




                                                                Helmerich& Payne, 176

                                                                                                                                                     Patterson, 262




                                                    Source: Land Rig Newsletter


                                                    The sector continues to have a significant number of small regional drillers that
                                                    have historically benefited from operational and geological expertise in their
                                                    particular regions. However, vast improvements in drilling processes and rig
                                                    technology and the intensifying focus on safety and the environment have eroded
                                                    away any advantage the smaller players have had. In our view, they now operate
                                                    at a meaningful disadvantage to the larger land drillers.

                                                    International Drilling Offers Substantial Growth
  The international markets                         The international markets continue to offer attractive opportunities. NBR has built
        continue to offer an                        its international fleet to approximately 140 units and maintains the largest land
     attractive opportunity.
                                                    drilling presence in Saudi Arabia. We expect NBR to grow its international
                                                    operating income by 39% in 2008 over last year due to contributions from
                                                    international jackups and additional land rigs. Strong growth in day rates and
                                                    margins should support this trend.

Figure 7                                                                                   Figure 8

International Revenue & Operating Income                                                   International Day Rate & Cash Margins
1,800                                                                                        $35,000                                                                                                        $16,000

                                                                                                                   Average Dayrate
1,600                                                                                                                                                                                                       $14,000
                  Revenue          Operating Income                                          $30,000
                                                                                                                   Average Daily CFOA
1,400                                                                                                                                                                                                       $12,000
                                                                                             $25,000
1,200
                                                                                                                                                                                                            $10,000
                                                                                             $20,000
1,000
                                                                                                                                                                                                            $8,000

  800                                                                                        $15,000
                                                                                                                                                                                                            $6,000
  600                                                                                        $10,000
                                                                                                                                                                                                            $4,000
  400
                                                                                              $5,000                                                                                                        $2,000
  200
                                                                                                 $0                                                                                                         $0
    0
                                                                                                       05

                                                                                                             05


                                                                                                                   05

                                                                                                                         05


                                                                                                                                06


                                                                                                                                         06


                                                                                                                                               06

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                                                                                                                                                           07

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                                                                                                                                                                       07


                                                                                                                                                                             07


                                                                                                                                                                                   08

                                                                                                                                                                                         08


                                                                                                                                                                                                 E


                                                                                                                                                                                                        E




           2001    2002     2003    2004     2005      2006    2007   2008E     2009E
                                                                                                                                                                                               08

                                                                                                                                                                                                      08
                                                                                                   1Q

                                                                                                            2Q


                                                                                                                  3Q

                                                                                                                        4Q


                                                                                                                              1Q


                                                                                                                                        2Q


                                                                                                                                              3Q

                                                                                                                                                    4Q


                                                                                                                                                          1Q

                                                                                                                                                                2Q


                                                                                                                                                                      3Q


                                                                                                                                                                            4Q


                                                                                                                                                                                  1Q

                                                                                                                                                                                        2Q

                                                                                                                                                                                              3Q

                                                                                                                                                                                                     4Q




Source: Company reports and Calyon Securities (USA) estimates




   8                                                           mark.urness@us.calyon.com                                                                                    02 September 2008
Riding the Rebound                                         Nabors Industries - BUY



                                          Attractive Industry Fundamentals
                                          We believe the current upcycle represents the strongest and longest growth
                                          period for the oil service industry since the 1970’s. Our positive investment thesis
                                          is formulated based on a number of important fundamental trends in the industry
                                          that we believe will remain intact for the foreseeable future.

                                          Robust Upstream Capital Spending
                                          After years of strong spending growth in 2006 and 2007, further expansion of
         After strong spending            upstream capital expenditures is expected to continue into 2008, albeit at a
     growth in 2006 and 2007,             slower rate. Capital spending grew by an estimated 26% in 2006, the largest
          further expansion of            increase since 2001, driven both by high oil prices and rising costs. Capital
              upstream capital            spending grew by an estimated 19% in 2007. In 2008, we expect capital
      expenditures is expected
        to continue into 2008.            spending to increase by close to 20% due to resilient global oil demand and
                                          strong oil prices; increased capital requirements for remote deepwater projects;
                                          higher oil services costs and the increased difficulty in replacing reserves.
                                          Although drilling for unconventional gas in North America remains one of the
                                          drivers of increased spending, in our view, oil leveraged companies see more
                                          attractive opportunities in lower-cost regions outside North America.

Figure 9

Worldwide Upstream Capital Spending (2008E)
                                   Canada
                                                                               National
                                     7%
                                                                               Oil Cos
                                                                                24%                    Major Oils
                                              United                                                     32%
                                              States
                                               24%

                                                                              Foreign
                                                                                Cos
             Outside                                                           22%
               NA                                                                Canadians           U.S.
              69%                                                                   8%             Indep's
                                                                                                     14%




Source: Calyon Securities USA estimates


                                          Oil Demand Growth Remains a Key Driver
  Oil demand is expected to               In our view, strong oil demand growth precipitated by the synchronized global
      grow at approximately               economic expansion has been the primary driver of accelerating upstream capital
                  2%/year.
                                          spending growth. In 2006, oil demand growth slowed to 1.0%, due primarily to
                                          price-related demand destruction. Importantly, oil demand growth rebounded to
                                          1.8% in 2007 and is expected to average nearly 2.0% per year for the next
                                          several years, according to the International Energy Agency (IEA). The global
                                          economy is expected to grow at a rate of approximately 4.0% in 2008, which
                                          should support oil demand. In particular, the Chinese economy, a key driver of oil
                                          demand growth, is expected to grow at a rate of 9-10% over the next two years.
                                          The single biggest risk to our positive investment thesis is the potential for global
                                          economic weakness and slowing oil demand growth brought on by high prices.

       Finding & development              We believe that there is a close correlation between global oil demand and
        costs have been rising            upstream capital spending trends. The finding and development (F&D) costs
                      rapidly.
                                          which have been increasing at 10% per year since the mid-1990s. The escalation
                                          in capital requirements puts the oil services industry under pressure to find ways
                                          to help customers reduce costs.


   02 September 2008                            mark.urness@us.calyon.com                                                  9
Riding the Rebound                                                                                        Nabors Industries - BUY



                                Challenges Replacing Reserves and Growing Production
      Global oil demand may     We believe that the oil industry faces serious problems replacing reserves each
     increase by as much as     year and growing production to meet rising global demand. According to the IEA,
          50% over the next
                    25 years.   global oil demand may increase by as much as 50% over the next 25 years.
                                Obviously, if this huge increase in consumption is to be met, the industry faces
                                tremendous challenges. The major oils have begun to adopt more realistic oil
                                price forecasts and raise their upstream spending budgets accordingly. Even after
                                beginning to increase spending, the major oils have yet to achieve the reserve
                                replacement levels desired, and year/year production continues to decline for the
                                major oils as a group. Technologies such as horizontal drilling and advanced well
                                stimulation techniques have resulted in more rapid depletion of oil reserves.

                                Worldwide Rig Count Continues to Grow
     We believe worldwide       We believe worldwide drilling activity will remain solid, with anticipated growth
       drilling activity will   through 2008. Given the strong crude oil and natural gas prices, we expect to
        remain solid, with
                                see a continued increase in the land drilling activity in the coming quarters. The
       anticipated growth
             through 2008.      operators were able to lock in high natural gas prices as the strip near $13/Mcf in
                                June 2008. We forecast a 7% increase in the U.S. land rig count to 1,816 units
                                in 2008 from 1,695 units last year. With the U.S. land rig count averaging at
                                1,712 units in 1Q08, we believe that this increase to 1,816 for 2008 is easily
                                achievable, given the recent strength in activity. While the newbuilds continue to
                                replace legacy rigs, some older rigs, which were previously stacked, are also
                                being reactivated. This should further help the rig count. Weatherford recently
                                indicated that the Canadian rig count might be 15% higher year/year in 3Q08.
                                We estimate the Canadian rig count will average 300 units in 2008.

                                We expect international rig count to average 1,094 units in 2008, 9% higher than
                                2007. The 89-unit increase in international rig count in 2008 is expected to be
                                driven by increased demand from national oil companies such as Pemex, Saudi
                                Aramco and ONGC. We believe that the rig count will continue to grow worldwide
                                in 2009, driven by strong demand from international markets. We expect the
                                North American rig count to grow 7% year/year to 2,340 in 2009. The
                                international rig count is expected to increase more rapidly as new offshore rigs
                                start drilling in the international markets. We expect the international rig count to
                                average 1,190 units in 2009, an increase of 9% year/year.

                                Figure 10

                                Worldwide Rig Count (1975-2008E)

                                              6,000

                                              5,000
                                  Rig Count




                                              4,000                                                                                30 Year Average

                                              3,000

                                              2,000

                                              1,000

                                                -
                                                      1975

                                                             1977

                                                                    1979

                                                                           1981

                                                                                  1983

                                                                                         1985

                                                                                                1987

                                                                                                       1989

                                                                                                              1991

                                                                                                                     1993

                                                                                                                            1995

                                                                                                                                   1997

                                                                                                                                          1999

                                                                                                                                                 2001

                                                                                                                                                        2003

                                                                                                                                                                2005

                                                                                                                                                                       2007

                                                                                                                                                                              2009E




                                                                                  U.S.             C anada                  International                      Average

                                Source: Baker Hughes and Calyon Securities (USA) estimates




10                                             mark.urness@us.calyon.com                                                                     02 September 2008
Riding the Rebound                                                                                                                                                                Nabors Industries - BUY



                              Natural Gas Market to Remain Tight in ‘08
                              Natural Gas Price Forecast
    Our 2008 natural gas      Our 2008 natural gas price forecast is $10.17/MMBtu and our 2009 forecast is
         price forecast is    $10.25/MMBtu. A key factor in our thesis is that the oil-to-natural gas price ratio
  $10.17/MMBtu and our
                              will narrow to the 10-11x level by year-end, driven primarily by limited liquefied
         2009 forecast is
         $10.25/MMBtu.        natural gas (LNG) imports and greater capital/resource allocation to oil versus
                              natural gas projects.

                              Despite actual and pending increases to US regasification capacity, we are
                              projecting that US LNG imports will remain essentially flat year-over-year in
                              2008. This is being driven by higher LNG prices in Asia and Europe, where LNG
                              prices are more closely tied to crude oil. Interestingly, while we believe the oil-to-
                              natural gas fuel switching in the US power-generation sector has been essentially
                              tapped out, there appears to be incremental switching capacity in Asia
                              (particularly Japan and Korea), with high crude oil prices making natural gas the
                              more attractive fuel.

                              Compounding the problem, there have been start-up delays at a number of key
                              global liquefaction projects, which have significantly reduced the amount of LNG
                              supply expected to reach the market this year. Out of a total 56 MM tons (~7.4
                              Bcf/d) previously scheduled to be on-line in 2008, less than one-third is expected
                              to make it to market before year-end.

                              Figure 11

                              Global Natural Gas Price Comparison
                                         20

                                         18

                                         16

                                         14

                                         12
                                / M tu
                               $M B




                                         10

                                         8

                                         6

                                         4

                                         2

                                          -
                                               /5 0 1


                                                         /5 0 1

                                                                   /5 0 1


                                                                             /5 0 2

                                                                                       /5 0 2


                                                                                                 /5 0 2


                                                                                                           /5 0 3

                                                                                                                     /5 0 3


                                                                                                                               /5 0 3

                                                                                                                                         /5 0 4


                                                                                                                                                   /5 0 4


                                                                                                                                                             /5 0 4

                                                                                                                                                                       /5 0 5

                                                                                                                                                                                 /5 0 5

                                                                                                                                                                                           /5 0 5


                                                                                                                                                                                                     /5 0 6

                                                                                                                                                                                                               /5 0 6


                                                                                                                                                                                                                         /5 0 6


                                                                                                                                                                                                                                   /5 0 7

                                                                                                                                                                                                                                             /5 0 7


                                                                                                                                                                                                                                                       /5 0 7

                                                                                                                                                                                                                                                                 /5 0 8
                                              1 /2 0


                                                        5 /2 0

                                                                  9 /2 0


                                                                            1 /2 0

                                                                                      5 /2 0


                                                                                                9 /2 0


                                                                                                          1 /2 0

                                                                                                                    5 /2 0


                                                                                                                              9 /2 0

                                                                                                                                        1 /2 0


                                                                                                                                                  5 /2 0


                                                                                                                                                            9 /2 0

                                                                                                                                                                      1 /2 0

                                                                                                                                                                                5 /2 0

                                                                                                                                                                                          9 /2 0


                                                                                                                                                                                                    1 /2 0

                                                                                                                                                                                                              5 /2 0


                                                                                                                                                                                                                        9 /2 0


                                                                                                                                                                                                                                  1 /2 0

                                                                                                                                                                                                                                            5 /2 0


                                                                                                                                                                                                                                                      9 /2 0

                                                                                                                                                                                                                                                                1 /2 0




                                              Europe: UK Balanc ing Point                                                     Japan: Japan Crude Coc kt ail                                                    Unit ed St at es: Henry Hub



                              Source: FactSet


Another important impact      Another important impact of the higher crude oil price (relative to natural gas) is
    of the higher crude oil   the capital and resource allocations of producing companies. With oil prices
 price (relative to natural
                              running significantly higher on an energy-equivalent basis to natural gas, returns
    gas) is the capital and
   resource allocations of    on oil projects look much greater than for natural gas. As a result, companies
    producing companies.      with limited capital resources and labor have to choose. Several independent
                              producers have already indicated shifts in their capital budgets towards oil
                              projects, and we expect to begin to see a modest natural gas production impact
                              over the next 12 months.




02 September 2008                                mark.urness@us.calyon.com                                                                                                                                                                                                11
Riding the Rebound                                                                                                                                                           Nabors Industries - BUY


                            Figure 12

                            US LNG Imports
                                 3.5




                                 3.0




                                 2.5




                                 2.0


                             Bcf/d

                                 1.5




                                 1.0




                                 0.5




                                 0.0
                                                 ar-04




                                                                  Jul-04




                                                                                    Nov-04




                                                                                                       ar-05




                                                                                                                        Jul-05




                                                                                                                                          Nov-05




                                                                                                                                                             ar-06




                                                                                                                                                                              Jul-06




                                                                                                                                                                                                Nov-06




                                                                                                                                                                                                                   ar-07




                                                                                                                                                                                                                                    Jul-07




                                                                                                                                                                                                                                                      Nov-07
                                       Jan-04




                                                          ay-04




                                                                           Sep-04




                                                                                             Jan-05




                                                                                                                ay-05




                                                                                                                                 Sep-05




                                                                                                                                                   Jan-06




                                                                                                                                                                      ay-06




                                                                                                                                                                                       Sep-06




                                                                                                                                                                                                         Jan-07




                                                                                                                                                                                                                            ay-07




                                                                                                                                                                                                                                             Sep-07




                                                                                                                                                                                                                                                               Jan-08
                                                M




                                                                                                      M




                                                                                                                                                            M




                                                                                                                                                                                                                  M
                                                         M




                                                                                                               M




                                                                                                                                                                     M




                                                                                                                                                                                                                           M
                            Source: US Department of Energy


                            We expect offshore production to increase 10% next year driven by the start-up
                            of Independence Hub (and other projects). Onshore production is expected to
                            increase roughly 3.5% driven by the continued ramp up in drilling (the average
                            nat gas rig count increased 7% in 2007 and we are projecting a 4% increase this
                            year). Overall though, we are still projecting a 3-4% year-over-year increase in
                            total US natural gas production.

                            Demand to Grow Nearly 2% in 2008
  We project natural gas    Utilizing a bottoms-up approach to analyze the natural gas supply/demand
    demand will slightly    fundamentals, we estimate that the natural gas market will remain tight in 2008,
 outstrip supply in 2008.
                            as demand is projected to slightly outstrip supply. We estimate that natural gas
                            storage on November 1, 2008 will be 3.3-3.4 Tcf, or 5% below the level on
                            November 1, 2007.

 Demand growth is being     We are projecting year-over-year natural gas demand growth of roughly 1.8% in
    driven largely by the   2008, driven largely by a 3% year-over-year uptick in power generation demand.
power generation sector.
                            In addition to an overall 1.5% increase in electricity demand (essentially
                            matching Calyon’s US GDP growth forecast of 1.8%), we expect natural gas will
                            continue to capture market share from fuel oil and coal.




12                                              mark.urness@us.calyon.com                                                                                                                                         02 September 2008
Riding the Rebound                                       Nabors Industries - BUY



                            Strong Financials & Appealing Valuation
                            With strong fundamental trends driving demand for land-based drilling, we
                            believe NBR will post strong revenue and earnings growth in 2008 and 2009. In
                            our view, NBR is well positioned to benefit from the U.S. land drilling rebound
                            and should generate strong and sustained earnings growth in the years ahead.
                            The company has an impressive financial profile. NBR has also shown an ability
                            to bring advances in rig design to market, which should help it grow in the
                            future.

                            In 2008, we expect revenue to come in at $5.34 billion, advancing to $6.18
                            billion next year. We estimate that NBR will earn $943.2 million, or $3.25/share,
                            this year, and $1.23 billion, or $4.15/share, in 2009.

          We have seen      Volatile swings in activity in the land-drilling market make earnings stability
            fundamental     difficult to achieve. That said, we have seen fundamental improvements in
 improvements in pricing
                            pricing patterns in the sector over the past decade, thanks to industry
   patterns in the sector
   over the past decade.    consolidation and increasing activity from the majors and large independents. In
                            addition, the trend toward long-term commitments should add a meaningful
                            amount of stability to revenue and earnings at Nabors.

                            We believe the trend toward long-term contracts demonstrates the confidence
                            that E&P customers have in the sustainability of the current upcycle. NBR
                            currently has a significant proportion of its rigs in the Lower-48 on term
                            contracts, and this will continue to trend higher as the newbuilds are added to
                            the fleet.

                            Strong Balance Sheet
 Nabors’ balance sheet is   Nabors’ balance sheet is strong, with a net-debt-to-total-capital of 37% at the
 strong, with a net-debt-   end of 2Q08, and the cash-flow outlook is very positive, thanks in part to the
 to-total-capital of 37%.
                            visibility provided by the healthy percentage of term commitments that the
                            company has entered into and the robust outlook towards North American land
                            drilling.

                            Good Operating Leverage
                            Soft demand and excess supply for land rigs have pushed day rates lower over
                            the past year. The company’s Lower-48 fleet of land rigs saw average day rates
                            decline by 3% in 2Q08, to $19,903, over the year ago period. We expect day
                            rates to continue to trend higher this year and next as the supply for rigs
                            tightens in North America due to the active drilling environment. We expect
                            average day rates to increase by 7% in 2Q09 to $21,300 over 2Q08.

 The shares of NBR have     The shares of NBR have advanced more than four-fold over the past 10 years, far
 advanced over four-fold    outpacing the S&P 500 Index. However, the stock exhibits a fair amount of
  over the past 10 years.
                            volatility, with movements to the downside occurring over relatively short periods
                            of time. Since investors are very mindful of this fact, short-term stock price
                            movements are heavily influenced by a number of leading indicators, including
                            natural gas and crude oil prices (the latter to a somewhat lesser degree), the
                            Baker Hughes North American rig count, and reports on E&P spending,
                            particularly from the operators focused on the North American markets.

                            The shares of NBR have more or less moved in tandem with the Philadelphia Oil
                            Services Index (OSX) over the past several years. The same generally holds true
                            over longer periods of time, although NBR’s upward and downward moves have
                            historically been more pronounced than those of the OSX.



02 September 2008                 mark.urness@us.calyon.com                                              13
Riding the Rebound                                                                                                                              Nabors Industries - BUY


                           Figure 13

                           NBR Relative Performance

                             6.0

                             5.0                              NBR
                                                              OSX
                             4.0                              SPX

                             3.0

                             2.0

                             1.0

                             0.0
                                   Jul-98

                                            Jan-99
                                                     Jul-99

                                                              Jan-00
                                                                       Jul-00
                                                                                Jan-01
                                                                                         Jul-01
                                                                                                  Jan-02

                                                                                                           Jul-02
                                                                                                                    Jan-03
                                                                                                                             Jul-03

                                                                                                                                      Jan-04
                                                                                                                                               Jul-04

                                                                                                                                                        Jan-05
                                                                                                                                                                 Jul-05
                                                                                                                                                                          Jan-06

                                                                                                                                                                                   Jul-06
                                                                                                                                                                                            Jan-07
                                                                                                                                                                                                     Jul-07

                                                                                                                                                                                                              Jan-08
                                                                                                                                                                                                                       Jul-08
                           Source: FactSet


                           Over 30% Upside Potential
   We reiterate our BUY    The shares are trading at 8.9x our 2009 EPS estimate, a discount to the peer
 rating on the shares of   group average of 9.6x. In addition, at 5.8x estimated 2009 cash flow/share, the
Nabors Industries with a
                           stock is trading at par with comparable land drillers. With its technologically
       $50 price target.
                           superior fleet of rigs and a diversified business mix, NBR has greater earnings
                           visibility than the average land driller. As a result, we believe that NBR should
                           trade at a 25% premium versus the land drilling group. In our opinion, a 12x P/E
                           applied to the 2009 EPS estimate of $4.15 is a fair valuation for the company. We
                           are reiterating our BUY rating on the shares of Nabors Industries with a $50 price
                           target.




14                                     mark.urness@us.calyon.com                                                                                                                   02 September 2008
Riding the Rebound                                        Nabors Industries - BUY



                               Risks
                               A Volatile Group with Considerable Risks
                               While we believe that industry fundamentals are strong and that revenue and
                               earnings visibility has reached unprecedented levels, we also acknowledge that
                               oil service stocks are volatile and substantial risks to our investment thesis
                               continue to exist.

  The greatest risk to our     By far the greatest risk to our positive investment thesis and the continuation of
positive investment thesis     the current upcycle is the potential for slowing global economic growth. If oil and
        is the potential for
                               natural gas prices decline precipitously, the oil service stocks would also fall
 slowing global economic
                   growth.     sharply.

                               One of the risks to our investment thesis is the scenario in which the E&P
                               companies continue to exercise capital discipline and do not meaningfully
                               increase upstream capital spending.

                               Another risk is that of external factors such as warm winter weather impacting oil
                               and natural gas demand. We estimate an average natural gas price of
                               $10.17/Mcf and crude oil price of $120.43/Bbl will prevail in 2008, which should
                               support the estimated level of drilling and exploration and production. However,
                               adverse weather conditions and decreased demand for crude oil and natural gas
                               may impact the company’s operations adversely.

                               Another substantial risk to our positive investment thesis is the threat of
                               oversupply in the land drilling markets. Newbuild construction may create an
                               oversupply and lead to declining pricing and utilization.

                               NBR has operations in parts of the world that have had unsettled political
                               conditions, wars, strikes, terrorism, etc. Continued uncertainty in such countries
                               could adversely impact oil service activity.




02 September 2008                    mark.urness@us.calyon.com                                               15
Charts & Tables
Figure 14

Land Drilling Companies: Comparative Valuation Table

                                                                                                                                             Mark S. Urness
                                                                                                                                             (212) 408-5683
                                                                                                                                             mark.urness@us.calyon.com

                                        Price   Price           Earnings per Share           Price/Earnings          Cash Flow per Share           Price/Cash Flow
Company             Symbol Rating      Target 08/27/08      2007A    2008E      2009E    2007A    2008E    2009E   2007A     2008E   2009E      2007A 2008E 2009E
Land Drillers (7)
Bronco Drilling      BRNC    Neutral    $17      $15.82         $1.44   $1.30    $1.85    11.0     12.2     8.5    $3.14    $3.13   $3.86         5.0     5.1     4.1
Grey Wolf             GW       NR       NR       $8.84           0.76    0.66    0.80     11.6     13.4    11.1     1.19     1.20    1.23         7.4     7.4     7.2
Helmerich & Payne      HP     Add       $67      $58.27          3.97    4.30    5.15     14.7     13.6    11.3     5.66     6.24    7.27        10.3     9.3     8.0
Nabors Industries     NBR     Buy       $50      $37.16          3.17    3.25    4.15     11.7     11.4     8.9     4.70     5.32    6.39         7.9     7.0     5.8
Patterson-UTI        PTEN      NR       NR       $29.55          2.52    2.27    2.85     11.7     13.0    10.4     4.24     4.00    4.95         7.0     7.4     6.0




                                                                                                                                                                              Riding the Rebound
Pioneer Drilling      PDC      NR       NR       $17.79          1.04    1.44    2.00     17.1     12.4     8.9     2.74     3.17    3.89         6.5     5.6     4.6
Unit Corporation      UNT     Buy       $90      $70.77          5.71    7.75    8.85     12.4      9.1     8.0    11.63    15.96   17.94         6.1     4.4     3.9
Average                                                                                  12.9     12.2     9.6                                   7.2     6.6     5.7

                                                                                                   Mkt     Firm
                             % Ch.     52-Week                  Book    Price/   Debt/   Shares    Cap     Value      EBITDA                     EV/ EBITDA
Company             Symbol   YTD         Low      High          Value   Book      Cap     Out     ($MM)   ($MM)    2007A   2008E    2009E       2007A 2008E     2009E
Land Drillers (7)
Bronco Drilling      BRNC     6.5%     $11.21    $18.69         14.05   1.13     15.5%   26.1       413     479     108       96     119         4.4     5.0     4.0
Grey Wolf             GW     65.9%       4.85     9.65           3.70   2.39     29.4%   178.3     1576    1,603    351      290     323         4.6     5.5     5.0
Helmerich & Payne      HP    45.4%      29.49    77.24          18.98   3.07     19.2%   106.1     6182    6,571    746      895    1,046        8.8     7.3     6.3
Nabors Industries     NBR    35.7%      23.61    50.58          15.80   2.35     47.0%   285.7    10618   14,093   1,675    1,859   2,375        8.4     7.6     5.9
Patterson-UTI        PTEN    51.4%      17.40    37.45          12.32   2.40      2.6%   153.9     4548    4,580    860      745     795         5.3     6.1     5.8
Pioneer Drilling      PDC    49.7%       8.95    20.75           9.17   1.94      0.0%   49.7       883     817     184      196     237         4.4     4.2     3.4
Unit Corporation      UNT    53.0%      43.30    88.24          30.94   2.29      8.3%   46.4      3282    3,411   1,675    1,859   2,375        2.0     1.8     1.4
Average                      43.9%                                      2.22     17.4%                                                           5.4     5.4     4.5

NR: Not Rated; First Call & Calyon Securities estimates used.
Source: Company reports and Calyon Securities (USA) estimates




                                                                                                                                                                         Nabors Industries– BUY
16                                               mark.urness@us.calyon.com                                                                              02 September 2008
Nabors Industries (NBR)
Nabors Industries (NBR)
Nabors Industries (NBR)
Nabors Industries (NBR)
Nabors Industries (NBR)
Nabors Industries (NBR)
Nabors Industries (NBR)
Nabors Industries (NBR)
Nabors Industries (NBR)
Nabors Industries (NBR)

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Nabors Industries (NBR)

  • 1. Nabors Industries $35.60 - BUY CREDIT AGRICOLE GROUP Mark S. Urness Riding the Rebound mark.urness@us.calyon.com 212 408-5683 • Nabors Industries currently reigns as the industry's largest provider of land-based contract drilling services, with a fleet of approximately 550 land drilling rigs operating around the globe. Shreyans Jain • We believe NBR is well positioned to benefit from the current North shreyans.jain@us.calyon.com 212 408-5707 American land drilling recovery, as well as growing demand for its rigs internationally. • We reiterate our BUY rating on the shares of NBR and 12-month price Zachary F. Sadow target of $50. zachary.sadow@us.calyon.com 212 261-3485 U.S. Land Drilling Rebounding. The U.S. land drilling market is in the middle of a turnaround. The market has experienced significant firming over the past few months and we believe that the prospects for an ever-improving 2H08 continue. We believe that continued strength in oil and gas prices coupled with a developing interest in shale plays will sustain the U.S. land drilling rebound. • Strong in Canada and Alaska. We believe the scenario in Canada and Alaska is improving as well. NBR is ready to capitalize on this trend led by its sizable fleet in Canada. We believe that the current increasing Canadian rig count coupled with improving activity and day rates bodes well for NBR. • International Drilling Offers Substantial Growth. NBR continues to deploy its strategy of extending its presence in the booming international market. It has built its international fleet to approximately 140 units, continues to be the largest land driller in September 2, 2008 Company Update Saudi Arabia, and has been steadily achieving attractive day rates and margins. We expect NBR to increase operating income in this segment USA by 39% in 2008. Oil Services & Equipment • Quality Driving Strong Visibility. Strong demand for NBR's rigs, Reuters NBR highlighted by its Pace Rigs, has stemmed from a need for high Bloomberg NBR quality rigs to drill in the various complex shale plays. The emergence of these shale plays has allowed NBR to achieve earnings visibility and Priced on 09/01/2008 continue to win term contracts. In 2Q08 NBR signed more than 20 S&P 1,283 term contracts and has 15 to 20 prospective term contracts in sight. 12M hi/lo $50.58/$23.61 • 40% Upside Potential. The shares are trading at 8.6x our 2009 EPS 12M price target $50.00 estimate, a discount to the peer group average of 9.6x. We believe ±% potential +40% that the shares of NBR should trade at a 25% premium versus the land drilling group. In our opinion, a 12x P/E applied to the 2009 EPS Target set on 08/20/2008 estimate of $4.15 is a fair valuation for the stock. We are reiterating Shares in issue (m) 280 our BUY rating on the shares of Nabors Industries with a $50 price Free float (est)(m) 274 target. Market Cap (m) $9,968 Financials 3M avg. daily vol.(000) 7,960,470 Dec Yr 06A 07A 08E 09E EPS $3.58 $3.17 $3.25 $4.15 -- P/E 9.9x 11.2x 11.0x 8.6x NM The group of companies that comprise CLSA are affiliates of Calyon Securities (USA) Inc. See important disclosures on page 25.
  • 2. Oilfield Services & Equipment in association with Nabors Industries Rating: BUY PT: $50 Riding the Rebound Nabors Industries currently reigns as the industry’s largest provider of Mark S. Urness mark.urness@us.calyon.com land-based contract drilling services, with a fleet of approximately 550 (212) 408-5683 land drilling rigs operating around the globe, and a large position in the workover and well-servicing market, with a fleet of approximately 750 Shreyans Jain well-servicing rigs primarily located in the U.S. and Canada. We believe shreyans.jain@us.calyon.com NBR is well positioned to benefit from the current North American land (212) 408-5707 drilling recovery. We reiterate our BUY rating on the shares of NBR and Zachary F. Sadow 12-month price target of $50. zachary.sadow@us.calyon.com (212) 261-3485  U.S. Land Drilling Rebounding. The U.S. land drilling market is in the middle of a robust recovery. The market has experienced significant firming over the past few months and we believe that the prospects for an ever-improving 2H08 continue. Reflecting the rebound is a steady increase in the U.S. land rig count and an increase in NBR’s working rig count in the U.S. Lower 48. We believe that continued strength in oil and gas prices coupled with a developing interest in shale plays will sustain the U.S. 2 September 2008 land drilling recovery.  Strong in Canada and Alaska. We believe the scenario in Canada and Alaska is USA improving as well. NBR is ready to capitalize on this trend led by its sizable fleet in Canada. While Canada and Alaska had a sequentially weak quarter in 2Q08, we see the Oil Services & Equipment trend as already improving. We believe that the currently increasing Canadian rig count Ticker NBR coupled with improving activity and day rates bodes well for NBR. Price (07/27/08) $37.16  International Drilling Offers Substantial Growth. NBR continues to execute its 12M hi/lo $23.61 / $50.58 strategy of extending its presence in the booming international markets. It has built its 12M price target $50 international fleet to approximately 140 units, continues to be the largest land driller in ±% potential +34% Saudi Arabia and has been steadily achieving attractive day rates and margins. Target set on 27 August 2008 Contributions from new land rigs should support substantial international revenue Shares Out. 285.7m growth during the next 18 months. We expect NBR to increase operating income in this Market cap US $10,618m segment by 39% in 2008. 3M Avg. volume 8,042,730  Quality Driving Strong Visibility. Strong demand for NBR’s rigs, highlighted by its Pace Rigs, stems from a need for high quality rigs to drill in the various complex shale plays. The emergence of these shale plays has allowed NBR to achieve earnings visibility and continue to win term contracts. In 2Q08 NBR signed more than 20 term contracts and has 15 to 20 prospective term contracts in sight.  Over 30% Upside Potential. The shares are trading at 8.9x our 2009 EPS estimate, a discount to the peer group average of 9.6x. In addition, at 5.8x estimated 2009 cash flow/share, the stock is trading at par with comparable land drillers. With its technologically superior fleet of rigs and a diversified business mix, NBR has greater earnings visibility than the average land driller. As a result, we believe that NBR should trade at a 25% premium versus the land drilling group. In our opinion, a 12x P/E applied to the 2009 EPS estimate of $4.15 is a fair valuation for the company. We are reiterating our BUY rating on the shares of Nabors Industries with a $50 price target. Stock performance (%) 1M 3M 12M Financials Absolute -4.7% -13.4% 21.6% Year to 31 Dec 05A 06A 07A 08E 09E Relative -3.6% -4.8% 34.7% Total Revenues ($ Mill) 3,460.9 4,840.7 5,009.3 5,340.8 6,176.9 6.0 Revenue Growth 45% 40% 3% 7% 16% 5.0 NBR Operating Income ($ Mill) 879.8 1491.9 1237.3 1259.2 1714.9 SPX 4.0 Net Income ($ Mill) 659.7 1059.0 930.7 943.2 1225.4 3.0 EPS Operating ($) $2.03 $3.58 $3.17 $3.25 $4.15 2.0 P/E 18.2x 10.3x 11.7x 11.4x 8.9x 1.0 Cash Flow Per Share ($) 3.08 4.92 4.70 5.32 6.39 0.0 P/CF 12.1x 7.5x 7.9x 6.9x 5.8x Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 EBIT Margin 25% 31% 25% 24% 28% Source: Calyon Securities (USA) Inc., Bloomberg Source: FactSet 2 mark.urness@us.calyon.com 02 September 2008
  • 3. Riding the Rebound Nabors Industries - BUY Contents Executive Summary ............................................................................... 4 Company Snapshot ................................................................................ 5 Riding the Rebound ............................................................................... 6 Attractive Industry Fundamentals.......................................................... 9 Natural Gas Market to Remain Tight in ‘08 ........................................... 11 Strong Financials & Appealing Valuation .............................................. 13 Risks ................................................................................................... 15 Charts & Tables ................................................................................... 16 All prices quoted herein are as at close of business 27th August 2008, unless otherwise stated Other Recent Reports 02 September 2008 mark.urness@us.calyon.com 3
  • 4. Riding the Rebound Nabors Industries - BUY Executive Summary We are reiterating our BUY rating on the shares of Nabors Industries with a $50 price target. The U.S. land drilling U.S. Land Drilling Rebounding. The U.S. land drilling market is in the middle market is in the middle of a robust recovery. The market has experienced significant firming over the of a recovery. past few months and we believe that the prospects for an ever-improving 2H08 continue. Reflecting the rebound is a steady increase in the U.S. land rig count and an increase in NBR’s working rig count in the U.S. Lower 48. We believe that continued strength in oil and gas prices coupled with a developing interest in the shale plays will sustain the U.S. land drilling recovery. Strong in Canada and Alaska. We believe the scenario in Canada and Alaska is improving as well. NBR is ready to capitalize on this trend led by its sizable fleet in Canada. While Canada and Alaska had a sequentially weak quarter in 2Q08, we see the trend as already improving. We believe that the current increasing Canadian rig count coupled with improving activity and day rates bodes well for NBR. NBR continues to execute International Drilling Offers Substantial Growth. NBR continues to execute its strategy of extending its strategy of extending its presence in the booming international markets. It its presence in the has built its international fleet to approximately 140 units, continues to be the booming international markets. largest land driller in Saudi Arabia and has been steadily achieving attractive day rates and margins. Contributions from new land rigs should support substantial international revenue growth during the next 18 months. We expect NBR to increase operating income in this segment by 39% in 2008. Quality Driving Strong Visibility. Strong demand for NBR’s rigs, highlighted by its Pace Rigs, has stemmed from a need for high quality rigs to drill in the various complex shale plays. The emergence of these shale plays has allowed NBR to achieve earnings visibility and continue to win term contracts. In 2Q08 NBR signed more than 20 term contracts and has 15 to 20 prospective term contracts in sight. We are reiterating our Over 30% Upside Potential. The shares are trading at 8.9x our 2009 EPS BUY rating on the shares estimate, a discount to the peer group average of 9.6x. In addition, at 5.8x of Nabors Industries with estimated 2009 cash flow/share, the stock is trading at par with comparable land a $50 price target. drillers. With its technologically superior fleet of rigs and a diversified business mix, NBR has greater earnings visibility than the average land driller. As a result, we believe that NBR should trade at a 25% premium versus the land drilling group. In our opinion, a 12x P/E applied to the 2009 EPS estimate of $4.15 is a fair valuation for the company. We are reiterating our BUY rating on the shares of Nabors Industries with a $50 price target. 4 mark.urness@us.calyon.com 02 September 2008
  • 5. Riding the Rebound Nabors Industries - BUY Company Snapshot Current Operations Nabors Industries operates the largest land drilling fleet in North America with approximately 550 land rigs and 750 land workover rigs. The company operates a fleet of approximately 140 land rigs in a variety of international markets, highlighted by its incumbent position as the largest land driller in Saudi Arabia. NBR also operates an offshore fleet consisting of 36 platform rigs, 13 jackups and four barge rigs in the Gulf of Mexico and various international locations. NBR’s well servicing segment is comprised of comprehensive oilfield hauling, engineering, construction and project management services as well as manufacturing of top drives and instrumentation systems. In 2007, revenues derived internationally from drilling and related services encompassed 21% of total revenues. Figure 1 2007 North America Revenue and Operating Income Revenues Operating Income Manufac, Manufac, Logistics & Logistics & Oil and Gas other Oil and Gas other 4% 12% 3% 4% International 24% International 21% North America North America 64% 68% *Exceludes $219.4 M M deduction for Other *Exceludes $136.5 M M deduction for Other Source: Company reports Background Since 1987, NBR has grown into the world’s largest provider of land drilling contract services. NBR has stretched its reach to include operations in most of the major oil and gas producing regions in the world. The company has also increased its scope since 1987 to incorporate offshore drilling, U.S. land well- servicing and workover activities. Figure 2 2007 Revenue and Operating Income Revenues Operating Income C anada Alaska C anada Alaska 16% 4% 9% 5% U.S. Offshore U.S. Offshore 6% 6% U.S. Land Well- Servicing U.S. Land U.S. Land Well- U.S. Land 17% Drilling Servicing Drilling 64% 21% 52% Source: Company reports 02 September 2008 mark.urness@us.calyon.com 5
  • 6. Riding the Rebound Nabors Industries - BUY Riding the Rebound We believe that NBR is well positioned to capitalize on the firming North American land drilling market. Land Drilling Nabors has over 550 land Nabors has over 550 land drilling rigs, with about 435 units (79%) located in drilling rigs. North America, the largest land drilling market in the world. The remaining rigs are spread across South America, Mexico, the Caribbean, the Middle East, Far East, Russia and Africa. Out of the 336 rigs located in the U.S. Lower 48, 242 are actively marketed and 94 are stacked in inventory. Figure 3 NBR: North American Land Drilling Fleet C anada 19% Alaska 4% Lower 48 77% Source: Company reports and Calyon Securities (USA) estimates We believe that land- We believe that land-drilling activity in North America is in the middle of a drilling activity in North recovery. The current elevated prices of oil and gas coupled with developing America is in the middle interest in shale plays have stimulated North American drilling activity. The of a recovery. firming U.S. land drilling market is evidenced by the steady increase in the U.S. land rig count and an increase in NBR’s working rig count. Figure 4 NBR Working Rig Count and Utilization 245 Lower 48 Drilling 82% 80% 240 Rigs Working Utilization 78% 235 76% 74% 230 72% 225 70% 68% 220 66% 215 64% 210 62% 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Source: Company reports 6 mark.urness@us.calyon.com 02 September 2008
  • 7. Riding the Rebound Nabors Industries - BUY We expect that land-drilling activity in North America will remain robust over the Volatility in natural gas next year as E&P customers continue to drill more in an effort to capitalize on prices is a cause for high oil and gas prices. Volatility in natural gas prices is a cause for some some concern. concern, as it relates to customers’ propensity to spend as well as equity valuations in the drilling sector. However, we are seeing evidence that the E&Ps will drill through any near-term price weakness with confidence in the long-term fundamentals. Our model assumes Nabors will average 248 active rigs in the Lower-48 states this year, another 31 in Canada, and 11 in Alaska. We expect the average size of the fleet in the Lower-48 to move up to 338 while remaining at 81 in Canada and 20 in Alaska. Figure 5 Total and Active North American Land Drilling Fleet – 2008E 350.0 338 300.0 Active Rigs # of Rigs 248 250.0 200.0 150.0 100.0 81 50.0 31 19 11 0.0 Alaska Canada Lower 48 Source: Company reports and Calyon Securities (USA) estimates Workover and Well Servicing We see continued NBR has more than 735 workover rigs in North America, primarily located in strength in the well Texas, California, and Western Canada. Though not as profitable as the land service and workover drilling business, the workover and well-servicing business does have high activity. operating margins, which came in at 17.3% in 2Q08 versus U.S. land drilling which came in at 30.6%. Going forward, we see continued strength in well service and workover activity, as sustained high oil prices lead to increased repair and maintenance of mechanically pumped wells. In addition, NBR Well Services continues to expand in the rapidly growing Rocky Mountains region. Operating in a Fragmented Industry Although the land-drilling industry is more consolidated today than in the past, we continue to characterize it as fragmented. We estimate that the top eight players accounted for roughly half of overall land-drilling revenues in 2007. Nabors, with about 12% of the market by our estimates, is the only company on this list, apart from PTEN, with more than a 10% share. According to Spears & Associates, the total land-based drilling revenues reached $20.4 billion in 2007. 02 September 2008 mark.urness@us.calyon.com 7
  • 8. Riding the Rebound Nabors Industries - BUY Figure 6 Top Five U.S. Land Drilling Marketed Rigs Grey Wolf, 108 Nabors, 286 Unit, 110 Helmerich& Payne, 176 Patterson, 262 Source: Land Rig Newsletter The sector continues to have a significant number of small regional drillers that have historically benefited from operational and geological expertise in their particular regions. However, vast improvements in drilling processes and rig technology and the intensifying focus on safety and the environment have eroded away any advantage the smaller players have had. In our view, they now operate at a meaningful disadvantage to the larger land drillers. International Drilling Offers Substantial Growth The international markets The international markets continue to offer attractive opportunities. NBR has built continue to offer an its international fleet to approximately 140 units and maintains the largest land attractive opportunity. drilling presence in Saudi Arabia. We expect NBR to grow its international operating income by 39% in 2008 over last year due to contributions from international jackups and additional land rigs. Strong growth in day rates and margins should support this trend. Figure 7 Figure 8 International Revenue & Operating Income International Day Rate & Cash Margins 1,800 $35,000 $16,000 Average Dayrate 1,600 $14,000 Revenue Operating Income $30,000 Average Daily CFOA 1,400 $12,000 $25,000 1,200 $10,000 $20,000 1,000 $8,000 800 $15,000 $6,000 600 $10,000 $4,000 400 $5,000 $2,000 200 $0 $0 0 05 05 05 05 06 06 06 06 07 07 07 07 08 08 E E 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 08 08 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Source: Company reports and Calyon Securities (USA) estimates 8 mark.urness@us.calyon.com 02 September 2008
  • 9. Riding the Rebound Nabors Industries - BUY Attractive Industry Fundamentals We believe the current upcycle represents the strongest and longest growth period for the oil service industry since the 1970’s. Our positive investment thesis is formulated based on a number of important fundamental trends in the industry that we believe will remain intact for the foreseeable future. Robust Upstream Capital Spending After years of strong spending growth in 2006 and 2007, further expansion of After strong spending upstream capital expenditures is expected to continue into 2008, albeit at a growth in 2006 and 2007, slower rate. Capital spending grew by an estimated 26% in 2006, the largest further expansion of increase since 2001, driven both by high oil prices and rising costs. Capital upstream capital spending grew by an estimated 19% in 2007. In 2008, we expect capital expenditures is expected to continue into 2008. spending to increase by close to 20% due to resilient global oil demand and strong oil prices; increased capital requirements for remote deepwater projects; higher oil services costs and the increased difficulty in replacing reserves. Although drilling for unconventional gas in North America remains one of the drivers of increased spending, in our view, oil leveraged companies see more attractive opportunities in lower-cost regions outside North America. Figure 9 Worldwide Upstream Capital Spending (2008E) Canada National 7% Oil Cos 24% Major Oils United 32% States 24% Foreign Cos Outside 22% NA Canadians U.S. 69% 8% Indep's 14% Source: Calyon Securities USA estimates Oil Demand Growth Remains a Key Driver Oil demand is expected to In our view, strong oil demand growth precipitated by the synchronized global grow at approximately economic expansion has been the primary driver of accelerating upstream capital 2%/year. spending growth. In 2006, oil demand growth slowed to 1.0%, due primarily to price-related demand destruction. Importantly, oil demand growth rebounded to 1.8% in 2007 and is expected to average nearly 2.0% per year for the next several years, according to the International Energy Agency (IEA). The global economy is expected to grow at a rate of approximately 4.0% in 2008, which should support oil demand. In particular, the Chinese economy, a key driver of oil demand growth, is expected to grow at a rate of 9-10% over the next two years. The single biggest risk to our positive investment thesis is the potential for global economic weakness and slowing oil demand growth brought on by high prices. Finding & development We believe that there is a close correlation between global oil demand and costs have been rising upstream capital spending trends. The finding and development (F&D) costs rapidly. which have been increasing at 10% per year since the mid-1990s. The escalation in capital requirements puts the oil services industry under pressure to find ways to help customers reduce costs. 02 September 2008 mark.urness@us.calyon.com 9
  • 10. Riding the Rebound Nabors Industries - BUY Challenges Replacing Reserves and Growing Production Global oil demand may We believe that the oil industry faces serious problems replacing reserves each increase by as much as year and growing production to meet rising global demand. According to the IEA, 50% over the next 25 years. global oil demand may increase by as much as 50% over the next 25 years. Obviously, if this huge increase in consumption is to be met, the industry faces tremendous challenges. The major oils have begun to adopt more realistic oil price forecasts and raise their upstream spending budgets accordingly. Even after beginning to increase spending, the major oils have yet to achieve the reserve replacement levels desired, and year/year production continues to decline for the major oils as a group. Technologies such as horizontal drilling and advanced well stimulation techniques have resulted in more rapid depletion of oil reserves. Worldwide Rig Count Continues to Grow We believe worldwide We believe worldwide drilling activity will remain solid, with anticipated growth drilling activity will through 2008. Given the strong crude oil and natural gas prices, we expect to remain solid, with see a continued increase in the land drilling activity in the coming quarters. The anticipated growth through 2008. operators were able to lock in high natural gas prices as the strip near $13/Mcf in June 2008. We forecast a 7% increase in the U.S. land rig count to 1,816 units in 2008 from 1,695 units last year. With the U.S. land rig count averaging at 1,712 units in 1Q08, we believe that this increase to 1,816 for 2008 is easily achievable, given the recent strength in activity. While the newbuilds continue to replace legacy rigs, some older rigs, which were previously stacked, are also being reactivated. This should further help the rig count. Weatherford recently indicated that the Canadian rig count might be 15% higher year/year in 3Q08. We estimate the Canadian rig count will average 300 units in 2008. We expect international rig count to average 1,094 units in 2008, 9% higher than 2007. The 89-unit increase in international rig count in 2008 is expected to be driven by increased demand from national oil companies such as Pemex, Saudi Aramco and ONGC. We believe that the rig count will continue to grow worldwide in 2009, driven by strong demand from international markets. We expect the North American rig count to grow 7% year/year to 2,340 in 2009. The international rig count is expected to increase more rapidly as new offshore rigs start drilling in the international markets. We expect the international rig count to average 1,190 units in 2009, an increase of 9% year/year. Figure 10 Worldwide Rig Count (1975-2008E) 6,000 5,000 Rig Count 4,000 30 Year Average 3,000 2,000 1,000 - 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009E U.S. C anada International Average Source: Baker Hughes and Calyon Securities (USA) estimates 10 mark.urness@us.calyon.com 02 September 2008
  • 11. Riding the Rebound Nabors Industries - BUY Natural Gas Market to Remain Tight in ‘08 Natural Gas Price Forecast Our 2008 natural gas Our 2008 natural gas price forecast is $10.17/MMBtu and our 2009 forecast is price forecast is $10.25/MMBtu. A key factor in our thesis is that the oil-to-natural gas price ratio $10.17/MMBtu and our will narrow to the 10-11x level by year-end, driven primarily by limited liquefied 2009 forecast is $10.25/MMBtu. natural gas (LNG) imports and greater capital/resource allocation to oil versus natural gas projects. Despite actual and pending increases to US regasification capacity, we are projecting that US LNG imports will remain essentially flat year-over-year in 2008. This is being driven by higher LNG prices in Asia and Europe, where LNG prices are more closely tied to crude oil. Interestingly, while we believe the oil-to- natural gas fuel switching in the US power-generation sector has been essentially tapped out, there appears to be incremental switching capacity in Asia (particularly Japan and Korea), with high crude oil prices making natural gas the more attractive fuel. Compounding the problem, there have been start-up delays at a number of key global liquefaction projects, which have significantly reduced the amount of LNG supply expected to reach the market this year. Out of a total 56 MM tons (~7.4 Bcf/d) previously scheduled to be on-line in 2008, less than one-third is expected to make it to market before year-end. Figure 11 Global Natural Gas Price Comparison 20 18 16 14 12 / M tu $M B 10 8 6 4 2 - /5 0 1 /5 0 1 /5 0 1 /5 0 2 /5 0 2 /5 0 2 /5 0 3 /5 0 3 /5 0 3 /5 0 4 /5 0 4 /5 0 4 /5 0 5 /5 0 5 /5 0 5 /5 0 6 /5 0 6 /5 0 6 /5 0 7 /5 0 7 /5 0 7 /5 0 8 1 /2 0 5 /2 0 9 /2 0 1 /2 0 5 /2 0 9 /2 0 1 /2 0 5 /2 0 9 /2 0 1 /2 0 5 /2 0 9 /2 0 1 /2 0 5 /2 0 9 /2 0 1 /2 0 5 /2 0 9 /2 0 1 /2 0 5 /2 0 9 /2 0 1 /2 0 Europe: UK Balanc ing Point Japan: Japan Crude Coc kt ail Unit ed St at es: Henry Hub Source: FactSet Another important impact Another important impact of the higher crude oil price (relative to natural gas) is of the higher crude oil the capital and resource allocations of producing companies. With oil prices price (relative to natural running significantly higher on an energy-equivalent basis to natural gas, returns gas) is the capital and resource allocations of on oil projects look much greater than for natural gas. As a result, companies producing companies. with limited capital resources and labor have to choose. Several independent producers have already indicated shifts in their capital budgets towards oil projects, and we expect to begin to see a modest natural gas production impact over the next 12 months. 02 September 2008 mark.urness@us.calyon.com 11
  • 12. Riding the Rebound Nabors Industries - BUY Figure 12 US LNG Imports 3.5 3.0 2.5 2.0 Bcf/d 1.5 1.0 0.5 0.0 ar-04 Jul-04 Nov-04 ar-05 Jul-05 Nov-05 ar-06 Jul-06 Nov-06 ar-07 Jul-07 Nov-07 Jan-04 ay-04 Sep-04 Jan-05 ay-05 Sep-05 Jan-06 ay-06 Sep-06 Jan-07 ay-07 Sep-07 Jan-08 M M M M M M M M Source: US Department of Energy We expect offshore production to increase 10% next year driven by the start-up of Independence Hub (and other projects). Onshore production is expected to increase roughly 3.5% driven by the continued ramp up in drilling (the average nat gas rig count increased 7% in 2007 and we are projecting a 4% increase this year). Overall though, we are still projecting a 3-4% year-over-year increase in total US natural gas production. Demand to Grow Nearly 2% in 2008 We project natural gas Utilizing a bottoms-up approach to analyze the natural gas supply/demand demand will slightly fundamentals, we estimate that the natural gas market will remain tight in 2008, outstrip supply in 2008. as demand is projected to slightly outstrip supply. We estimate that natural gas storage on November 1, 2008 will be 3.3-3.4 Tcf, or 5% below the level on November 1, 2007. Demand growth is being We are projecting year-over-year natural gas demand growth of roughly 1.8% in driven largely by the 2008, driven largely by a 3% year-over-year uptick in power generation demand. power generation sector. In addition to an overall 1.5% increase in electricity demand (essentially matching Calyon’s US GDP growth forecast of 1.8%), we expect natural gas will continue to capture market share from fuel oil and coal. 12 mark.urness@us.calyon.com 02 September 2008
  • 13. Riding the Rebound Nabors Industries - BUY Strong Financials & Appealing Valuation With strong fundamental trends driving demand for land-based drilling, we believe NBR will post strong revenue and earnings growth in 2008 and 2009. In our view, NBR is well positioned to benefit from the U.S. land drilling rebound and should generate strong and sustained earnings growth in the years ahead. The company has an impressive financial profile. NBR has also shown an ability to bring advances in rig design to market, which should help it grow in the future. In 2008, we expect revenue to come in at $5.34 billion, advancing to $6.18 billion next year. We estimate that NBR will earn $943.2 million, or $3.25/share, this year, and $1.23 billion, or $4.15/share, in 2009. We have seen Volatile swings in activity in the land-drilling market make earnings stability fundamental difficult to achieve. That said, we have seen fundamental improvements in improvements in pricing pricing patterns in the sector over the past decade, thanks to industry patterns in the sector over the past decade. consolidation and increasing activity from the majors and large independents. In addition, the trend toward long-term commitments should add a meaningful amount of stability to revenue and earnings at Nabors. We believe the trend toward long-term contracts demonstrates the confidence that E&P customers have in the sustainability of the current upcycle. NBR currently has a significant proportion of its rigs in the Lower-48 on term contracts, and this will continue to trend higher as the newbuilds are added to the fleet. Strong Balance Sheet Nabors’ balance sheet is Nabors’ balance sheet is strong, with a net-debt-to-total-capital of 37% at the strong, with a net-debt- end of 2Q08, and the cash-flow outlook is very positive, thanks in part to the to-total-capital of 37%. visibility provided by the healthy percentage of term commitments that the company has entered into and the robust outlook towards North American land drilling. Good Operating Leverage Soft demand and excess supply for land rigs have pushed day rates lower over the past year. The company’s Lower-48 fleet of land rigs saw average day rates decline by 3% in 2Q08, to $19,903, over the year ago period. We expect day rates to continue to trend higher this year and next as the supply for rigs tightens in North America due to the active drilling environment. We expect average day rates to increase by 7% in 2Q09 to $21,300 over 2Q08. The shares of NBR have The shares of NBR have advanced more than four-fold over the past 10 years, far advanced over four-fold outpacing the S&P 500 Index. However, the stock exhibits a fair amount of over the past 10 years. volatility, with movements to the downside occurring over relatively short periods of time. Since investors are very mindful of this fact, short-term stock price movements are heavily influenced by a number of leading indicators, including natural gas and crude oil prices (the latter to a somewhat lesser degree), the Baker Hughes North American rig count, and reports on E&P spending, particularly from the operators focused on the North American markets. The shares of NBR have more or less moved in tandem with the Philadelphia Oil Services Index (OSX) over the past several years. The same generally holds true over longer periods of time, although NBR’s upward and downward moves have historically been more pronounced than those of the OSX. 02 September 2008 mark.urness@us.calyon.com 13
  • 14. Riding the Rebound Nabors Industries - BUY Figure 13 NBR Relative Performance 6.0 5.0 NBR OSX 4.0 SPX 3.0 2.0 1.0 0.0 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Source: FactSet Over 30% Upside Potential We reiterate our BUY The shares are trading at 8.9x our 2009 EPS estimate, a discount to the peer rating on the shares of group average of 9.6x. In addition, at 5.8x estimated 2009 cash flow/share, the Nabors Industries with a stock is trading at par with comparable land drillers. With its technologically $50 price target. superior fleet of rigs and a diversified business mix, NBR has greater earnings visibility than the average land driller. As a result, we believe that NBR should trade at a 25% premium versus the land drilling group. In our opinion, a 12x P/E applied to the 2009 EPS estimate of $4.15 is a fair valuation for the company. We are reiterating our BUY rating on the shares of Nabors Industries with a $50 price target. 14 mark.urness@us.calyon.com 02 September 2008
  • 15. Riding the Rebound Nabors Industries - BUY Risks A Volatile Group with Considerable Risks While we believe that industry fundamentals are strong and that revenue and earnings visibility has reached unprecedented levels, we also acknowledge that oil service stocks are volatile and substantial risks to our investment thesis continue to exist. The greatest risk to our By far the greatest risk to our positive investment thesis and the continuation of positive investment thesis the current upcycle is the potential for slowing global economic growth. If oil and is the potential for natural gas prices decline precipitously, the oil service stocks would also fall slowing global economic growth. sharply. One of the risks to our investment thesis is the scenario in which the E&P companies continue to exercise capital discipline and do not meaningfully increase upstream capital spending. Another risk is that of external factors such as warm winter weather impacting oil and natural gas demand. We estimate an average natural gas price of $10.17/Mcf and crude oil price of $120.43/Bbl will prevail in 2008, which should support the estimated level of drilling and exploration and production. However, adverse weather conditions and decreased demand for crude oil and natural gas may impact the company’s operations adversely. Another substantial risk to our positive investment thesis is the threat of oversupply in the land drilling markets. Newbuild construction may create an oversupply and lead to declining pricing and utilization. NBR has operations in parts of the world that have had unsettled political conditions, wars, strikes, terrorism, etc. Continued uncertainty in such countries could adversely impact oil service activity. 02 September 2008 mark.urness@us.calyon.com 15
  • 16. Charts & Tables Figure 14 Land Drilling Companies: Comparative Valuation Table Mark S. Urness (212) 408-5683 mark.urness@us.calyon.com Price Price Earnings per Share Price/Earnings Cash Flow per Share Price/Cash Flow Company Symbol Rating Target 08/27/08 2007A 2008E 2009E 2007A 2008E 2009E 2007A 2008E 2009E 2007A 2008E 2009E Land Drillers (7) Bronco Drilling BRNC Neutral $17 $15.82 $1.44 $1.30 $1.85 11.0 12.2 8.5 $3.14 $3.13 $3.86 5.0 5.1 4.1 Grey Wolf GW NR NR $8.84 0.76 0.66 0.80 11.6 13.4 11.1 1.19 1.20 1.23 7.4 7.4 7.2 Helmerich & Payne HP Add $67 $58.27 3.97 4.30 5.15 14.7 13.6 11.3 5.66 6.24 7.27 10.3 9.3 8.0 Nabors Industries NBR Buy $50 $37.16 3.17 3.25 4.15 11.7 11.4 8.9 4.70 5.32 6.39 7.9 7.0 5.8 Patterson-UTI PTEN NR NR $29.55 2.52 2.27 2.85 11.7 13.0 10.4 4.24 4.00 4.95 7.0 7.4 6.0 Riding the Rebound Pioneer Drilling PDC NR NR $17.79 1.04 1.44 2.00 17.1 12.4 8.9 2.74 3.17 3.89 6.5 5.6 4.6 Unit Corporation UNT Buy $90 $70.77 5.71 7.75 8.85 12.4 9.1 8.0 11.63 15.96 17.94 6.1 4.4 3.9 Average 12.9 12.2 9.6 7.2 6.6 5.7 Mkt Firm % Ch. 52-Week Book Price/ Debt/ Shares Cap Value EBITDA EV/ EBITDA Company Symbol YTD Low High Value Book Cap Out ($MM) ($MM) 2007A 2008E 2009E 2007A 2008E 2009E Land Drillers (7) Bronco Drilling BRNC 6.5% $11.21 $18.69 14.05 1.13 15.5% 26.1 413 479 108 96 119 4.4 5.0 4.0 Grey Wolf GW 65.9% 4.85 9.65 3.70 2.39 29.4% 178.3 1576 1,603 351 290 323 4.6 5.5 5.0 Helmerich & Payne HP 45.4% 29.49 77.24 18.98 3.07 19.2% 106.1 6182 6,571 746 895 1,046 8.8 7.3 6.3 Nabors Industries NBR 35.7% 23.61 50.58 15.80 2.35 47.0% 285.7 10618 14,093 1,675 1,859 2,375 8.4 7.6 5.9 Patterson-UTI PTEN 51.4% 17.40 37.45 12.32 2.40 2.6% 153.9 4548 4,580 860 745 795 5.3 6.1 5.8 Pioneer Drilling PDC 49.7% 8.95 20.75 9.17 1.94 0.0% 49.7 883 817 184 196 237 4.4 4.2 3.4 Unit Corporation UNT 53.0% 43.30 88.24 30.94 2.29 8.3% 46.4 3282 3,411 1,675 1,859 2,375 2.0 1.8 1.4 Average 43.9% 2.22 17.4% 5.4 5.4 4.5 NR: Not Rated; First Call & Calyon Securities estimates used. Source: Company reports and Calyon Securities (USA) estimates Nabors Industries– BUY 16 mark.urness@us.calyon.com 02 September 2008