Summary of NABORS INDUSTRIES LTD

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management Overview
The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of our operations and our financial condition. This information is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to our consolidated financial statements.
Nabors is the largest land drilling contractor in the world. We conduct oil, gas and geothermal land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South America, Mexico, the Caribbean, the Middle East, the Far East, Russia and Africa. Nabors also is one of the largest land well-servicing and workover contractors in the United States and Canada and is a leading provider of offshore platform workover and drilling rigs in the United States and multiple international markets. To further supplement and complement our primary business, we offer a wide range of ancillary well-site services, including engineering, transportation, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services, in selected domestic and international markets. We offer logistics services for onshore drilling in Canada using helicopter and fixed-winged aircraft. We manufacture and lease or sell top drives for a broad range of drilling applications, directional drilling systems, rig instrumentation and data collection equipment, pipeline handling equipment and rig reporting software. We also invest in oil and gas exploration, development and production activities worldwide.
The majority of our business is conducted through our various Contract Drilling operating segments, which include our drilling, workover and well-servicing operations, on land and offshore. Our oil and gas exploration, development and production operations are included in a category labeled Oil and Gas for segment reporting purposes. Our operating segments engaged in drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are aggregated in a category labeled Other Operating Segments for segment reporting purposes.
Our businesses depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Therefore, a sustained increase or decrease in the price of natural gas or oil, which could have a material impact on exploration, development and production activities, could also materially affect our financial position, results of operations and cash flows.
The magnitude of customer spending on new and existing wells is the primary driver of our business. The primary determinate of customer spending is the degree of their cash flow and earnings which are largely determined by natural gas prices in our U.S. Lower 48 Land Drilling and Canadian Drilling operations, while oil prices are the primary determinate in our Alaskan, International, U.S. Offshore (Gulf of Mexico), Canadian Well-servicing and U.S. Land Well-servicing operations. The following table sets forth natural gas and oil price data per Bloomberg for the last three years:

                                 Year Ended December 31,                              Increase / (Decrease)
                          2008            2007            2006               2008 to 2007                2007 to 2006
Commodity prices:
Average Henry Hub
natural gas spot
price ($/million
cubic feet (mcf))       $  8.89         $  6.97         $  6.73         $  1.92           28 %       $  0.24           4 %
Average West Texas
intermediate crude
oil spot price
($/barrel)              $ 99.92         $ 72.23         $ 66.09         $ 27.69           38 %       $  6.14           9 %

Beginning in the second half of 2008, there has been a significant decrease in natural gas and oil prices. Natural gas prices, which averaged $10.03 per mcf during the first half of 2008, declined significantly, averaging only $7.74 per mcf during the second half of 2008 and $5.84 per mcf during December 2008. The decline has continued as natural gas prices have averaged $4.96 per mcf during the period January 1, 2009 through February 23, 2009.
Oil prices also declined in the second half of 2008 with average prices of $111.14 per barrel during the first half of 2008, decreasing to average prices of $88.88 per barrel during the second half of 2008 and $41.44 per barrel during December 2008. Oil prices remain depressed and have averaged $40.22 per barrel during the period January 1, 2009 through February 23, 2009.
This significant decline in commodity prices has, at least in part, been driven by the significant deterioration of the global economic environment including the extreme volatility in the capital and credit markets. All of these factors are having an adverse effect on our customers' spending plans for exploration, production and development activities which has had a significant negative impact on our operations beginning in December 2008.

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Operating revenues and Earnings from unconsolidated affiliates for the year ended December 31, 2008 totaled $5.3 billion, representing an increase of $325.5 million, or 7% as compared to the year ended December 31, 2007. Adjusted income derived from operating activities and net income for the year ended December 31, 2008 totaled $1.0 billion and $551.2 million ($1.93 per diluted share), respectively, representing decreases of 15% and 41%, respectively, compared to the year ended December 31, 2007. Operating revenues and Earnings from unconsolidated affiliates for the year ended December 31, 2007 totaled $5.0 billion, representing an increase of $228.7 million, or 5% as compared to the year ended December 31, 2006. Adjusted income derived from operating activities and net income for the year ended December 31, 2007 totaled $1.2 billion and $930.7 million ($3.25 per diluted share), respectively, representing decreases of 13% and 9%, respectively, compared to the year ended December 31, 2006.
Our operating results were negatively impacted as a result of non-cash, pre-tax charges arising from oil and gas full cost ceiling test writedowns and goodwill and intangible asset impairments. Our Earnings (losses) from Unconsolidated Affiliates line in our income statement includes $228.3 million, representing our proportionate share of non-cash pre-tax full cost ceiling test writedowns from our U.S., international and Canadian joint ventures during the three months ended December 31, 2008. Additionally, we recorded non-cash pre-tax impairment charges of $21.5 million related to our wholly owned Ramshorn business unit under application of the successful efforts method of accounting related to oil and gas properties during the three months ended December 31, 2008. Charges from our U.S., international and Canadian joint ventures and our wholly owned Ramshorn business unit are included in our Oil and Gas operating segment results. Our Canada Well-servicing and Drilling operating segment and Nabors Blue Sky Ltd., one of our Canadian subsidiaries reported in our Other Operating Segments include $145.4 million and $4.6 million non-cash pre-tax goodwill and intangible asset impairment charges to reduce the carrying value of these assets to their estimated fair value due to the duration of the economic downturn in Canada and the lack of certainty regarding eventual recovery. Excluding these charges, our operating results were slightly higher primarily due to our U.S. Lower 48 Land Drilling, International Drilling and Other Operating segments resulting from higher average dayrates and activity levels resulting from sustained higher natural gas and oil prices throughout 2007 and the majority of 2008, partially offset by increased operating costs and higher depreciation expense due to our capital expenditures.
The decrease in our adjusted income derived from operating activities from 2006 to 2007 related primarily to our U.S. Lower 48 Land Drilling, Canada Drilling and Well-servicing, and our U.S. Well-servicing operations, where activity levels decreased despite slightly higher natural gas prices and higher oil prices. Operating results were further negatively impacted by higher levels of depreciation expense due to our capital expenditures. Partially offsetting the decreases in our adjusted income derived from operating activities were the increases in operating results from our International operations and to a lesser extent by our Alaska operations, driven by high oil prices. In addition, our net income and earnings per share for 2007 has decreased compared to 2006 as a result of investment net losses during 2007 only partially offset by a lower effective tax rate and a lower number of average shares outstanding.
Our operating results for 2009 are expected to decrease from levels realized during 2008 given our current expectation of the continuation of lower commodity prices during 2009 and the related impact on drilling and well-servicing activity and dayrates. The decrease in drilling activity and dayrates is expected to have a significant impact on our U.S. Lower 48 Land Drilling and our U.S. Land Well-servicing operations. In our U.S. Lower 48 Land Drilling operations, our rig count has decreased from its peak during October 2008 of 273 rigs to 162 rigs currently operating as of February 23, 2009. Our Well-servicing activity is down approximately 45% from its October 2008 peak of 105,872 hours when compared to estimated rig hours for February 2009. We expect our International operations to increase during 2009 resulting from the deployment of additional rigs under long-term contracts and the renewal of existing contracts at higher dayrates.
The following tables set forth certain information with respect to our reportable segments and rig activity:

(In thousands, except percentages                   Year Ended December 31,                                        Increase/(Decrease)
and rig activity)                         2008               2007               2006                  2008 to 2007                     2007 to 2006
Reportable segments:
Operating revenues and Earnings
(losses) from unconsolidated
affiliates from continuing
operations: (1)
Contract Drilling: (2)
U.S. Lower 48 Land Drilling            $ 1,878,441        $ 1,710,990        $ 1,890,302        $ 167,451             10 %       $ (179,312 )           (9 %)
U.S. Land Well-servicing                   758,510            715,414            704,189           43,096              6 %           11,225              2 %
U.S. Offshore                              252,529            212,160            221,676           40,369             19 %           (9,516 )           (4 %)
Alaska                                     184,243            152,490            110,718           31,753             21 %           41,772             38 %
Canada                                     502,695            545,035            686,889          (42,340 )           (8 %)        (141,854 )          (21 %)

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(In thousands, except percentages                   Year Ended December 31,                                         Increase/(Decrease)
and rig activity)                         2008               2007               2006                  2008 to 2007                      2007 to 2006
International                            1,372,168          1,094,802            746,460           277,366             25 %          348,342             47 %

Subtotal Contract Drilling (3)           4,948,586          4,430,891          4,360,234           517,695             12 %           70,657              2 %
Oil and Gas (4) (5)                       (151,465 )          152,320             59,431          (303,785 )         (199 %)          92,889            156 %
Other Operating Segments (6) (7)           683,186            588,483            505,286            94,703             16 %           83,197             16 %
Other reconciling items (8)               (198,245 )         (215,122 )         (197,117 )          16,877              8 %          (18,005 )           (9 %)

Total                                  $ 5,282,062        $ 4,956,572        $ 4,727,834        $  325,490              7 %       $  228,738              5 %

Adjusted income (loss) derived
from operating activities from
continuing operations: (1)(9)
Contract Drilling:
U.S. Lower 48 Land Drilling            $   628,579        $   596,302        $   821,821        $   32,277              5 %       $ (225,519 )          (27 %)
U.S. Land Well-servicing                   148,626            156,243            199,944            (7,617 )           (5 %)         (43,701 )          (22 %)
U.S. Offshore                               59,179             51,508             65,328             7,671             15 %          (13,820 )          (21 %)
Alaska                                      52,603             37,394             17,542            15,209             41 %           19,852            113 %
Canada                                      61,040             87,046            185,117           (26,006 )          (30 %)         (98,071 )          (53 %)
International                              407,675            332,283            208,705            75,392             23 %          123,578             59 %

Subtotal Contract Drilling(3)            1,357,702          1,260,776          1,498,457            96,926              8 %         (237,681 )          (16 %)
Oil and Gas(4)(5)                         (228,027 )           56,133              4,065          (284,160 )         (506 %)          52,068            n/m (6)
Other Operating Segments (7)(8)             68,572             35,273             30,028            33,299             94 %            5,245             17 %
Other reconciling items (11)              (164,530 )         (136,363 )         (135,951 )         (28,167 )          (21 %)            (412 )            0 %

Total                                    1,033,717          1,215,819          1,396,599          (182,102 )          (15 %)        (180,780 )          (13 %)
Interest expense                           (91,620 )          (53,702 )          (46,586 )         (37,918 )          (71 %)          (7,116 )          (15 %)
Investment (loss) income                    21,726            (15,891 )          102,007            37,617            237 %         (117,898 )         (116 %)
(Losses) gains on sales,
retirements and impairments of
long-lived assets and other
income (expense), net                       (7,613 )          (10,895 )          (24,118 )           3,282             30 %           13,223             55 %
Goodwill and intangible asset
impairment (12)                           (154,586 )                -                  -          (154,586 )         (100 %)               -              -

Income from continuing operations
before income taxes                    $   801,624        $ 1,135,331        $ 1,427,902        $ (333,707 )          (29 %)      $ (292,571 )          (20 %)

Rig activity:
Rig years: (13)
U.S. Lower 48 Land Drilling                  247.9              229.4              255.5              18.5              8 %            (26.1 )          (10 %)
U.S. Offshore                                 17.6               15.8               16.4               1.8             11 %             (0.6 )           (4 %)
Alaska                                        10.9                8.7                8.6               2.2             25 %              0.1              1 %
Canada                                        35.5               36.7               53.3              (1.2 )           (3 %)           (16.6 )          (31 %)
International (14)                           120.5              115.2               97.1               5.3              5 %             18.1             19 %

Total rig years                              432.4              405.8              430.9              26.6              7 %            (25.1 )           (6 %)

Rig hours: (15)
U.S. Land Well-servicing                 1,090,511          1,119,497          1,256,141           (28,986 )           (3 %)        (136,644 )          (11 %)
Canada Well-servicing                      248,032            283,471            360,129           (35,439 )          (13 %)         (76,658 )          (21 %)

Total rig hours                          1,338,543          1,402,968          1,616,270           (64,425 )           (5 %)        (213,302 )          (13 %)

(1) All segment information excludes the Sea Mar business, which has been classified as a discontinued operation.

(2) These segments include our drilling, workover and well-servicing operations, on land and offshore.

(3) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $5.8 million, $5.6 million and $4.0 million for the years ended December 31, 2008, 2007 and 2006, respectively.

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(4) Represents our oil and gas exploration, development and production operations. Includes
$228.3 million,
representing
our
proportionate
share, of
non-cash
pre-tax full
cost ceiling
test writedowns
from our U.S.,
international
and Canadian
joint ventures
and non-cash
pre-tax
impairment
charges of
$21.5 million
under
application of
the successful
efforts method
of accounting
from our wholly
owned Ramshorn
business unit
related to oil
and gas
properties.

(5) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $(241.4) million, $(3.9) million and $0 for the years ended December 31, 2008, 2007 and 2006, respectively.

(6) The percentage is so large that it is not meaningful.

(7) Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations.

(8) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $5.8 million, $16.0 million and $16.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.

(9) Represents the elimination of inter-segment transactions.

(10) Adjusted income derived from operating activities is computed by:
subtracting
direct costs,
general and
administrative
expenses,
depreciation
and
amortization,
and depletion
expense from
Operating
revenues and
then adding
Earnings from
unconsolidated
affiliates.
Such amounts
should not be
used as a
substitute to
those amounts
reported under
GAAP. However,
management
evaluates the
performance of
our business
units and the
consolidated
company based
on several
criteria,
including
adjusted income
derived from
operating
activities,
because it
believes that
this financial
measure is an
accurate
reflection of
the ongoing
profitability
of our Company.
A
reconciliation
of this
non-GAAP
measure to
income from
continuing
operations
before income
taxes, which is
a GAAP measure,
is provided
within the
above table.

(11) Represents the elimination of inter-segment transactions and unallocated corporate expenses.

(12) Represents non-cash pre-tax goodwill and intangible asset impairment charges recorded during the three months ended December 31, 2008, all of which related to our Canadian business units.

(13) Excludes well-servicing rigs, which are measured in rig hours. Includes our equivalent percentage ownership of rigs owned by unconsolidated affiliates. Rig years represent a measure of the number of equivalent rigs operating during a given period. For example, one rig operating 182.5 days during a 365-day period represents 0.5 rig years.

(14) International rig years include our equivalent percentage ownership of rigs owned by unconsolidated affiliates which totaled 3.5 years during the year ended December 31, 2008 and 4.0 years during the years ended December 31, 2007 and 2006, respectively.

(15) Rig hours represents the number of hours that our well-servicing rig fleet operated during the year.

Segment Results of Operations

Contract Drilling
   Our Contract Drilling operating segments contain one or more of the following
operations: drilling, workover and well-servicing, on land and offshore.
   U.S. Lower 48 Land Drilling. The results of operations for this reportable
segment are as follows:

(In thousands, except percentages                          Year Ended December 31,                                                   Increase/(Decrease)
and rig activity)                            2008                   2007                   2006                      2008 to 2007                          2007 to 2006
Operating revenues and Earnings
from unconsolidated affiliates           $ 1,878,441            $ 1,710,990            $ 1,890,302            $ 167,451              10 %          $ (179,312 )             (9 %)
Adjusted income derived from
operating activities                     $   628,579            $   596,302            $   821,821            $  32,277               5 %          $ (225,519 )            (27 %)
Rig years                                      247.9                  229.4                  255.5                 18.5               8 %               (26.1 )            (10 %)