• fluctuations in levels of natural gas and oil exploration and development activities;

• fluctuations in the demand for our services;

• the existence of competitors, technological changes and developments in the oilfield services industry;

• the existence of operating risks inherent in the oilfield services industry;

• the existence of regulatory and legislative uncertainties;

• the possibility of changes in tax laws;

• the possibility of political instability, war or acts of terrorism in any of the countries in which we do business; and

• general economic conditions including the capital and credit markets.

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 above description of risks and uncertainties is by no means all-inclusive, but is designed to highlight what we believe are important factors to consider. For a more detailed description of risk factors, please refer to our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 2, 2009 and Exhibit 99.1 of Nabors' Current Report on Form 8-K filed with the SEC on May 29, 2009 under section Item 1A. - Risk Factors.
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "we," "us," "our," "Company," or "Nabors" means Nabors Industries Ltd. and, where the context requires, includes our subsidiaries. Management Overview
The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of our operations and our financial condition. This information is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to our consolidated financial statements.
Nabors is the largest land drilling contractor in the world, with approximately 531 actively marketed land drilling rigs. We conduct oil, gas and geothermal land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South America, Mexico, the

Caribbean, the Middle East, the Far East, Russia and Africa. We are also one of the largest land well-servicing and workover contractors in the United States and Canada. We actively market approximately 594 land workover and well-servicing rigs in the United States, primarily in the southwestern and western United States, and actively market approximately 172 land workover and well-servicing rigs in Canada. Nabors is a leading provider of offshore platform workover and drilling rigs, and actively markets 40 platform rigs, 13 jack-up units and 3 barge rigs in the United States and multiple international markets. These rigs provide well-servicing, workover and drilling services. We have a 51% ownership interest in a joint venture in Saudi Arabia, which owns and actively markets 9 rigs in addition to the rigs we lease to the joint venture. We also offer a wide range of ancillary well-site services, including engineering, transportation, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services in selected domestic and international markets. We provide logistics services for onshore drilling in Canada using helicopters and fixed-wing 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 in the U.S., Canada and international areas through both our wholly-owned subsidiaries and our separate joint venture entities in which we have 49.7% ownership interests in the U.S. and international entities and a 50% ownership interest in the Canadian entity. Each joint venture pursues development and exploration projects with both existing customers of ours and with other operators in a variety of forms including operated and non-operated working interests, joint ventures, farm-outs and acquisitions.
The majority of our business is conducted through our various Contract Drilling operating segments, which include our drilling, workover and well-servicing operations, on land and offshore. Our oil and gas exploration, development and production operations are included in a category labeled Oil and Gas for segment reporting purposes. Our operating segments engaged in drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are aggregated in a category labeled Other Operating Segments for segment reporting purposes.
Our businesses depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Therefore, a sustained increase or decrease in the price of natural gas or oil, which could have a material impact on exploration, development and production activities, could also materially affect our financial position, results of operations and cash flows.
Natural gas prices are the primary drivers of our U.S. Lower 48 Land Drilling and Canadian Contract Drilling operations, while oil prices are the primary driver in our Alaskan, International, U.S. Offshore (Gulf of Mexico), Canadian Well-servicing and U.S. Land Well-servicing operations. The Henry Hub natural gas spot price averaged $5.93 per million cubic feet (mcf) during the period from July 1, 2008 through June 30, 2009, down from $8.31 per mcf average during the period from July 1, 2007 through June 30, 2008. West Texas intermediate spot oil prices averaged $70.44 per barrel during the period from July 1, 2008 through June 30, 2009, down from a $96.97 per barrel average during the period from July 1, 2007 through June 30, 2008.
Beginning in the fourth quarter of 2008, there was a significant reduction in the demand for natural gas that was caused, at least in part, by the significant deterioration of the global economic environment including the extreme volatility in the capital and credit markets. Weaker demand has resulted in a 67% decline in gas prices from the second quarter of fiscal year 2008 average of $11.36 per mcf to the second quarter of fiscal year 2009 average of $3.71 per mcf. Oil prices also declined significantly by 52% from the second quarter of fiscal year 2008 average of $123.80 per barrel to the second quarter of fiscal year 2009 average of $59.69 per barrel. These reduced prices for natural gas and oil have led to a sharp decline in the demand for drilling and workover services. Continued fluctuations in the demand for gas and oil, among other factors including supply, could contribute to continued price volatility which may continue to affect demand for our services. The following table sets forth natural gas and oil price data for each quarter over the past two years:

Average commodity prices, by quarter:

                               Gas (1)                                                  Oil (2)
                         Twelve Month Period                                      Twelve Month Period
                                Ended                                                    Ended
                      June 30,        June 30,             Increase/            June 30,        June 30,              Increase/
Time Period             2009            2008               (Decrease)             2009            2008               (Decrease)
July - September      $    9.07       $    6.18      $  2.89          47 %     $    118.23      $   75.24      $  42.99          57 %
October - December         6.42            6.98         (.56 )        (8 %)          59.06          90.49        (31.43 )       (35 %)
January - March            4.56            8.64        (4.08 )       (47 %)          43.18          97.86        (54.68 )       (56 %)
April - June               3.71           11.36        (7.65 )       (67 %)          59.69         123.80        (64.11 )       (52 %)

12 month average      $    5.93       $    8.31        (2.38 )       (29 %)    $     70.44      $   96.97        (26.53 )       (27 %)

(1) Represents the average Henry Hub natural gas spot price ($/million cubic feet
(mcf))

(2) Represents the average West Texas intermediate crude oil spot price
($/barrel)

The decline in natural gas and oil prices, as discussed above, have also adversely affected our customers' spending plans for exploration, production and development activities which has had a significant negative impact on our operations beginning in the latter part of 2008 and could materially affect our future financial results.
Operating revenues and Earnings (losses) from unconsolidated affiliates for the three months ended June 30, 2009 totaled $859.7 million, representing a decrease of $418.6 million, or 33%, as compared to the three months ended June 30, 2008, and $2.0 billion for the six months ended June 30, 2009, representing a decrease of $580.4 million, or 23%, as compared to the six months ended June 30, 2008. Adjusted income derived from operating activities and net income (loss) for the three months ended June 30, 2009 totaled $73.4 million and $(193.0) million ($(.68) per diluted share), respectively, representing decreases of 72% and 209%, respectively, compared to the three months ended June 30, 2008. Adjusted income derived from operating activities and net income
(loss) for the six months ended June 30, 2009 totaled $272.5 million and $(67.8) million ($(.24) per diluted share), respectively, representing decreases of 51% and 117%, respectively, compared to the six months ended June 30, 2008. Our operating results during the three and six months ended June 30, 2009 were lower than prior year periods primarily due to the continuing weak environment in our U.S. Lower 48 Land Drilling, U.S. Land Well-servicing, Canada Well-servicing and Drilling and U.S. Offshore operations where activity levels and demand for our drilling rigs have decreased substantially in response to uncertainty in the financial markets and commodity price deterioration. Operating results were further negatively impacted by higher levels of depreciation expense due to our capital expenditures in recent years and an increase in stock compensation expense. Our operating results for 2009 are expected to decrease substantially 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. We expect that the decrease in drilling activity and dayrates will continue to have a significant impact on our U.S. Lower 48 Land Drilling and our U.S. Land Well-servicing operations as the number of working rigs and average dayrates decline. In our U.S. Lower 48 Land Drilling operations, our rig count has decreased from its peak during October 2008 of 273 rigs to 93 rigs currently operating as of July 29, 2009. Our Well-servicing activity is down approximately 51% from its October 2008 peak of 105,872 hours when compared to estimated rig hours of 51,796 for July 2009. We expect our International operations to increase slightly during 2009 resulting from the deployment of new and incremental rigs under long-term contracts and the renewal of multi-year contracts. Although rig count is lower overall, the reductions are primarily comprised of lower yielding assets, leaving higher margin contracts in place. Our investments in new and upgraded rigs over the past four years have resulted in long-term contracts which we expect will enhance our competitive position when market conditions improve.

The following tables set forth certain information with respect to our reportable segments and rig activity:

                                                              Three Months Ended                                                     Six Months Ended June
                                                                   June 30,                           Increase/                               30,                              Increase/
(In thousands, except percentages and rig activity)         2009              2008                    (Decrease)                    2009               2008                    (Decrease)
Reportable segments:
Operating revenues and Earnings (losses) from
unconsolidated affiliates:
Contract Drilling: (1)
U.S. Lower 48 Land Drilling                              $  249,859        $   438,848        $ (188,989 )           (43 %)      $   639,738        $   845,909        $ (206,171 )           (24 %)
U.S. Land Well-servicing                                    100,080            182,222           (82,142 )           (45 %)          234,442            353,363          (118,921 )           (34 %)
U.S. Offshore                                                41,947             65,723           (23,776 )           (36 %)          102,339            117,178           (14,839 )           (13 %)
Alaska                                                       53,207             45,114             8,093              18 %           115,989             99,483            16,506              17 %
Canada                                                       45,035             67,782           (22,747 )           (34 %)          157,180            246,634           (89,454 )           (36 %)
International                                               327,551            342,892           (15,341 )            (4 %)          670,207            646,464            23,743               4 %

Subtotal Contract Drilling (2)                              817,679          1,142,581          (324,902 )           (28 %)        1,919,895          2,309,031          (389,136 )           (17 %)
Oil and Gas (3) (4)                                          (6,001 )           11,352           (17,353 )          (153 %)          (66,045 )           25,392           (91,437 )          (360 %)
Other Operating Segments (5) (6)                            105,547            172,865           (67,318 )           (39 %)          262,464            338,647           (76,183 )           (22 %)
Other reconciling items (7)                                 (57,483 )          (48,431 )          (9,052 )           (19 %)         (122,954 )          (99,296 )         (23,658 )           (24 %)

Total                                                    $  859,742        $ 1,278,367        $ (418,625 )           (33 %)      $ 1,993,360        $ 2,573,774        $ (580,414 )           (23 %)


Adjusted income derived from operating activities
(8):
Contract Drilling: (1)
U.S. Lower 48 Land Drilling                              $   70,075        $   134,322        $  (64,247 )           (48 %)      $   199,317        $   261,193        $  (61,876 )           (24 %)
U.S. Land Well-servicing                                      6,192             31,468           (25,276 )           (80 %)           19,850             61,854           (42,004 )           (68 %)
U.S. Offshore                                                 6,724             17,983           (11,259 )           (63 %)           23,554             24,441              (887 )            (4 %)
Alaska                                                       16,374             13,466             2,908              22 %            37,199             31,249             5,950              19 %
Canada                                                      (10,151 )          (14,326 )           4,175              29 %             3,024             27,647           (24,623 )           (89 %)
International                                               101,303            101,752              (449 )            (0 %)          204,278            192,402            11,876               6 %

Subtotal Contract Drilling (2)                              190,517            284,665           (94,148 )           (33 %)          487,222            598,786          (111,564 )           (19 %)
Oil and Gas (3)(4)                                          (15,228 )           (1,645 )         (13,583 )          (826 %)          (86,562 )           (6,497 )         (80,065 )           N/M (9)
Other Operating Segments (5)(6)                               4,925             19,006           (14,081 )           (74 %)           24,029             31,440            (7,411 )           (24 %)
Other reconciling items (10)                               (106,766 )          (36,907 )         (69,859 )          (189 %)         (152,158 )          (72,179 )         (79,979 )          (111 %)

Total                                                        73,448            265,119          (191,671 )           (72 %)          272,531            551,550          (279,019 )           (51 %)
Interest expense                                            (66,027 )          (49,375 )         (16,652 )           (34 %)         (133,105 )          (96,067 )         (37,038 )           (39 %)
Investment income                                            18,248             25,057            (6,809 )           (27 %)           27,389             51,239           (23,850 )           (47 %)

                                                            Three Months Ended                                               Six Months Ended June
                                                                 June 30,                        Increase/                            30,                            Increase/
(In thousands, except percentages and rig activity)        2009            2008                 (Decrease)                    2009             2008                 (Decrease)
(Losses) gains on sales and retirements of
long-lived assets and other income (expense), net           (6,469 )        (3,158 )         (3,311 )         (105 %)           10,828         (11,255 )         22,083            196 %
Impairments and other charges (11)                        (227,083 )             -         (227,083 )         (100 %)         (227,083 )             -         (227,083 )         (100 %)

Income (loss) before income taxes                       $ (207,883 )     $ 237,643       $ (445,526 )         (187 %)     $    (49,440 )     $ 495,467       $ (544,907 )         (110 %)


Rig activity:
Rig years: (12)
U.S. Lower 48 Land Drilling                                  142.9           242.3            (99.4 )          (41 %)            167.7           234.0            (66.3 )          (28 %)
U.S. Offshore                                                 12.2            17.1             (4.9 )          (29 %)             13.7            16.6             (2.9 )          (17 %)
Alaska                                                        11.3            10.4              0.9              9 %              11.6            10.5              1.1             10 %
Canada                                                        11.1            16.9             (5.8 )          (34 %)             22.7            33.1            (10.4 )          (31 %)
International (13)                                           104.1           121.5            (17.4 )          (14 %)            109.0           119.6            (10.6 )           (9 %)

Total rig years                                              281.6           408.2           (126.6 )          (31 %)            324.7           413.8            (89.1 )          (22 %)

Rig hours: (14)
U.S. Land Well-servicing                                   142,797         272,101         (129,304 )          (48 %)          322,364         531,578         (209,214 )          (39 %)
Canada Well-servicing                                       23,896          40,257          (16,361 )          (41 %)           74,120         119,394          (45,274 )          (38 %)

Total rig hours                                            166,693         312,358         (145,665 )          (47 %)          396,484         650,972         (254,488 )          (39 %)

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

(2) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $.6 million and $2.8 million for the three months ended June 30, 2009 and 2008, respectively, and $1.9 million and $9.6 million for the six months ended June 30, 2009 and 2008, respectively.

(3) Includes our proportionate share of non-cash pre-tax writedowns recorded by our domestic oil and gas joint venture of $(8.3) million and $(83.3) million for the three and six months ended June 30, 2009, respectively.

(4) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $(11.0) million and $(6.7) million for the three months ended June 30, 2009 and 2008, respectively, and $(83.3) million and $(24.6) million for the six months ended June 30, 2009 and 2008, respectively.

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

(6) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $2.3 million and $(.1) million for the three months ended June 30, 2009 and 2008, respectively, and $8.8 million and $6.6 million for the six months ended June 30, 2009 and 2008, respectively.

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

(8) Adjusted income derived from operating activities is computed by subtracting direct costs, general and administrative expenses, depreciation and amortization, and depletion expense from Operating revenues and then adding Earnings (losses) 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
(loss) before income taxes, which is a GAAP measure, is provided within the above table.

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

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

(11) Represents non-cash pre-tax impairments and other charges recorded during the three months ended June 30, 2009.

(12) 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.

(13) International rig years include our equivalent percentage ownership of rigs owned by unconsolidated affiliates which totaled 2.3 years and 4.0 years during the three months ended June 30, 2009 and 2008, respectively, and 2.6 years and 4.0 years for the six months ended June 30, 2009 and 2008, respectively.

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

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

                                                                   Three Months                                                                  Six Months
                                                                  Ended June 30,                           Increase/                           Ended June 30,                           Increase/
(In thousands, except percentages and rig activity)          2009                2008                      (Decrease)                     2009                2008                      (Decrease)
Operating revenues and Earnings from unconsolidated
affiliates                                                $ 249,859           $ 438,848           $ (188,989 )           (43 %)        $ 639,738           $ 845,909           $ (206,171 )           (24 %)
Adjusted income derived from operating activities         $  70,075           $ 134,322           $  (64,247 )           (48 %)        $ 199,317           $ 261,193           $  (61,876 )           (24 %)
Rig years                                                     142.9               242.3                (99.4 )           (41 %)            167.7               234.0                (66.3 )           (28 %)

Operating results decreased during the three and six months ended June 30, 2009 compared to the prior year periods primarily due to a decline in drilling activity driven by lower natural gas prices beginning in the fourth quarter of 2008 and diminished demand as customers released rigs and delayed drilling projects in response to the significant drop in natural gas prices and the tightening of the credit markets. Operating revenues earned during the three and six months ended June 30, 2009 includes $17.5 million and $48.8 million, respectively, related to early contract termination revenue including approximately $7.7 million and $13.1 million, respectively, which would have . . .