• 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 538 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 600 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 $4.45 per million cubic feet (mcf) during the period from October 1, 2008 through September 30, 2009, down from $9.03 per mcf average during the period from October 1, 2007 through September 30, 2008. West Texas intermediate spot oil prices averaged $57.67 per barrel during the period from October 1, 2008 through September 30, 2009, down from a $107.84 per barrel average during the period from October 1, 2007 through September 30, 2008.
Beginning in the fourth quarter of 2008, there was a significant reduction in the demand for natural gas and oil 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 throughout 2009 has resulted in sustained lower natural gas and oil prices. The average price of $3.17 per mcf during the third quarter of fiscal year 2009 included a low of $1.88 per mcf in September 2009 and represented the lowest quarter average price for the periods presented. The significant drop in the price of oil reached a low of $31.41 per barrel in December 2008 and remains depressed at the current quarter average price of $68.14 per barrel when compared to the third quarter of fiscal year 2008 average price of $118.23. 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
                           September 30,          September 30,              Increase/               September 30,          September 30,              Increase/
Time Period                    2009                   2008                  (Decrease)                   2009                   2008                   (Decrease)
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 %)
July - September                     3.17                   9.06         (5.89 )         (65 %)               68.14                 118.23         (50.09 )         (42 %)

12 month average          $          4.45        $          9.03       $ (4.58 )         (51 %)     $         57.67        $        107.84       $ (50.17 )         (47 %)

(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 September 30, 2009 totaled $805.4 million, representing a decrease of $657.1 million, or 45%, as compared to the three months ended September 30, 2008, and $2.8 billion for the nine months ended September 30, 2009, representing a decrease of $1.2 billion, or 31%, as compared to the nine months ended September 30, 2008. Adjusted income derived from operating activities and net income (loss) for the three months ended September 30, 2009 totaled $112.8 million and $29.5 million ($.10 per diluted share), respectively, representing decreases of 69% and 85%, respectively, compared to the three months ended September 30, 2008. Adjusted income derived from operating activities and net income (loss) for the nine months ended September 30, 2009 totaled $385.3 million and ($38.3) million (($.14) per diluted share), respectively, representing decreases of 58% and 107%, respectively, compared to the nine months ended September 30, 2008.
Our operating results during the three and nine months ended September 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 have a significant impact on our U.S. Lower 48 Land Drilling and our U.S. Land Well-servicing operations for 2009 as compared to 2008, 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 117 rigs currently operating as of October 28, 2009. Our Well-servicing activity is down approximately 59% from its October 2008 peak of 105,872 hours when compared to estimated rig hours of 43,199 for October 2009. We expect our International operations to decrease slightly during 2009 as a result of lower drilling activity and utilization partially offset by 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                                                                                 Nine Months
                                                                    Ended September 30,                                Increase/                                 Ended September 30,                                  Increase/
                                                               2009                    2008                            (Decrease)                           2009                     2008                             (Decrease)
(In thousands, except percentages and rig activity)
Reportable segments:
Operating revenues and Earnings (losses) from
unconsolidated affiliates:
Contract Drilling: (1)
U.S. Lower 48 Land Drilling                              $    212,004           $      505,197           $    (293,193 )               (58 %)        $      851,742           $    1,351,106           $      (499,364 )               (37 %)
U.S. Land Well-servicing                                       89,459                  204,029                (114,570 )               (56 %)               323,901                  557,392                  (233,491 )               (42 %)
U.S. Offshore                                                  25,708                   68,581                 (42,873 )               (63 %)               128,047                  185,759                   (57,712 )               (31 %)
Alaska                                                         45,210                   38,496                   6,714                  17 %                161,199                  137,979                    23,220                  17 %
Canada                                                         58,219                  127,412                 (69,193 )               (54 %)               217,464                  376,952                  (159,488 )               (42 %)
International                                                 307,660                  368,418                 (60,758 )               (16 %)               977,867                1,014,882                   (37,015 )                (4 %)

Subtotal Contract Drilling (2)                                738,260                1,312,133                (573,873 )               (44 %)             2,660,220                3,624,070                  (963,850 )               (27 %)
Oil and Gas (3)(4)                                             10,091                   29,532                 (19,441 )               (66 %)               (55,954 )                 54,924                  (110,878 )              (202 %)
Other Operating Segments (5)(6)                                89,774                  169,131                 (79,357 )               (47 %)               350,173                  504,872                  (154,699 )               (31 %)
Other reconciling items (7)                                   (32,753 )                (48,301 )                15,548                  32 %               (155,707 )               (147,597 )                  (8,110 )                (5 %)

Total                                                    $    805,372           $    1,462,495           $    (657,123 )               (45 %)        $    2,798,732           $    4,036,269           $    (1,237,537 )               (31 %)


Adjusted income derived from operating activities (8):
Contract Drilling: (1)
U.S. Lower 48 Land Drilling                              $     46,382           $      176,819           $    (130,437 )               (74 %)        $      245,699           $      438,012           $      (192,313 )               (44 %)
U.S. Land Well-servicing                                          342                   42,433                 (42,091 )               (99 %)                20,192                  104,287                   (84,095 )               (81 %)
U.S. Offshore                                                    (163 )                 18,456                 (18,619 )              (101 %)                23,391                   42,897                   (19,506 )               (45 %)
Alaska                                                         11,145                   10,159                     986                  10 %                 48,344                   41,408                     6,936                  17 %
Canada                                                        (10,448 )                 13,534                 (23,982 )              (177 %)                (7,651 )                 40,889                   (48,540 )              (119 %)
International                                                  86,865                  111,048                 (24,183 )               (22 %)               291,143                  303,450                   (12,307 )                (4 %)

Subtotal Contract Drilling (2)                                134,123                  372,449                (238,326 )               (64 %)               621,118                  970,943                  (349,825 )               (36 %)
Oil and Gas (3)(4)                                                (90 )                 17,577                 (17,667 )              (101 %)               (86,652 )                 11,080                   (97,732 )              (882 %)
Other Operating Segments (5)(6)                                 3,978                   18,239                 (14,261 )               (78 %)                28,253                   50,094                   (21,841 )               (44 %)

Other reconciling items (9)                                   (25,232 )                (43,805 )                18,573                  42 %               (177,409 )               (116,107 )                 (61,302 )               (53 %)

Total                                                         112,779                  364,460                (251,681 )               (69 %)               385,310                  916,010                  (530,700 )               (58 %)
Interest expense                                              (66,671 )                (50,546 )               (16,125 )               (32 %)              (199,776 )               (146,613 )                 (53,163 )               (36 %)
Investment income (loss)                                       (1,805 )                (22,235 )                20,430                  92 %                 25,584                   29,004                    (3,420 )               (12 %)
(Losses) gains on sales and retirements of long-lived
assets and other income (expense), net                        (11,218 )                (10,875 )                  (343 )                (3 %)                  (390 )                (22,130 )                  21,740                  98 %
Impairments and other charges (10)                                  -                        -                       -                   -                 (227,083 )                      -                  (227,083 )              (100 %)

Income (loss) before income taxes                              33,085                  280,804                (247,719 )               (88 %)               (16,355 )                776,271                  (792,626 )              (102 %)
Income tax expense                                              3,555                   86,821                 (83,266 )               (96 %)                21,931                  193,831                  (171,900 )               (89 %)

Net income (loss)                                        $     29,530           $      193,983           $    (164,453 )               (85 %)        $      (38,286 )         $      582,440           $      (620,726 )              (107 %)


Rig activity:
Rig years: (11)
U.S. Lower 48 Land Drilling                                     123.6                    263.3                  (139.7 )               (53 %)                 152.8                    243.8                     (91.0 )               (37 %)
U.S. Offshore                                                     7.8                     19.2                   (11.4 )               (59 %)                  11.7                     17.5                      (5.8 )               (33 %)
Alaska                                                            9.0                     11.0                    (2.0 )               (18 %)                  10.7                     10.6                        .1                   1 %
Canada                                                           12.3                     35.8                   (23.5 )               (66 %)                  19.2                     34.0                     (14.8 )               (44 %)
International (12)                                               97.1                    121.3                   (24.2 )               (20 %)                 105.0                    120.2                     (15.2 )               (13 %)

Total rig years                                                 249.8                    450.6                  (200.8 )               (45 %)                 299.4                    426.1                    (126.7 )               (30 %)

Rig hours: (13)
U.S. Land Well-servicing                                      135,040                  290,680                (155,640 )               (54 %)               457,404                  822,258                  (364,854 )               (44 %)
Canada Well-servicing                                          31,686                   67,141                 (35,455 )               (53 %)               105,806                  186,535                   (80,729 )               (43 %)

Total rig hours                                               166,726                  357,821                (191,095 )               (53 %)               563,210                1,008,793                  (445,583 )               (44 %)

(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 $4.9 million and $.1 million for the three months ended September 30, 2009 and 2008, respectively, and $6.8 million and $9.7 million for the nine months ended September 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 ($83.3) million for the nine months ended September 30, 2009.

(4) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $4.0 million and $7.1 million for the three months ended September 30, 2009 and 2008, respectively, and ($79.2) million and ($17.6) million for the nine months ended September 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 $4.5 million and $.7 million for the three months ended September 30, 2009 and 2008, respectively, and $13.3 million and $7.4 million for the nine months ended September 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) Represents the elimination of inter-segment transactions and unallocated corporate expenses.

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

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

(12) International rig years include our equivalent percentage ownership of rigs owned by unconsolidated affiliates which totaled 2.5 years and 3.3 years during the three months ended September 30, 2009 and 2008, respectively, and 2.6 years and 3.6 years for the nine months ended September 30, 2009 and 2008, respectively.

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

. . .