NABORS INDUSTRIES LTD - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

COMMISSION FILE NUMBER: 000-49887

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NABORS INDUSTRIES LTD.

INCORPORATED IN BERMUDA
2(ND) FL. INTERNATIONAL TRADING CENTRE
WARRENS
PO BOX 905E
ST. MICHAEL, BARBADOS
(246) 421-9471

98-0363970
(I.R.S. Employer Identification No.)

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No ___

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).

Yes X No ___

The number of common shares, par value $.001 per share, outstanding as of
April 30, 2004 was 148,563,453. In addition, our subsidiary, Nabors Exchangeco
(Canada) Inc., has 289,956 exchangeable shares outstanding as of April 30, 2004
that are exchangeable for Nabors common shares on a one-for-one basis, and have
essentially identical rights as Nabors Industries Ltd. common shares, including
but not limited to voting rights and the right to receive dividends, if any.

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

INDEX

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial
statements.

2

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial
statements.

3

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial
statements.
4

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial
statements.

5

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (CONTINUED)
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial
statements.

6

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 NATURE OF OPERATIONS

Nabors is the largest land drilling contractor in the world, with almost
600 land drilling rigs. We conduct oil, gas and geothermal land drilling
operations in the U.S. Lower 48 states, Alaska, Canada, South and Central
America, the Middle East, the Far East and Africa. Nabors also is one of the
largest land well-servicing and workover contractors in the United States and
Canada. We own approximately 750 land workover and well-servicing rigs in the
United States, primarily in the southwestern and western United States, and
approximately 200 land workover and well-servicing rigs in Canada. Nabors is a
leading provider of offshore platform workover and drilling rigs, and owns 45
platform, 16 jack-up and three barge rigs in the Gulf of Mexico and
international markets. These rigs provide well-servicing, workover and drilling
services. We have a 50% ownership interest in a joint venture in Saudi Arabia,
which owns 17 rigs.

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. Our land transportation and hauling fleet
includes approximately 240 rig and oilfield equipment hauling tractor-trailers
and a number of cranes, loaders and light-duty vehicles. We maintain
approximately 300 fluid hauling trucks, approximately 800 fluid storage tanks,
ten saltwater disposal wells and other auxiliary equipment used in drilling,
workover and well-servicing operations in the United States. In addition, we
time charter a fleet of 31 marine transportation and supply vessels, which
provide transportation of drilling materials, supplies and crews for offshore
operations primarily in the Gulf of Mexico. We manufacture and lease or sell top
drives for a broad range of drilling applications, directional drilling systems,
rig instrumentation and data collection equipment and rig reporting software. We
have also made selective investments in oil and gas exploration, development and
production activities.

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 operating segments engaged
in marine transportation and supply services, 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 limited oil and gas
exploration, development and production operations are included in a category
labeled Oil and Gas for segment reporting purposes.

As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INTERIM FINANCIAL INFORMATION

The unaudited consolidated financial statements of Nabors are prepared in
conformity with accounting principles generally accepted in the United States of
America (GAAP). Pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission, certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with GAAP have
been omitted. Therefore, these financial statements should be read along with
our Annual Report on Form 10-K for the year ended December 31, 2003. In our
management's opinion, the consolidated financial statements contain all
adjustments necessary to present fairly our financial position as of March 31,
2004, and the results of our operations and our cash flows for each of the
three-month periods ended March 31, 2004 and 2003, in accordance with GAAP.
Interim results for the three months ended March 31, 2004 may not be indicative
of results that will be realized for the full year ending December 31, 2004.

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Our independent auditors have performed a review of, and issued a report
on, these consolidated interim financial statements in accordance with standards
established by the American Institute of Certified Public Accountants. Pursuant
to Rule 436(c) under the U.S. Securities Act of 1933, this report should not be
considered a part of any registration statement prepared or certified within the
meanings of Sections 7 and 11 of the Securities Act.

PRINCIPLES OF CONSOLIDATION

Our consolidated financial statements include the accounts of Nabors, all
majority-owned subsidiaries, and all non-majority owned subsidiaries required to
be consolidated under Financial Accounting Standards Board (FASB) Interpretation
No. 46R. All significant intercompany accounts and transactions are eliminated
in consolidation.

Investments in entities where we have the ability to exert significant
influence, but where we do not control their operating and financial policies,
are accounted for using the equity method. Our share of the net income of these
entities is recorded as Earnings from unconsolidated affiliates in our
consolidated statements of income, and our investment in these entities is
carried as a single amount in our consolidated balance sheets. Investments in
net assets of unconsolidated affiliates accounted for using the equity method
totaled $61.8 million and $58.1 million as of March 31, 2004 and December 31,
2003, respectively, and are included in other long-term assets in our
consolidated balance sheets.

RECLASSIFICATIONS

Certain reclassifications have been made to prior periods to conform to the
current period presentation, with no effect on our consolidated financial
position, results of operations or cash flows.

STOCK-BASED COMPENSATION

We account for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, compensation expense for stock options
is measured as the excess, if any, of the quoted market price of Nabors common
shares at the date of grant over the amount an employee must pay to acquire the
common shares. We grant options at prices equal to the market price of our
shares on the date of grant and therefore do not record compensation expense
related to these grants. Statement of Financial Accounting Standards (SFAS) No.
148, "Accounting for Stock-Based Compensation -- an Amendment to FAS 123,"
requires companies that continue to account for stock-based compensation in
accordance with APB 25 to disclose certain information using a tabular
presentation. The table presented below illustrates the effect on our net income
and earnings per share as if we had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to our
stock-based employee compensation. Under the provisions of SFAS 123,
compensation cost for stock-based compensation is determined based on fair
values as of the dates of grant estimated using an option pricing model such as
the Black-Scholes option-pricing model, and compensation cost is amortized over
the applicable option vesting period.

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RECENT ACCOUNTING PRONOUNCEMENTS

As discussed above, we currently account for stock-based compensation as
prescribed by APB 25, and because we grant options at prices equal to the market
price of our shares on the date of the grant we do not record compensation
expense related to these grants. On March 31, 2004, the FASB issued an Exposure
Draft, "Share-Based Payment," which, if enacted in its current form, would
eliminate our ability to account for stock-based compensation using APB 25 and
instead would require us to account for stock option awards using a fair-value
based method resulting in compensation expense for stock option awards. The
proposed statement would be effective for stock options granted or modified in
fiscal years beginning after December 15, 2004. Additionally, for stock options
granted or modified after December 15, 1994 that have not vested as of the
effective date of the proposed statement, compensation cost will be measured and
recorded based on the same estimates of fair value calculated as of the date of
grant as currently disclosed within the table required by SFAS 148 presented
above. If enacted in its proposed form, the proposed statement may have a
material adverse affect on our results of operations in future periods.

In January 2003 the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of variable interest entities (VIEs) by business enterprises that are the
primary beneficiaries. A VIE is an entity that does not have sufficient equity
investment at risk to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest. The primary beneficiary of
a VIE is the enterprise that has the majority of the risks or rewards associated
with the VIE. In December 2003 the FASB issued a revision to FIN 46 (FIN 46R) to
clarify some of the provisions of FIN 46, and to exempt certain entities from
its requirements. Application of FIN 46R is required in financial statements of
public entities that have interests in structures that are commonly referred to
as special-purpose entities for periods ending after December 15, 2003.
Application for all other types of VIEs is required in financial statements for
periods ending after March 15, 2004. Our adoption of FIN 46R as of March 31,
2004 did not have a material affect on our financial position, results of
operations or cash flows.

NOTE 3 INCOME TAXES

Our effective income tax (benefit) rate was 10.5% during the three months
ended March 31, 2004 compared to (10.1%) for the three months ended March 31,
2003. The change from an income tax benefit in the 2003 quarter to an income tax
expense in the 2004 quarter resulted from a higher proportion of our income
being generated in the U.S. for the three months ended March 31, 2004 compared
to the prior year quarter. Income generated in the U.S. is generally taxed at a
higher rate than in international jurisdictions in which we operate. Our tax
rate for the three months ended March 31, 2004 and 2003 was decreased by tax
savings realized as a result of our corporate reorganization effective June 24,
2002. It is possible that the tax savings recorded as a result of the corporate
reorganization may not be realized, depending on the final disposition of
various legislative proposals introduced in the U.S. Congress, and any
responsive action taken by Nabors.

NOTE 4 COMMITMENTS AND CONTINGENCIES

Contingencies

Proposed Coast Guard Regulations and Actions. Our Sea Mar division time
charters supply vessels to offshore operators, primarily in U.S. waters. On
February 4, 2004, the United States Coast Guard took several actions which could
adversely affect our ability to do so.

The vessels which operate in U.S. coastwise trade are owned by one of our
financing company subsidiaries, but are operated and managed by a U.S.
citizen-controlled company pursuant to long-term bareboat charters. Our Sea Mar
division time charters the vessels from this U.S. operating company in
connection with our own offshore activities in the Gulf of Mexico and in support
of other offshore operators.

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On February 4, 2004, the United States Coast Guard adopted final
regulations which could cause arrangements like that utilized by Sea Mar to no
longer qualify vessels for employment in the U.S. coastwise trade. However, the
final regulations contain grandfathering provisions which could permit us to
continue coastwise marketing of the vessels until the present bareboat charters
terminate. The original term of most of these bareboat charters ends in June
2007, but the charter provides for one or more renewal terms of three to five
years. We believe the grandfathering provisions in these final regulations would
apply to these renewal terms.

Also, on February 4, 2004, the United States Coast Guard proposed a rule
which, if finally adopted, would end the grandfathering provision on February 4,
2007. In these same proposed regulations, the United States Coast Guard is
proposing a rule under which time charters from a U.S. citizen bareboat charter
like the charter to Sea Mar would no longer be permitted. However, we believe
that if this rule is adopted, the grandfathering provision would apply to the
preexisting Sea Mar arrangement.

Additionally, on February 4, 2004, the United States Coast Guard notified
us that it is considering an appeal of the United States Coast Guard's original
issuance in June 2002 of the coastwise trade endorsements for the vessels
bareboat chartered to the U.S. citizen qualified company. The coastwise trade
endorsements on the documents of the vessels issued by the United States Coast
Guard authorize the vessels to engage in the U.S. coastwise trade. If the appeal
is decided against us, we could lose the ability to market the vessels for use
in U.S. coastwise trade.

As of March 31, 2004, the net assets of our Sea Mar division totaled
approximately $166.6 million. During the three months ended March 31, 2004, the
adjusted loss derived from operating activities for our Sea Mar division reduced
our income before income taxes by approximately 0.2%.

Litigation. Nabors and its subsidiaries are defendants or otherwise
involved in a number of lawsuits in the ordinary course of their business. In
the opinion of management, our ultimate liability with respect to these pending
lawsuits is not expected to have a significant or material adverse effect on our
consolidated financial position, results of operations or cash flows.

Guarantees. We enter into various agreements providing financial or
performance assurance to third parties. Certain of these agreements serve as
guarantees, including standby letters of credit issued on behalf of insurance
carriers in conjunction with our workers' compensation insurance program and
guarantees of residual value in certain of our operating lease agreements. We
have also guaranteed payment of contingent consideration in conjunction with an
acquisition in 2002 which is based on future operating results of that business.
In addition, we have provided indemnifications to certain third parties which
serve as guarantees. These guarantees include indemnification provided by Nabors
to our stock transfer agent and our insurance carriers. We are not able to
estimate the potential future maximum payments that might be due under our
indemnification guarantees.

Management believes the likelihood that we would be required to perform or
otherwise incur any material losses associated with any of these guarantees is
remote. The following table summarizes the total maximum amount of financial and
performance guarantees issued by Nabors:

10

NOTE 5 EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:

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(1) Diluted earnings per share for the three months ended March 31, 2003
reflects the assumed conversion of our $825 million zero coupon convertible
senior debentures, as the conversion in that quarter would have been
dilutive. We redeemed for cash the remaining outstanding principal amount of
our $825 million zero coupon convertible senior debentures on June 20, 2003
and therefore these debentures did not impact the calculation of diluted
earnings per share for the three months ended March 31, 2004.

(2) Diluted earnings per share for the three months ended March 31, 2004
reflects the assumed conversion of our $1.381 billion zero coupon
convertible senior debentures, as the conversion in that quarter would have
been dilutive. For the three months ended March 31, 2003 the
weighted-average number of shares outstanding-diluted excludes 8.5 million
potentially dilutive shares issuable upon the conversion of our $1.381
billion zero coupon convertible senior debentures because the inclusion of
such shares would have been anti-dilutive, given the level of net income for
that quarter. Net income for the three months ended March 31, 2003 excludes
the related add-back of interest expense, net of tax, of $3.0 million for
these debentures. These shares would have been dilutive and therefore
included in the calculation of the weighted-average number of shares
outstanding-diluted had diluted earnings per share been at or above $.35 for
the three months ended March 31, 2003.

(3) Diluted earnings per share for the three months ended March 31, 2004
excludes approximately 10.0 million potentially dilutive shares initially
issuable upon the exchange of our $700 million zero coupon exchangeable
senior notes due 2023. Such shares are contingently exchangeable under
certain

11

circumstances and would only be included in the calculation of the
weighted-average number of shares outstanding-diluted if any of those criteria
were met. Such criteria were not met during the three months ended March 31,
2004. Based on the initial exchange price per share, these notes would be
exchangeable for our common shares if the closing sale price per share of
Nabors' common shares for at least 20 trading days during the period of 30
consecutive trading days ending on the last trading day of the previous
calendar quarter is greater than or equal to $84.12 for calendar quarters
ending on or before June 30, 2008, and $77.11 for calendar quarters
thereafter. These notes were issued in June 2003 and therefore did not
impact the calculation of diluted earnings per share for the three months
ended March 31, 2003.

(4) Includes the following weighted-average number of common shares of Nabors
and weighted-average number of exchangeable shares of Nabors Exchangeco,
respectively: 147.6 million and .4 million shares for the three months ended
March 31, 2004; and 145.1 million and .6 million shares for the three months
ended March 31, 2003. The exchangeable shares of Nabors Exchangeco are
exchangeable for Nabors common shares on a one-for-one basis, and have
essentially identical rights as Nabors Industries Ltd. common shares,
including but not limited to voting rights and the right to receive
dividends, if any.

For all periods presented, the computation of diluted earnings per share
excludes outstanding stock options and warrants with exercise prices greater
than the average market price of Nabors' common shares, because the inclusion of
such options and warrants would be anti-dilutive. The number of options and
warrants that were excluded from diluted earnings per share that would
potentially dilute earnings per share in the future were 3,850,308 and 3,720,242
shares during the three months ended March 31, 2004 and 2003, respectively.

The holders of our $1.381 billion zero coupon convertible senior debentures
and our $700 million zero coupon senior exchangeable notes have the right to
require us to repurchase the debentures/notes at various dates commencing
February 5, 2006 and June 15, 2008, respectively. We may pay the redemption
prices with either cash or shares or a combination thereof. We do not presently
anticipate using shares to satisfy any such future purchase obligations.

NOTE 6 SEGMENT INFORMATION

The following tables set forth certain financial information with respect
to our reportable segments:

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

(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.2 million and $.9 million for the three months ended
March 31, 2004 and 2003, respectively.

(3) Represents our oil and gas exploration, development and production
operations.

(4) Includes our marine transportation and supply services, drilling technology
and top drive manufacturing, directional drilling, rig instrumentation and
software, and construction and logistics operations.

13

(5) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $2.6 million and $5.0 million for the three months ended
March 31, 2004 and 2003, respectively.

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

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

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

(9) Includes $27.6 million and $26.5 million of investments in unconsolidated
affiliates accounted for by the equity method as of March 31, 2004 and
December 31, 2003, respectively.

(10) Includes $34.2 million and $31.6 million of investments in unconsolidated
affiliates accounted for by the equity method as of March 31, 2004 and
December 31, 2003, respectively.

NOTE 7 CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Nabors has fully and unconditionally guaranteed all of the issued public
debt securities of Nabors Industries, Inc. (Nabors Delaware), and Nabors and
Nabors Delaware have fully and unconditionally guaranteed the $225 million
4.875% senior notes due 2009 issued by Nabors Holdings 1, ULC, our indirect
subsidiary.

The following condensed consolidating financial information is included so
that separate financial statements of Nabors Delaware and Nabors Holdings are
not required to be filed with the U.S. Securities and Exchange Commission. The
condensed consolidating financial statements present investments in both
consolidated and unconsolidated affiliates using the equity method of
accounting.

The following condensed consolidating financial information presents:
condensed consolidating balance sheets as of March 31, 2004 and December 31,
2003, and statements of income and cash flows for the three months ended March
31, 2004 and 2003 of (a) Nabors, parent/guarantor, (b) Nabors Delaware, issuer
of public debt securities guaranteed by Nabors and guarantor of the $225 million
4.875% senior notes issued by Nabors Holdings, (c) Nabors Holdings, issuer of
the $225 million 4.875% senior notes, (d) the non-guarantor subsidiaries, (e)
consolidating adjustments necessary to consolidate Nabors and its subsidiaries
and (f) Nabors on a consolidated basis.

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CONDENSED CONSOLIDATING BALANCE SHEETS

16

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

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NOTE 8 SUBSEQUENT EVENT

On April 15, 2004, we made a payment of $305.3 million upon maturity of our
6.8% senior notes, representing principal of $295.3 million, which was included
in our consolidated balance sheet as current portion of long-term debt as of
March 31, 2004, and accrued interest of $10.0 million.

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders
of Nabors Industries Ltd.:

We have reviewed the accompanying consolidated balance sheet of Nabors
Industries Ltd. and its subsidiaries as of March 31, 2004, and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity for each of the three-month periods ended March 31, 2004 and 2003. This
interim financial information is the responsibility of the Company's management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial information
for it to be in conformity with accounting principles generally accepted in the
United States of America.

We previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2003, and the related consolidated statements of income, of cash
flows, and of changes in shareholders' equity for the year then ended (not
presented herein), and in our report dated March 5, 2004, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the accompanying consolidated balance sheet information as of December 31, 2003,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.

/s/ PRICEWATERHOUSECOOPERS LLP

Houston, Texas
May 7, 2004

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This discussion includes various forward-looking statements about our
markets, demand for our products and services and our future results.
Statements, such as these, that are not historical facts are "forward-looking
statements" within the meaning of the safe harbor provisions of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These
forward-looking statements are based upon our analysis of currently available
competitive, financial and economic data and our operating plans. They are
inherently uncertain and investors should recognize that events and actual
results could turn out to be significantly different from our expectations. By
way of illustration, when used in this document, words such as "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "should,"
"could," "may," "predict" and similar expressions are intended to identify
forward-looking statements.

You should consider the following key factors when evaluating these
forward-looking statements:

- fluctuations in worldwide prices of and demand for natural gas and oil;

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

- fluctuations in the demand for our services;

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

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

- the existence of regulatory and legislative uncertainties;

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

- general economic conditions.

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, 2003
filed with the Securities and Exchange Commission under Part 1, Item I, "Risk
Factors".

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RESULTS OF OPERATIONS

A discussion of our results of operations for the three months ended March
31, 2004 and 2003 is included below. This discussion should be read in
conjunction with our accompanying consolidated financial statements and notes
thereto and our Annual Report on Form 10-K for the year ended December 31, 2003.

As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.

The following table sets forth certain information with respect to our
reportable segments and rig activity:

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

(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.2 million and $.9 million for the three months ended
March 31, 2004 and 2003, respectively.

(3) Represents our oil and gas exploration, development and production
operations.

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

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

(6) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $2.6 million and $5.0 million for the three months ended
March 31, 2004 and 2003, respectively.

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

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

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

(10) Excludes well-servicing rigs, which are measured in rig hours. Rig years
represents 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.

(11) International rig years include our equivalent percentage ownership of rigs
owned by unconsolidated affiliates which totaled 4.0 years and 3.0 years
during the three months ended March 31, 2004 and 2003, respectively.

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

THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003

Operating revenues and Earnings from unconsolidated affiliates for the
three months ended March 31, 2004 totaled $596.8 million, representing an
increase of $141.1 million, or 31%, as compared to the prior year quarter.
Adjusted income derived from operating activities and net income for the three
months ended March 31, 2004 totaled $85.1 million and $71.7 million ($.46 per
diluted share), respectively, representing increases of 52% and 49% compared to
the prior year quarter.

The increase in our operating results during the three months ended March
31, 2004 primarily resulted from higher revenues realized by our U.S. Lower 48
Land Drilling and Canadian operations. Revenues increased for these business
units as a result of higher activity levels and average dayrates in the first
quarter of 2004 compared to the prior year quarter. This increase in activity
reflects an increase in demand for our services in these markets during 2003 and
2004, which resulted from continuing higher price levels for natural gas during
2003 and 2004.

Natural gas prices are the primary driver of our U.S. Lower 48 Land
Drilling, Canadian and U.S. Offshore (Gulf of Mexico) operations, while oil
prices are the primary driver of our Alaskan, International and U.S. Land
Well-servicing operations. The Henry Hub natural gas spot price (per Bloomberg)
averaged $5.31 per million cubic feet (mcf) during the period from April 1, 2003
through March 31, 2004, up from a $4.30 per mcf average during the period from
April 1, 2002 through March 31, 2003. West

25

Texas intermediate spot oil prices (per Bloomberg) averaged $31.40 per barrel
during the period from April 1, 2003 through March 31, 2004, up from a $29.16
per barrel average during the period from April 1, 2002 through March 31, 2003.

Our operating results for 2004 are expected to increase from levels
realized during 2003 given our current expectations of commodity prices and the
related impact on drilling and well-servicing activity during 2004. However, our
operating results for the second quarter of 2004 are expected to decrease from
levels realized during the first quarter of 2004 primarily as a result of an
expected seasonal decline in activity for our Canadian and, to a lesser extent,
our Alaskan operations. Canadian drilling activity is subject to substantial
levels of seasonality, as activity levels typically peak in the first quarter,
decline substantially in the second quarter, and then generally increase over
the last half of the year. We expect to see an overall continued improvement in
activity across a majority of our business units for 2004 as a whole, including
our Canadian, U.S. Lower 48 Land Drilling, U.S. Offshore (Gulf of Mexico),
International and U.S. Land Well-servicing operations. In addition to this
expected increase in overall activity, our U.S. Offshore operations are expected
to improve as a result of incremental revenues from three new platform rigs for
deepwater development projects, one of which commenced operations in the first
quarter of 2004, with the other two expected to commence operations late in the
second quarter of 2004. Results for our International operations should also be
improved as we expect rigs operating under a number of long-running contracts,
that were unexpectedly idled late in 2003, to return to work in 2004. We expect
results from our operations in Alaska to be reduced overall during 2004 compared
to 2003, as three significant long-term contracts were completed late in 2003
and have not yet been renewed or replaced.

Contract Drilling. Our Contract Drilling operating segments contain one or
more of the following operations: drilling, workover and well-servicing, on land
and offshore. Operating revenues and Earnings from unconsolidated affiliates for
our Contract Drilling operating segments totaled $535.3 million and adjusted
income derived from operating activities totaled $92.2 million during the three
months ended March 31, 2004, representing increases of 30% and 54%,
respectively, compared to the three months ended March 31, 2003. Rig years
(excluding well-servicing rigs) increased to 325.0 years during the three months
ended March 31, 2004 from 246.9 years during the three months ended March 31,
2003 as a result of increased capital spending by our customers, which resulted
from the improvement in commodity prices discussed above.

U.S. Lower 48 Land Drilling Operating revenues and adjusted income derived
from operating activities totaled $153.4 million and $8.6 million, respectively,
during the three months ended March 31, 2004, representing increases of 70% and
318%, respectively, compared to the prior year quarter. These increases resulted
from the increase in drilling activity driven by higher natural gas prices,
which is reflected in the increase in rig years to 175.2 years during the first
quarter of 2004 compared to 108.9 years during the prior year quarter, and
higher average dayrates.

U.S. Land Well-servicing Operating revenues and adjusted income derived
from operating activities totaled $79.5 million and $9.7 million, respectively,
during the three months ended March 31, 2004, representing increases of 4% and
1%, respectively, compared to the prior year quarter. These increases primarily
resulted from a marginal increase in average dayrates compared to the prior year
quarter, which was primarily attributable to an increase in workover activity as
a percentage of total well-servicing sales, and slightly higher well-servicing
hours, which totaled 275,148 hours during the first quarter of 2004 compared to
273,513 hours during the prior year quarter. The increase in adjusted income
derived from operating activities, resulting from higher operating revenues, was
partially offset by higher labor, maintenance and repair costs in the first
quarter of 2004 compared to the prior year quarter.

U.S. Offshore Operating revenues and adjusted income derived from operating
activities totaled $31.3 million and $4.8 million, respectively, during the
three months ended March 31, 2004, representing increases of 44% and 221%,
respectively, compared to the prior year quarter. These increases primarily
resulted from higher average dayrates for most rigs and from slightly higher rig
years compared to the

26

prior year quarter. Rig years for our U.S. Offshore operations totaled 13.8
years for the first quarter of 2004 compared to 13.4 years during the prior year
quarter.

Alaskan Operating revenues and adjusted income derived from operating
activities totaled $29.3 million and $7.2 million, respectively, during the
three months ended March 31, 2004, representing decreases of 18% and 53%,
respectively, compared to the prior year quarter. These decreases primarily
resulted from an incremental $5.7 million of Operating revenues recorded in the
first quarter of 2003, representing business interruption insurance proceeds
related to the damage incurred on one of our land drilling rigs in 2001, and
lower drilling activity, which was only partially offset by higher average
dayrates in the first quarter of 2004 compared to the prior year quarter. The
decrease in drilling activity is reflected in the decrease in rig years to 7.8
years during the first quarter of 2004 from 8.7 years during the prior year
quarter.

Canadian Operating revenues and adjusted income derived from operating
activities totaled $138.8 million and $43.3 million, respectively, during the
three months ended March 31, 2004, representing increases of 38% and 66%,
respectively, compared to the prior year quarter. These increases reflect an
increase in drilling and well-servicing revenues, which resulted from an overall
increase in drilling and well-servicing activity driven by increased commodity
prices, and an increase in average dayrates. Rig years in Canada increased to
63.2 years during the first quarter of 2004 from 58.8 years during the prior
year quarter. Well-servicing hours totaled 117,596 hours during the first
quarter of 2004 compared to 92,702 hours during the prior year quarter.

International Operating revenues and Earnings from unconsolidated
affiliates and adjusted income derived from operating activities totaled $103.0
and $18.6 million, respectively, during the three months ended March 31, 2004,
representing increases of 18% and 11%, respectively, compared to the prior year
quarter. The improved results for the first quarter of 2004 primarily resulted
from an increase in operations in Mexico and from the addition of operations in
India and Indonesia, which began in the last half of 2003. International rig
years increased to 65.0 years during the first quarter of 2004 from 57.1 years
during the prior year quarter.

Oil and Gas. This operating segment represents our oil and gas
exploration, development and production operations. Oil and Gas Operating
revenues and adjusted income derived from operating activities totaled $21.1
million and $4.5 million, respectively, during the three months ended March 31,
2004, compared to $1.6 million and $1.0 million during the prior year quarter.
These increases resulted from the agreements executed with El Paso Corporation
in the fourth quarter of 2003.

Other Operating Segments. These operations include our marine
transportation and supply services, drilling technology and top drive
manufacturing, directional drilling, rig instrumentation and software, and
construction and logistics operations. Operating revenues and Earnings from
unconsolidated affiliates for our Other Operating Segments totaled $55.9 million
during the three months ended March 31, 2004 representing only a slight increase
of 1% compared to the prior year quarter. This increase primarily resulted from
increased sales of directional drilling and rig instrumentation systems compared
to the prior year quarter. Adjusted loss derived from operating activities
totaled $.4 million during the three months ended March 31, 2004 compared to
adjusted income derived from operating activities totaling $5.6 million during
the prior year quarter. This decline primarily resulted from decreased margins
from our marine transportation and supply services, which was driven by lower
average dayrates compared to prior year quarter.

Other Financial Information. General and administrative expenses totaled
$45.6 million in the first quarter of 2004, representing an increase of $4.4
million, or 11%, compared to the prior year quarter primarily resulting from
increased activity for a number of our operating segments including our U.S.
Lower 48 Land Drilling, U.S. Land Well-servicing, Canadian and International
operations. As a percentage of operating revenues, general and administrative
expenses decreased (7.7% vs. 9.2%) during the first quarter of 2004 compared to
the prior year quarter as these expenses were spread over a larger revenue base.

27

Depreciation and amortization expense totaled $60.5 million in the first
quarter of 2004, representing an increase of $6.9 million, or 13%, compared to
the prior year quarter, and depletion expense totaled $15.6 million in the first
quarter of 2004 compared to only $0.4 million in the prior year quarter.
Depreciation and amortization expense increased primarily as a result of an
increase in average rig years for our U.S. Lower 48 Land Drilling, Canadian land
drilling and International operations, and depreciation on capital expenditures
made during the last three quarters of 2003 and the first quarter of 2004.
Depletion expense increased as a result of depletion on oil and gas properties
added through our agreements with El Paso Corporation in the fourth quarter of
2003.

Interest expense totaled $15.9 million in the first quarter of 2004,
representing a decrease of $4.2 million, or 21%, compared to the prior year
quarter resulting from the issuance of our $700 million zero coupon senior
exchangeable notes in June 2003. Such notes will not accrue interest unless we
become obligated to pay contingent interest. The amount of contingent interest
payable per note in respect to any six-month period will equal 0.185% of the
principal amount of a note commencing on or after June 15, 2008 only if certain
conditions are met. The proceeds from this debt issuance were used in June 2003
to redeem our $825 million zero coupon convertible senior debentures that had an
effective interest rate of 2.5%.

Interest income totaled $6.5 million in the first quarter of 2004,
representing a decrease of $1.2 million, or 15%, compared to the prior year
quarter, reflecting lower average yields on investments resulting from the
overall declining interest rate environment partially offset by higher average
cash and marketable securities balances.

Other income totaled $4.4 million in the first quarter of 2004,
representing an increase of $4.4 million compared to the prior year quarter.
Other income for the three months ended March 31, 2004 includes net gains on
marketable and non-marketable securities of approximately $5.7 million,
partially offset by mark-to-market losses recorded on our range cap and floor
derivative instrument of approximately $2.5 million. Other income for the three
months ended March 31, 2003 includes $2.4 million in gains on long-term assets
primarily resulting from the $1.9 million gain on a casualty insurance
settlement in our Alaskan operations offset by a mark-to-market loss of
approximately $1.1 million recorded on our range cap and floor derivative
instrument and a net loss on marketable securities of approximately $.5 million.

Our effective income tax (benefit) rate was 10.5% during the three months
ended March 31, 2004 compared to (10.1%) for the three months ended March 31,
2003. The change from an income tax benefit in the 2003 quarter to an income tax
expense in the 2004 quarter resulted from a higher proportion of our income
being generated in the U.S. for the three months ended March 31, 2004 compared
to the prior year quarter. Income generated in the U.S. is generally taxed at a
higher rate than in international jurisdictions in which we operate. Our tax
rate for the three months ended March 31, 2004 and 2003 was decreased by tax
savings realized as a result of our corporate reorganization effective June 24,
2002. It is possible that the tax savings recorded as a result of the corporate
reorganization may not be realized, depending on the final disposition of
various legislative proposals introduced in the U.S. Congress, and any
responsive action taken by Nabors.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Our cash flows primarily depend on the level of spending by our primary
customers, oil and gas companies, for exploration, development and production
activities. Sustained increases or decreases in the price of natural gas or oil
could have a material impact on these activities, and could also materially
affect our cash flows. Certain uses of cash, such as the level of non-sustaining
capital expenditures, purchases and sales of marketable securities, issuances of
debt and repurchases of our common shares are within our control and are
adjusted as necessary based on market conditions. The following is a discussion
of our cash flows for the three months ended March 31, 2004 and 2003.

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Operating Activities. Net cash provided by operating activities totaled
$102.1 million during the three months ended March 31, 2004, compared to net
cash provided by operating activities totaling $50.5 million during the prior
year quarter. During the three months ended March 31, 2004 and 2003, net income
was increased for non-cash items such as depreciation and amortization, and
depletion, and was reduced for changes in our working capital and other balance
sheet accounts.

Investing Activities. Net cash used for investing activities totaled
$160.5 million during the three months ended March 31, 2004, compared to $36.6
million used for investing activities during the prior year quarter. During the
three months ended March 31, 2004, cash was used for purchases, net of sales, of
marketable and non-marketable securities and capital expenditures. During the
prior year quarter, cash was used for capital expenditures and was provided by
sales, net of purchases, of marketable and non-marketable securities.

Financing Activities. Financing activities provided cash totaling $41.4
million during the three months ended March 31, 2004 compared to cash provided
by financing activities of $9.8 million during the prior year quarter. During
the current year quarter, cash was provided by our receipt of proceeds totaling
$39.3 million from the exercise of options to acquire our common shares. During
the prior year quarter, cash was provided by an increase in cash overdrafts and
our receipt of proceeds totaling $4.9 million from the exercise of options to
acquire our common shares.

FUTURE CASH REQUIREMENTS

As of March 31, 2004, we had long-term debt, including current maturities,
of $2.3 billion and cash and cash equivalents and investments in marketable
securities of $1.5 billion.

On April 15, 2004, we made a payment of $305.3 million upon maturity of our
6.8% senior notes, representing principal of $295.3 million, which was included
in our consolidated balance sheet as current portion of long-term debt as of
March 31, 2004, and accrued interest of $10.0 million.

Our $1.381 billion zero coupon convertible senior debentures due 2021 can
be put to us on February 5, 2006, February 5, 2011 and February 5, 2016, for a
purchase price equal to the issue price plus accrued original issue discount to
the date of repurchase. The amount of the purchase price would total $826.8
million, $936.2 million and $1.1 billion if the debentures were put to us on
February 5, 2006, February 5, 2011 or February 5, 2016, respectively. Our $700
million zero coupon senior exchangeable notes due 2023 can be put to us on June
15, 2008, June 15, 2013 and June 15, 2018, for a purchase price equal to 100% of
the principal amount of the notes plus contingent interest and additional
amounts, if any. We may elect to pay all or a portion of the purchase price of
the debentures and the notes in common shares instead of cash, depending upon
our cash balances and cash requirements at that time. We do not presently
anticipate using common shares to satisfy any such future purchase obligations.
In accordance with the indentures with respect to the debentures and the notes,
we cannot redeem the $1.381 billion debentures before February 5, 2006 and the
$700 million notes before June 15, 2008. After those dates, we may redeem all or
a portion of the debentures and notes for cash at any time at their accreted
value.

As of March 31, 2004, we had outstanding capital expenditure purchase
commitments of approximately $35.3 million, primarily for rig-related enhancing
and sustaining capital expenditures. In addition, we estimate that we will
contribute approximately $42.4 million and $2.3 million in conjunction with our
agreements with El Paso Corporation during the remainder of 2004 and during
2005, respectively.

We have historically completed a number of acquisitions and will continue
to evaluate opportunities to acquire assets or businesses to enhance our
operations. Several of our previous acquisitions were funded through issuances
of our common shares. Future acquisitions may be paid for using existing cash or
issuance of debt or Nabors shares. Such capital expenditures and acquisitions
will depend on our view of market conditions and other factors.

See our discussion of guarantees issued by Nabors that could have a
potential impact on our financial position, results of operations or cash flows
in future periods included in Note 4 to our accompanying consolidated financial
statements.

29

FINANCIAL CONDITION AND SOURCES OF LIQUIDITY

Our primary sources of liquidity are cash and cash equivalents, marketable
securities and cash generated from operations. As of March 31, 2004, we had cash
and cash equivalents and investments in marketable securities of $1.5 billion
(including $634.5 million of long-term marketable securities) and working
capital of $969.0 million. This compares to cash and cash equivalents and
investments in marketable securities of $1.5 billion (including $612.4 million
of long-term marketable securities) and working capital of $917.3 million as of
December 31, 2003.

Our funded debt to capital ratio was 0.47:1 as of March 31, 2004 and 0.48:1
as of December 31, 2003. Our net funded debt to capital ratio was 0.22:1 as of
March 31, 2004 and 0.23:1 as of December 31, 2003. The funded debt to capital
ratio is calculated by dividing funded debt by funded debt plus capital. Funded
debt is defined as the sum of (1) short-term borrowings, (2) current portion of
long-term debt and (3) long-term debt. Capital is defined as shareholders'
equity. The net funded debt to capital ratio nets cash and cash equivalents and
marketable securities against funded debt. This ratio is calculated by dividing
net funded debt by net funded debt plus capital. Both of these ratios are a
method for calculating the amount of leverage a company has in relation to its
capital. Our interest coverage ratio was 8.0:1 as of March 31, 2004, compared to
6.8:1 as of December 31, 2003. The interest coverage ratio is computed by
calculating the sum of income before income taxes, interest expense, and
depreciation and amortization, and depletion expense and then dividing by
interest expense. This ratio is a method for calculating the amount of cash
flows available to cover interest expense.

We have three letter of credit facilities and a Canadian line of credit
facility with various banks as of March 31, 2004. Availability and borrowings
under our credit facilities as of March 31, 2004 are as follows:

We have a shelf registration statement on file with the Securities and
Exchange Commission to allow us to offer, from time to time, up to $700 million
in debt securities, guarantees of debt securities, preferred shares, depository
shares, common shares, share purchase contracts, share purchase units and
warrants. We currently have not issued any securities registered under this
registration statement.

Our current cash and cash equivalents, investments in marketable securities
and projected cash flow generated from current operations are expected to more
than adequately finance our sustaining capital expenditures, our debt service
requirements, including payments at maturity of our 6.8% senior notes due April
15, 2004, and all other expected cash requirements for the next twelve months.

See our discussion of the impact of changes in market conditions on our
derivative financial instruments discussed under Item 3. Quantitative and
Qualitative Disclosures About Market Risk below.

RECENT ACCOUNTING PRONOUNCEMENTS

We currently account for stock-based compensation as prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and because we grant options at prices equal to the market price
of our shares on the date of the grant we do not record compensation expense
related to these grants. On March 31, 2004, the Financial Accounting Standards
Board (FASB) issued an Exposure Draft, "Share-Based Payment," which, if enacted
in its current form, would eliminate our ability to account for stock-based
compensation using APB 25 and instead would require us to account for stock
option awards using a fair-value based method resulting in compensation expense
for stock option awards. The proposed statement would be effective for stock
options granted or modified in fiscal years beginning after December 15, 2004.
Additionally, for stock options granted or modified after

30

December 15, 1994 that have not vested as of the effective date of the proposed
statement, compensation cost will be measured and recorded based on the same
estimates of fair value calculated as of the date of grant as currently
disclosed within the table required by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - an Amendment to
FAS 123," presented in Note 2 to our accompanying consolidated financial
statements. If enacted in its proposed form, the proposed statement may have a
material adverse effect on our results of operations in future periods.

In January 2003 the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of variable interest entities (VIEs) by business enterprises that are the
primary beneficiaries. A VIE is an entity that does not have sufficient equity
investment at risk to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest. The primary beneficiary of
a VIE is the enterprise that has the majority of the risks or rewards associated
with the VIE. In December 2003 the FASB issued a revision to FIN 46,
Interpretation No. 46R (FIN 46R), to clarify some of the provisions of FIN 46,
and to exempt certain entities from its requirements. Application of FIN 46R is
required in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application for all other types of VIEs is
required in financial statements for periods ending after March 15, 2004. Our
adoption of FIN 46R as of March 31, 2004 did not have a material affect on our
financial position, results of operations or cash flows.

CRITICAL ACCOUNTING POLICIES

We disclosed our critical accounting policies in our 2003 Annual Report on
Form 10-K. No significant changes have occurred to those policies.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We may be exposed to market risk through changes in interest rates and
foreign currency risk due to our operations in international markets as
discussed in our 2003 Annual Report on Form 10-K. Material changes in our
exposure to market risk from that disclosed in our 2003 Annual Report on Form
10-K are discussed below.

The fair value of our interest rate swap agreement recorded as a derivative
asset and included in other long-term assets totaled approximately $11.1 million
and $4.2 million as of March 31, 2004 and December 31, 2003, respectively. The
carrying value of our 5.375% senior notes has been increased by the same amount
as of March 31, 2004 and December 31, 2003.

The fair value of our range cap and floor transaction recorded as a
derivative liability and included in other long-term liabilities totaled
approximately $5.5 million and $3.7 million as of March 31, 2004 and December
31, 2003, respectively. We recorded a mark-to-market loss, included in other
income, of approximately $2.5 million for the three months ended March 31, 2004
resulting from the change in cumulative fair value of this derivative instrument
during the three months ended March 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. We maintain a set of disclosure
controls and procedures that are designed to provide reasonable assurance that
information required to be disclosed in our reports filed under the Securities
and Exchange Act of 1934, as amended, is recorded, processed, summarized, and
reported within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms. We have investments in certain unconsolidated
entities that we do not control or manage. As we do not control or manage these
entities, our disclosure controls and procedures with respect to such entities
are necessarily more limited than those we maintain with respect to our
consolidated subsidiaries.

31

We evaluated the effectiveness of the design and operation of our
"disclosure controls and procedures" (as defined in Rule 13a-15(e) of the
Exchange Act) under the supervision and with the participation of management,
including our Chairman and Chief Executive Officer and Chief Financial Officer,
as of the end of this period covered by this report. Based on that evaluation,
our Chairman and Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely making known
to them material information relating to Nabors and its consolidated
subsidiaries required to be disclosed in our reports filed or submitted under
the Exchange Act.

(b) Internal Control Over Financial Reporting. There has been no change in
our internal control over financial reporting during the quarter ended March 31,
2004 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.

32

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Nabors and its subsidiaries are defendants or otherwise involved in a
number of lawsuits in the ordinary course of their business. In the opinion of
management, our ultimate liability with respect to these pending lawsuits is not
expected to have a significant or material adverse effect on our consolidated
financial position, results of operations or cash flows.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

15 Awareness Letter of Independent Accountants.
31.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Vice President and Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman and Chief Executive Officer, and
Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

- Report on Form 8-K furnished to the U.S. Securities and Exchange
Commission on January 30, 2004, with respect to Nabors' press release
announcing results for the fourth quarter and full year ended December
31, 2003.

33

EXHIBIT INDEX

EXHIBITS

15 Awareness Letter of Independent Accountants.
31.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Vice President and Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman and Chief Executive Officer, and
Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

34

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

NABORS INDUSTRIES LTD.

/s/ Anthony G. Petrello
--------------------------------------
Anthony G. Petrello
Deputy Chairman, President and Chief
Operating Officer

/s/ Bruce P. Koch
--------------------------------------
Bruce P. Koch
Vice President and Chief Financial
Officer

Dated: May 7, 2004

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