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 JUNE 30, 2002
COMMISSION FILE NUMBER: 000-49887

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NABORS INDUSTRIES LTD.
(Exact name of registrant as specified in its charter)

BERMUDA 98-0363970
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

c/o THE CORPORATE SECRETARY LTD.
WHITE PARK HOUSE
WHITEPARK ROAD
BRIDGETOWN, BARBADOS N/A
(Address of principal executive offices) (Zip Code)

(246) 228-1590
(Registrant's telephone number, including area code)

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____
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The number of common shares par value $.001 per share, outstanding as
of July 31, 2002 was 144,429,630. In addition, our subsidiary, Nabors Exchangeco
(Canada) Inc., has 669,627 exchangeable shares outstanding as of July 31, 2002
that are exchangeable for Nabors common shares on a one-for-one basis.

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

INDEX

PAGE NO.
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Part I Financial Information

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001...........................................2

Consolidated Statements of
Income for the Three months and Six months ended
June 30, 2002 and 2001........................................................3

Consolidated Statements of Cash
Flows for the Six months ended
June 30, 2002 and 2001........................................................4

Consolidated Statements of
Changes in Stockholders' Equity for the Six
months ended June 30, 2002 and 2001...........................................5

Notes to Consolidated Financial Statements.....................................7

Report of Independent Accountants.............................................23

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................24

Part II Other Information

Item 1. Legal Proceedings.............................................................32

Item 2. Changes in Securities and Use of Proceeds.....................................33

Item 4. Submission of Matters to a Vote of Security Holders...........................33

Item 5. Other Information.............................................................34

Item 6. Exhibits and Reports on Form 8-K..............................................35

Signatures..............................................................................38

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 STOCKHOLDERS' EQUITY
(UNAUDITED)

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

5

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 RECENT CORPORATE REORGANIZATION

Effective June 24, 2002, Nabors Industries Ltd., a Bermuda exempted
company (Nabors), became the successor to Nabors Industries, Inc., a Delaware
corporation (Nabors Delaware), following a corporate reorganization. The
reorganization was accomplished through the merger of an indirect, newly formed
Delaware subsidiary owned by Nabors into Nabors Delaware. Nabors Delaware was
the surviving company in the merger and became a wholly-owned, indirect
subsidiary of Nabors. Upon consummation of the merger, all outstanding shares of
Nabors Delaware common stock automatically converted into the right to receive
Nabors common shares, with the result that the shareholders of Nabors Delaware
on the date of the merger became the shareholders of Nabors. Nabors and its
subsidiaries continue to conduct the businesses previously conducted by Nabors
Delaware and its subsidiaries. The reorganization has been accounted for as a
reorganization of entities under common control and accordingly, it did not
result in any changes to the consolidated amounts of assets, liabilities and
stockholders' equity.

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, or US GAAP. Nabors is the successor to Nabors Delaware following a
corporate reorganization, as described in Note 1. Pursuant to the rules and
regulations of the US Securities and Exchange Commission, certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with US 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, 2001. In our management's opinion, the
consolidated financial statements contain all adjustments necessary to present
fairly our financial position as of June 30, 2002, and the results of our
operations, for each of the three-month and six-month periods ended June 30,
2002 and 2001 and our consolidated statements of changes in stockholders' equity
and of cash flows for each of the six-month periods ended June 30, 2002 and
2001, in accordance with US GAAP. Interim results for the six months ended June
30, 2002 may not be indicative of results that will be realized for the full
year ending December 31, 2002.

Our independent accountants 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 US 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
and all majority-owned subsidiaries. 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 the
consolidated statements of income, and our investment in these entities is
carried as a single amount in the consolidated balance sheets. Investments in
net assets of affiliated entities accounted for using the equity method totaled
$58.9 million and $55.1 million as of June 30, 2002 and December 31, 2001,
respectively, and are included in other long-term assets in the consolidated
balance sheets.

Reclassifications

Certain immaterial 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 (See Recent Accounting
Pronouncements).

Property, Plant and Equipment

Effective October 1, 2001, we changed the depreciable lives of our
drilling and workover rigs from 4,200 to 4,900 active days, our jackup rigs from
4,200 to 8,030 active days and certain other drilling equipment to better
reflect the estimated useful lives of these assets. The effect of this change in
accounting estimate was accounted for on a prospective

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basis beginning October 1, 2001 and increased net income by approximately $5.1
million ($.03 per diluted share) for the current quarter and approximately $10.7
million ($.07 per diluted share) for the six months ended June 30, 2002.

Foreign Currency Risk

We operate in a number of international areas and are involved in
transactions denominated in currencies other than US dollars, which exposes us
to foreign exchange rate risk. The most significant exposures arise in
connection with our operations in Canada and Saudi Arabia, which usually are
substantially unhedged. In Saudi Arabia, upon renewal of our contracts, we have
been converting riyal-denominated contracts to US dollar-denominated contracts
in order to reduce our exposure to the Saudi riyal even though that currency has
been pegged to the US dollar at a rate of 3.745 Saudi riyal to 1.00 US dollar
since 1986. We cannot guarantee that we will be able to convert future
riyal-denominated contracts to US dollar-denominated contracts or that the riyal
exchange rate will continue in effect as in the past.

At various times, we utilize local currency borrowings (foreign
currency denominated debt), the payment structure of customer contracts and
foreign exchange contracts to selectively hedge our exposure to exchange rate
fluctuations in connection with monetary assets, liabilities, cash flows and
commitments denominated in certain foreign currencies. A foreign exchange
contract is a foreign currency transaction, defined as an agreement to exchange
different currencies at a given future date and at a specified rate.

On March 26, 2002, in anticipation of closing the Enserco acquisition
discussed in Note 3, we entered into two foreign exchange contracts with a total
notional value of Cdn. $115.9 million and maturity dates of April 29, 2002.
Additionally, on April 9, 2002, we entered into a third foreign exchange
contract with a notional value of Cdn. $50.0 million maturing April 29, 2002.
The notional amounts of these contracts were used to fund the cash portion of
the Enserco acquisition purchase price. The notional amounts of these contracts
represented the amount of foreign currency purchased at maturity and did not
represent our exposure on these contracts. Although such contracts served as an
economic hedge against our foreign currency risk related to the cash portion of
the acquisition cost, we accounted for these contracts as speculative as
required by Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and therefore
marked them to market as of March 31, 2002. We recorded a US $.17 million loss
in our statement of income as of March 31, 2002. Upon maturity of these foreign
exchange contracts on April 29, 2002, we recognized a gain of approximately US
$1.95 million in our statement of income for the three months ended June 30,
2002.

Recent Accounting Pronouncements

SFAS No. 142, "Goodwill and Other Intangible Assets", addresses the
accounting for goodwill and other intangible assets after an acquisition. The
most significant changes made by SFAS 142 are: (1) goodwill and intangible
assets with indefinite lives no longer will be amortized; (2) goodwill and
intangible assets with indefinite lives must be tested for impairment at least
annually; and (3) the amortization period for those intangible assets with
finite lives no longer will be limited to 40 years. The effect of no longer
amortizing goodwill would have increased net income by approximately $1.1
million ($.01 per diluted share) for the prior year quarter and approximately
$2.3 million ($.01 per diluted share) for the six months ended June 30, 2001.

We adopted SFAS 142 effective January 1, 2002 and during the current
quarter, we performed our initial goodwill impairment assessment as required. As
part of that assessment, we determined that our 11 business units represent our
reporting units as defined by SFAS 142. We determined the aggregate carrying
values and fair values of all such reporting units, both of which were measured
as of the January 1, 2002 adoption date. We calculated the fair value of each
reporting unit based on discounted cash flows and determined there was no
goodwill impairment.

We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", effective January 1, 2002, as required. This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. Due to the nature of our business, this new accounting
pronouncement had no impact on our reported results of operations or financial
position.

We adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections", effective
April 1, 2002. Due to the nature of our business, Financial Accounting Standards
Board (FASB) 44, 64 and Amendment of FASB 13 are not applicable. SFAS 145
eliminates SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and states that gains and losses from the extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in Accounting
Principles Board (APB) Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". APB
30 defines extraordinary items as events and transactions that are distinguished
by their unusual nature and by the infrequency of their occurrence. Accordingly,
we no longer classify gains and losses from extinguishment of debt that are
usual and frequent as extraordinary items and we reclassified to other income
any similar debt extinguishment items that had been reported as extraordinary
items in prior accounting periods. In conjunction with adopting SFAS 145 we
reclassified an extraordinary loss recorded during the first quarter of the year
totaling $.13 million, net of taxes of $.08 million, to other income with the
related income tax component

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reclassified to income tax expense.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement will require us to
recognize costs associated with exit or disposal activities when they are
incurred rather than when we commit to an exit or disposal plan. Examples of
costs covered by this guidance include lease termination costs, employee
severance costs that are associated with a restructuring, discontinued
operations, plant closings or other exit or disposal activities. The provisions
of this statement are effective for fiscal years beginning after December 31,
2002 and will impact any exit or disposal activities initiated after January 1,
2003. This statement does not currently impact Nabors.

We adopted Emerging Issues Task Force (EITF) No. 01-14, "Income
Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred", in the current quarter. Previously, we recognized reimbursements
received as a reduction to the related direct costs. EITF 01-14 requires that
reimbursements received be included in operating revenues and "out-of-pocket"
expenses be included in direct costs. Accordingly, reimbursements received from
our customers have been reclassified to revenues for all periods presented. The
effect of adopting EITF 01-14 increased operating revenues and direct costs from
previously reported amounts by $12.9 million and $16.7 million for the three
months ended June 30, 2002 and 2001, and $28.0 million and $33.8 million for the
six months ended June 30, 2002 and 2001, respectively.

NOTE 3 ACQUISITIONS

On March 18, 2002, we acquired, for cash, 20.5% of the issued and
outstanding shares of Enserco Energy Service Company, Inc., a Canadian
publicly-held corporation, for Cdn. $15.50 per share for a total price of Cdn.
$83.2 million (US $52.6 million). At March 31, 2002, our investment in Enserco
was accounted for using the equity method of accounting.

On April 26, 2002, we completed our acquisition of Enserco by
purchasing their remaining outstanding shares for Cdn. $15.65 per share by
paying cash of Cdn. $100.1 million (US $64.1 million) and by issuing 2,638,526
shares of Nabors Delaware common stock and 910,556 shares of exchangeable stock
of Nabors Exchangeco (Canada) Inc., an indirect wholly-owned Canadian subsidiary
of Nabors Delaware. The Nabors Exchangeco shares are exchangeable for Nabors
common shares on a one-for-one basis. Additionally, these exchangeable shares
have essentially identical rights as Nabors common shares, including but not
limited to voting rights and the right to receive dividends, if any. The value
of the Nabors Delaware and Nabors Exchangeco shares issued totaled Cdn. $254.2
million, or US $162.8 million. Enserco's results of operations were consolidated
into ours commencing on April 26, 2002. In addition, we assumed Enserco debt
totaling Cdn. $33.4 million (US $21.3 million). The Enserco purchase price has
been allocated based on preliminary estimates of the fair market value of assets
acquired and liabilities assumed as of the acquisition date and resulted in
goodwill of approximately US $100 million. The purchase price allocation for the
Enserco acquisition is subject to adjustment as additional information becomes
available and will be finalized by December 31, 2002.

Enserco provided land drilling, well-servicing and workover services in
Canada and operated a fleet of 193 well-servicing rigs and 30 drilling rigs on
the acquisition date. The Enserco acquisition increases our position in Canada
with assets that are relatively new and in excellent condition, allowing us to
provide services to many of our key US customers who have increased their
presence in Canada as it has become even more strategic to the North American
gas supply market.

In late June 2002, Nabors acquired the RBF 209 for approximately $21
million. This 200 foot, mat support, cantilever jackup has been renamed Nabors
Rig 659. It is being upgraded at a cost of approximately $4.5 million for work
on a 4.5 year contract in Mexico for PEMEX commencing September 2002.

NOTE 4 LONG-TERM DEBT

During the six months ended June 30, 2002, we purchased $.6 million
face value of our 8-5/8% senior subordinated notes due April 2008 in the open
market at a price of 108%. In addition, we purchased $4.7 million face value of
our 6.8% senior unsecured notes due April 2004 in the open market at a price of
104%. Upon settlement of these transactions, we paid $5.7 million and recognized
a pretax loss of approximately $.2 million, resulting from the repurchases of
these notes at prices higher than the amounts recorded on our books.
Additionally, we paid off Cdn. $21.0 million (US $13.2 million) of the debt
assumed in the Enserco acquisition. In the first quarter of 2002, we made a $2.5
million scheduled principal payment relating to our medium-term notes.

As a result of the reorganization, discussed in Note 1, we may have
failed to comply with a covenant contained in our $200 million credit facility
agreement and a related $30 million letter of credit facility. At the time of
the default, there were no outstanding borrowings on the $200 million unsecured
revolving credit facility and approximately $23 million outstanding on the
related letter of credit facility. Since the $200 million credit facility was
scheduled to mature on September 5, 2002 and we had cash, short-term and
long-term marketable securities balances as of July 31, 2002 totaling $814.3
million, we have notified the bank that we are terminating the facility. We plan
on replacing this credit facility with a similar facility during the fourth
quarter of 2002. The bank has provided a waiver on the letter of credit
facility.

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NOTE 5 COMMON SHARES

In conjunction with our acquisition of Enserco during April, Nabors
Delaware issued 2,638,526 shares of Nabors Delaware common stock and 910,556
shares of exchangeable stock of Nabors Exchangeco (Canada) Inc. that is now
exchangeable for our common shares on a one-for-one basis (Note 3). The
exchangeable stock has been recorded as an increase in capital in excess of par
value. Subsequent to the acquisition 181,789 Exchangeco shares have been
exchanged, resulting in approximately 728,767 exchangeable shares outstanding as
of June 30, 2002.

As a result of the corporate reorganization (Note 1), the authorized
share capital of Nabors consists of 400 million common shares, par value $.001
per share, and 25 million preferred shares, par value $.001 per share. Common
shares issued were 144,368,390 at $.001 par value at June 30, 2002 compared to
144,368,390 at $.10 par value immediately preceding the reorganization. The
decrease in par value of common stock from $.10 to $.001 is recorded as an
increase to capital in excess of par value and a decrease in common shares in
our Consolidated Financial Statements.

In conjunction with the reorganization, 6.8 million shares of treasury
stock outstanding were retired, as Bermuda law does not recognize the concept of
treasury stock. The effect of this retirement reduced common shares by $.7
million, capital in excess of par value by $59.2 million and retained earnings
by $192.9 million.

NOTE 6 COMMITMENTS AND CONTINGENCIES

Capital Expenditures

As of June 30, 2002, we had outstanding capital expenditure purchase
commitments of approximately $36.0 million primarily for rig-related enhancing
and sustaining capital expenditures.

Contingencies

Self Insurance Accruals. Nabors is self-insured for certain losses
relating to workers' compensation, general liability, property damage and
employee medical benefits. Effective April 1, 2002, our exposure (that is our
deductible) per occurrence ranges from $1.0 million for workers' compensation to
between $2.0 million and $5.0 million for employer liability, Jones Act and
general liability and $10.0 million for rig physical damage. Therefore, we are
self-insured for rigs with replacement values less than $10.0 million. As a
result, if a Nabors' rig with a net book value of $9.0 million was destroyed, we
would record a $9.0 million loss in the period in which the loss event occurred.
In previous years, we had physical damage insurance for essentially all of our
rigs, with a substantially lower deductible of $.25 million per occurrence.
Thus, historically we have not recorded material losses in our financial
statements related to the destruction of one of our rigs. We have purchased
stop-loss coverage in order to limit our aggregate exposure to certain physical
damage claims for insured rigs, that is those rigs with replacement values in
excess of $10.0 million. The effect of this coverage is that our maximum
physical damage loss on insured rigs would be $20.0 million plus $1.0 million
per occurrence. There is no assurance that such coverage will adequately protect
Nabors against liability from all potential consequences.

Litigation. In Verdin v. R&B Falcon Drilling USA, Inc., et al., Civil
Action No. G-00-488, in the United States District Court for the Southern
District of Texas, Galveston Division, the class action lawsuit against our
offshore drilling subsidiaries alleging, among other things, conspiracy to
depress wages and benefits paid to our offshore employees, we have reached a
settlement, which was approved by the court on April 22, 2002. The settlement
payment was made in the second quarter, and the amount paid by Nabors'
subsidiaries was not material to Nabors.

On May 23, 2002, Steve Rosenberg, an individual shareholder of the
company, filed a complaint against the company and its directors in the United
States District Court for the Southern District of Texas (Civil Action No.
02-1942), alleging that Nabors' May 10, 2002 proxy statement/prospectus
contained certain material misstatements and omissions in violation of federal
securities laws and state law. Nabors' May 10, 2002 proxy statement/prospectus
was sent to shareholders in connection with the special meeting to consider and
vote on Nabors' proposed reorganization and effective reincorporation in
Bermuda. The AFL-CIO moved to intervene in Civil Action No. 02-1942 and filed a
complaint containing similar allegations. On June 5, 2002, Marilyn Irey, an
individual shareholder of the company, filed a complaint in the United States
District Court for the Southern District of Texas (Civil Action No. 02-2108)
that is nearly identical to Steve Rosenberg's complaint. The three shareholders
requested that the Court either enjoin the closing of the shareholder vote on
the scheduled date or the effectuation of the reorganization. In addition, two
of the shareholders (Steve Rosenberg and Marilyn Irey) purported to bring a
class action on behalf of all shareholders, alleging that Nabors and its
directors violated their state law fiduciary duties by making these alleged
misstatements and omissions. These two shareholders, on behalf of their
purported class, seek monetary damages for their state law claims. Since the
beginning of the litigation, two of the shareholders (Steve Rosenberg and the
AFL-CIO) have amended their complaints, but have not added any substantive
allegations.

On June 13, 2002, the Court granted the AFL-CIO's motion to intervene.
On June 15, 2002, the Court denied a motion for temporary restraining order
brought by two of the shareholders (Steve Rosenberg and the AFL-CIO) in their

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attempts to prevent the closing of Nabors' reorganization and its effective
reincorporation in Bermuda. On July 2, 2002, the Court granted an agreed motion
to consolidate Civil Action No. 02-2108 into Civil Action No. 02-1942. Nabors
and its directors have moved to dismiss the lawsuits of all three shareholders,
and that motion is currently pending. Nabors and its directors believe that the
allegations in this lawsuit are without merit, and Nabors and its directors will
defend vigorously the claims brought against them. We are unable, however, to
predict the outcome of this action or the costs to be incurred in connection
with its defense and there can be no assurance that this litigation will be
resolved in our favor.

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

NOTE 7 EARNINGS PER SHARE

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

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
-------- -------- -------- --------

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (numerator):
Net income - basic $ 25,420 $104,015 $ 67,362 $187,153
Add interest expense on assumed conversion of our
zero coupon convertible senior debentures,
net of tax (1):
$825 million due 2020 -- 2,009 -- 4,005
$1.381 billion due 2021 -- 3,311 -- 5,311
-------- -------- -------- --------
Adjusted net income - diluted $ 25,420 $109,335 $ 67,362 $196,469
-------- -------- -------- --------
Earnings per share:
Basic $ .18 $ .71 $ .47 $ 1.28
Diluted $ .17 $ .63 $ .45 $ 1.14

Shares (denominator):
Weighted average number of shares outstanding-basic (1) 143,188 146,539 142,079 146,617
Net effect of dilutive stock options and warrants based
on the treasury stock method 7,263 8,140 6,477 8,438
Assumed conversion of our zero coupon
convertible senior debentures (2):
$825 million due 2020 -- 8,859 -- 8,859
$1.381 billion due 2021 -- 9,771 -- 7,882
-------- -------- -------- --------
Weighted average number of shares outstanding-diluted 150,451 173,309 148,556 171,796
-------- -------- -------- --------

(1) Includes the weighted average number of common shares of Nabors and the
weighted average number of exchangeable shares of Nabors Exchangeco
(Canada) Inc. issued as part of the Enserco acquisition.
(2) Diluted earnings per share for the three months and six months ended June
30, 2001 reflects the assumed conversion of our $825 million and $1.381
billion zero coupon convertible senior debentures, as the conversion in
those periods would have been dilutive. Diluted earnings per share for the
three months and six months ended June 30, 2002 does not reflect the
assumed conversion of our $825 million and $1.381 billion zero coupon
convertible senior debentures, as the conversion in those periods would
have been anti-dilutive.

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NOTE 8 SUPPLEMENTAL INCOME STATEMENT INFORMATION

Other income, net includes the following:

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
-------- -------- -------- --------

(IN THOUSANDS)

Gains on marketable securities $ 475 $ 3,354 $ 2,950 $ 7,215
(Losses) gains on disposition of long-term assets (722) (189) (828) 4,988
Foreign currency transaction gains (losses) 2,524 (185) 2,307 297
Corporate reorganization expense (1,316) -- (3,358) --
Other 1,688 76 2,075 (176)
-------- -------- -------- --------
$ 2,649 $ 3,056 $ 3,146 $ 12,324
-------- -------- -------- --------

NOTE 9 SEGMENT INFORMATION

The following table sets forth financial information with respect to our
reportable segments:

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------

(IN THOUSANDS)
Operating revenues and Earnings from
unconsolidated affiliates:
Contract drilling(1) $ 326,173 $ 572,687 $ 684,605 $ 1,075,921
Manufacturing and logistics(2) 40,214 74,168 79,933 138,940
Other(3) (9,869) (35,375) (21,183) (62,214)
----------- ----------- ----------- -----------
Total $ 356,518 $ 611,480 $ 743,355 $ 1,152,647
----------- ----------- ----------- -----------

Income derived from operating activities:(4)
Contract drilling(1) $ 39,719 $ 145,846 $ 100,889 $ 259,059
Manufacturing and logistics(2) 7,235 27,769 16,441 50,701
Other(5) (9,434) (12,729) (18,753) (24,845)
----------- ----------- ----------- -----------
Total $ 37,520 $ 160,886 $ 98,577 $ 284,915
Interest expense (14,418) (14,513) (29,033) (26,977)
Interest income 8,142 15,676 17,393 28,936
Other income, net 2,649 3,056 3,146 12,324
----------- ----------- ----------- -----------
Income before income taxes $ 33,893 $ 165,105 $ 90,083 $ 299,198
----------- ----------- ----------- -----------

(1) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $7.1 million and $4.2 million for the three-month periods
ended June 30, 2002 and 2001, and $13.5 million and $8.4 million for the
six-month periods ended June 30, 2002 and 2001, respectively.
(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $3.3 million and $5.8 million for the three-month periods
ended June 30, 2002 and 2001, and $7.9 million and $11.8 million for the
six-month periods ended June 30, 2002 and 2001, respectively.
(3) Includes the elimination of inter-segment manufacturing and logistics
sales.
(4) Income derived from operating activities is computed by: subtracting direct
costs, general and administrative expenses, and depreciation and
amortization 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. However, management does evaluate the
performance of its business units and the consolidated company based on
income derived from operating activities because it believes that this
financial measure is an accurate reflection of the ongoing profitability of
our company.
(5) Includes the elimination of inter-segment transactions and unallocated
corporate expenses, assets and capital expenditures.
(6) Includes $26.5 million and $22.3 million of investments in unconsolidated
affiliates, accounted for by the equity method, at June 30, 2002 and
December 31, 2001, respectively.
(7) Includes $32.4 million and $32.8 million of investments in unconsolidated
affiliates, accounted for by the equity method, at June 30, 2002 and
December 31, 2001, respectively.

11

NOTE 10 CONDENSED CONSOLIDATING FINANCIAL INFORMATION

In connection with the corporate reorganization discussed in Note 1,
Nabors has fully and unconditionally guaranteed all of the issued public debt
securities of Nabors Delaware at the effective time of the merger. The following
condensed consolidated financial information for Nabors as Parent-Guarantor,
Nabors Delaware as Issuer, and all their other subsidiaries is included so that
separate financial statements of Nabors Delaware are not required to be filed
with the US Securities and Exchange Commission. The condensed consolidating
financial statements present Nabors and Nabors Delaware investments in their
subsidiaries using the equity method of accounting.
Condensed Consolidating Balance Sheet

June 30, 2002
--------------------------------------------------------------------------------
Nabors Other Consolidating
Nabors Delaware Subsidiaries Adjustments Total
-------------- -------------- -------------- -------------- --------------

(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 25 $ 12 $ 142,996 $ -- $ 143,033
Marketable securities -- -- 409,550 -- 409,550
Accounts receivable, net -- -- 297,261 -- 297,261
Inventory and supplies -- -- 16,592 -- 16,592
Prepaid expenses and other current assets -- 25 120,862 -- 120,887
---------- ---------- ---------- ------------ ----------
Total current assets 25 37 987,261 -- 987,323

Marketable securities -- -- 236,915 -- 236,915
Investments in affiliates 176,921 2,815,306 1,862,436 (4,795,766) 58,897
Property, plant and equipment, net -- -- 2,787,503 -- 2,787,503
Goodwill, net -- -- 304,377 -- 304,377
Intercompany receivables 1,986,897 2,028,410 -- (4,015,307) --
Other long-term assets -- 11,043 46,720 -- 57,763
---------- ---------- ---------- ------------ ----------
Total assets $2,163,843 $4,854,796 $6,225,212 $ (8,811,073) $4,432,778
========== ========== ========== ============ ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt -- -- 3,565 -- 3,565
Trade accounts payable -- 20 107,608 -- 107,628
Accrued liabilities -- 2,607 134,343 -- 136,950
Income taxes payable -- (189) 31,636 -- 31,447
---------- ---------- ---------- ------------ ----------
Total current liabilities -- 2,438 277,152 -- 279,590

Long-term debt -- 1,534,460 47,723 -- 1,582,183
Other long-term liabilities -- -- 100,731 -- 100,731
Deferred income taxes -- (78,610) 385,041 -- 306,431
Intercompany payables -- -- 4,015,307 (4,015,307) --
---------- ---------- ---------- ------------ ----------
Total liabilities -- 1,458,288 4,825,954 (4,015,307) 2,268,935
---------- ---------- ---------- ------------ ----------
Stockholders' equity 2,163,843 3,396,508 1,399,258 (4,795,766) 2,163,843
---------- ---------- ---------- ------------ ----------
Total liabilities and stockholders' equity $2,163,843 $4,854,796 $6,225,212 $ (8,811,073) $4,432,778
========== ========== ========== ============ ==========

12

December 31, 2001
--------------------------------------------------------------------------------
Nabors Other Consolidating
Nabors(1) Delaware Subsidiaries Adjustments Total
-------------- -------------- -------------- -------------- --------------

(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 2,201 $ 196,242 $ -- $ 198,443
Marketable securities -- -- 343,169 -- 343,169
Accounts receivable, net -- -- 361,086 -- 361,086
Inventory and supplies -- -- 18,515 -- 18,515
Prepaid expenses and other current assets -- 417 109,316 -- 109,733
---------- ---------- ---------- ----------- ----------
Total current assets -- 2,618 1,028,328 -- 1,030,946

Marketable securities -- -- 377,025 -- 377,025
Investments in affiliates 13 1,428,593 55,141 (1,428,606) 55,141
Property, plant and equipment, net -- -- 2,433,247 -- 2,433,247
Goodwill, net -- -- 199,048 -- 199,048
Intercompany receivables -- 1,916,919 -- (1,916,919) --
Other long-term assets -- 13,574 42,934 -- 56,508
---------- ---------- ---------- ----------- ----------
Total assets $ 13 $3,361,704 $4,135,723 $(3,345,525) $4,151,915
========== ========== ========== =========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt -- -- 2,510 -- 2,510
Trade accounts payable -- 23 131,798 -- 131,821
Accrued liabilities -- 4,372 163,650 -- 168,022
Income taxes payable -- (189) 27,966 -- 27,777
---------- ---------- ---------- ----------- ----------
Total current liabilities -- 4,206 325,924 -- 330,130

Long-term debt -- 1,523,915 43,701 -- 1,567,616
Other long-term liabilities -- -- 110,902 -- 110,902
Deferred income taxes -- (24,283) 309,684 -- 285,401
Intercompany payables 1 -- 1,916,918 (1,916,919) --
---------- ---------- ---------- ----------- ----------
Total liabilities 1 1,503,838 2,707,129 (1,916,919) 2,294,049
---------- ---------- ---------- ----------- ----------
Stockholders' equity 12 1,857,866 1,428,594 (1,428,606) 1,857,866
---------- ---------- ---------- ----------- ----------
Total liabilities and stockholders' equity $ 13 $3,361,704 $4,135,723 $(3,345,525) $4,151,915
========== ========== ========== =========== ==========

(1) Non-Parent, Non-Guarantor

13

Condensed Consolidating Income Statement

Three months ended June 30, 2002
-------------------------------------------------------------------------
Nabors Other Consolidating
Nabors Delaware Subsidiaries Adjustments Total
--------- --------- ------------ ----------- ---------

(IN THOUSANDS)
Revenues and other income:
Operating revenues $ -- $ -- $ 346,088 $ -- $ 346,088
Earnings from unconsolidated affiliates -- -- 10,430 -- 10,430
Earnings from consolidated affiliates 22,166 22,126 -- (44,292) --
Interest income -- (5) 8,147 -- 8,142
Intercompany interest income 3,261 13,516 -- (16,777) --
Other income, net -- 633 2,016 -- 2,649
--------- --------- --------- --------- ---------
Total revenues and other income 25,427 36,270 366,681 (61,069) 367,309
--------- --------- --------- --------- ---------
Costs and other deductions:
Direct costs -- -- 238,190 -- 238,190
General and administrative expenses 7 126 32,691 -- 32,824
Depreciation and amortization -- -- 47,984 -- 47,984
Interest expense -- 13,954 464 -- 14,418
Intercompany interest expense -- -- 16,777 (16,777) --
--------- --------- --------- --------- ---------
Total costs and other deductions 7 14,080 336,106 (16,777) 333,416
--------- --------- --------- --------- ---------
Income before income taxes 25,420 22,190 30,575 (44,292) 33,893
--------- --------- --------- --------- ---------

Income taxes:
Current -- -- 2,514 -- 2,514
Deferred -- 24 5,935 -- 5,959
--------- --------- --------- --------- ---------
Total income taxes -- 24 8,449 -- 8,473
--------- --------- --------- --------- ---------
Net income $ 25,420 $ 22,166 $ 22,126 $ (44,292) $ 25,420
========= ========= ========= ========= =========

14

Three months ended June 30, 2001
------------------------------------------------------------------------
Nabors Other Consolidating
Nabors(1) Delaware Subsidiaries Adjustments Total
---------- --------- ------------ ----------- ---------

(IN THOUSANDS)
Revenues and other income:
Operating revenues $ -- $ -- $ 601,484 $ -- $ 601,484
Earnings from unconsolidated affiliates -- -- 9,996 -- 9,996
Earnings from consolidated affiliates -- 100,066 -- (100,066) --
Interest income -- 16 15,660 -- 15,676
Intercompany interest income -- 20,581 -- (20,581) --
Other income, net -- (280) 3,336 -- 3,056
--------- --------- --------- ---------- ---------
Total revenues and other income -- 120,383 630,476 (120,647) 630,212
--------- --------- --------- ---------- ---------

Costs and other deductions:
Direct costs -- -- 366,034 -- 366,034
General and administrative expenses -- 73 33,741 -- 33,814
Depreciation and amortization -- -- 50,746 -- 50,746
Interest expense -- 13,976 537 -- 14,513
Intercompany interest income -- -- 20,581 (20,581) --
--------- --------- --------- ---------- ---------
Total costs and other deductions -- 14,049 471,639 (20,581) 465,107
--------- --------- --------- ---------- ---------
Income before income taxes -- 106,334 158,837 (100,066) 165,105
--------- --------- --------- ---------- ---------
Income taxes:
Current -- -- 11,388 -- 11,388
Deferred -- 2,319 47,383 -- 49,702
--------- --------- --------- ---------- ---------
Total income taxes -- 2,319 58,771 -- 61,090
--------- --------- --------- ---------- ---------
Net income $ -- $ 104,015 $ 100,066 $ (100,066) $ 104,015
========= ========= ========= ========== =========

(1) Non-Parent, Non-Guarantor

15

Condensed Consolidating Income Statement

Six months ended June 30, 2002
------------------------------------------------------------------------
Nabors Other Consolidating
Nabors Delaware Subsidiaries Adjustments Total
--------- --------- ------------ ----------- ---------

(IN THOUSANDS)
Revenues and other income:
Operating revenues $ -- $ -- $ 721,959 $ -- $ 721,959
Earnings from unconsolidated affiliates -- -- 21,396 -- 21,396
Earnings from consolidated affiliates 64,113 65,702 -- (129,815) --
Interest income -- 15 17,378 -- 17,393
Intercompany interest income 3,261 27,464 -- (30,725) --
Other income, net -- (1,780) 4,926 -- 3,146
--------- --------- --------- --------- ---------
Total revenues and other income 67,374 91,401 765,659 (160,540) 763,894
--------- --------- --------- --------- ---------

Costs and other deductions:
Direct costs -- -- 487,623 -- 487,623
General and administrative expenses 12 268 65,210 -- 65,490
Depreciation and amortization -- -- 91,665 -- 91,665
Interest expense -- 27,954 1,079 -- 29,033
Intercompany interest expense -- -- 30,725 (30,725) --
--------- --------- --------- --------- ---------
Total costs and other deductions 12 28,222 676,302 (30,725) 673,811
--------- --------- --------- --------- ---------

Income before income taxes 67,362 63,179 89,357 (129,815) 90,083
--------- --------- --------- --------- ---------

Income taxes:
Current -- -- 6,957 -- 6,957
Deferred -- (934) 16,698 -- 15,764
--------- --------- --------- --------- ---------
Total income taxes -- (934) 23,655 -- 22,721
--------- --------- --------- --------- ---------

Net income $ 67,362 $ 64,113 $ 65,702 $(129,815) $ 67,362
========= ========= ========= ========= =========

16

Six months ended June 30, 2001
----------------------------------------------------------------------------
Nabors Other Consolidating
Nabors(1) Delaware Subsidiaries Adjustments Total
---------- --------- ------------ ----------- ----------

(IN THOUSANDS)
Revenues and other income:
Operating revenues $ -- $ -- $1,132,404 $ -- $1,132,404
Earnings from unconsolidated affiliates -- -- 20,243 -- 20,243
Earnings from consolidated affiliates -- 178,940 -- (178,940) --
Interest income -- 33 28,903 -- 28,936
Intercompany interest income -- 39,944 -- (39,944) --
Other income, net -- (969) 13,293 -- 12,324
--------- --------- ---------- --------- ----------
Total revenues and other income -- 217,948 1,194,843 (218,884) 1,193,907
--------- --------- ---------- --------- ----------

Costs and other deductions:
Direct costs -- -- 706,356 -- 706,356
General and administrative expenses -- 191 66,709 -- 66,900
Depreciation and amortization -- -- 94,476 -- 94,476
Interest expense -- 25,781 1,196 -- 26,977
Intercompany interest expense -- -- 39,944 (39,944) --
--------- --------- ---------- --------- ----------
Total costs and other deductions -- 25,972 908,681 (39,944) 894,709
--------- --------- ---------- --------- ----------

Income before income taxes -- 191,976 286,162 (178,940) 299,198
--------- --------- ---------- --------- ----------

Income taxes:
Current -- -- 26,323 -- 26,323
Deferred -- 4,823 80,899 -- 85,722
--------- --------- ---------- --------- ----------
Total income taxes -- 4,823 107,222 -- 112,045
--------- --------- ---------- --------- ----------

Net income $ -- $ 187,153 $ 178,940 $(178,940) $ 187,153
========= ========= ========== ========= ==========

(1) Non-Parent, Non-Guarantor

17

Condensed Consolidating Cash Flow

Six months ended June 30, 2002
--------------------------------------------------------------------
Nabors Other Consolidating
Nabors Delaware Subsidiaries Adjustments Total
--------- --------- ------------ ----------- ---------

(IN THOUSANDS)
Net cash provided by (used for) operating activities $ 25 $ (5,469) $ 200,129 $ -- $ 194,685
--------- --------- --------- --------- ---------

Cash flows from investing activities:
Purchases of marketable securities, available-for-sale -- -- (24,253) -- (24,253)
Sales of marketable securities, available-for-sale -- -- 94,526 -- 94,526
Cash received from disposition of long-term assets -- -- 4,923 -- 4,923
Cash paid for acquisitions of businesses, net -- -- (116,668) -- (116,668)
Capital expenditures -- -- (198,072) -- (198,072)
--------- --------- --------- --------- ---------
Net cash used for investing activities -- -- (239,544) -- (239,544)
--------- --------- --------- --------- ---------

Cash flows from financing activities:
Decrease in restricted cash -- -- 867 -- 867
Reduction of long-term borrowings -- (5,048) (16,414) -- (21,462)
Common stock transactions -- 8,328 -- -- 8,328
--------- --------- --------- --------- ---------
Net cash provided by (used for) financing activities -- 3,280 (15,547) -- (12,267)
--------- --------- --------- --------- ---------

Effect of exchange rate changes on cash and cash equivalents -- -- 1,716 -- 1,716
--------- --------- --------- --------- ---------

Net increase (decrease) in cash and cash equivalents 25 (2,189) (53,246) -- (55,410)
Cash and cash equivalents, beginning of period -- 2,201 196,242 -- 198,443
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period $ 25 $ 12 $ 142,996 $ -- $ 143,033
========= ========= ========= ========= =========

18

Six months ended June 30, 2001
--------------------------------------------------------------------
Nabors Other Consolidating
Nabors(1) Delaware Subsidiaries Adjustments Total
--------- --------- ------------ ----------- ---------

(IN THOUSANDS)
Net cash (used for) provided by operating activities $ -- $(736,427) $ 977,384 $ -- $ 240,957
--------- --------- --------- --------- ---------

Cash flows from investing activities:
Purchases of marketable securities, available-for-sale -- -- (441,279) -- (441,279)
Sales of marketable securities, available-for-sale -- -- 28,193 -- 28,193
Cash received from disposition of long-term assets -- -- 7,486 -- 7,486
Capital expenditures -- -- (319,797) -- (319,797)
--------- --------- --------- --------- ---------
Net cash used for investing activities -- -- (725,397) -- (725,397)
--------- --------- --------- --------- ---------

Cash flows from financing activities:
Increase in restricted cash -- -- (33) -- (33)
Proceeds from long-term borrowings -- 840,335 3 -- 840,338
Reduction of long-term borrowings -- -- (3,556) -- (3,556)
Debt issuance costs -- -- (12,879) -- (12,879)
Common stock transactions -- 7,724 -- -- 7,724
Treasury stock transactions -- (111,580) -- -- (111,580)
--------- --------- --------- --------- ---------
Net cash provided by (used for) financing activities -- 736,479 (16,465) -- 720,014
--------- --------- --------- --------- ---------

Effect of exchange rate changes on cash and cash equivalents -- -- 6 -- 6
--------- --------- --------- --------- ---------

Net increase in cash and cash equivalents -- 52 235,528 -- 235,580
Cash and cash equivalents, beginning of period -- 2,118 195,194 -- 197,312
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period $ -- $ 2,170 $ 430,722 $ -- $ 432,892
========= ========= ========= ========= =========

(1) Non-Parent, Non-Guarantor

NOTE 11 SUBSEQUENT EVENTS

Share and Debt Repurchase Programs

On July 17, 2002, the Board of Directors of Nabors authorized the
continuation of the share repurchase program that had begun under Nabors
Delaware, and provided that the amount of Nabors common shares authorized for
purchase by Nabors going forward was up to $400 million. Under the Nabors
Delaware program, Nabors Delaware had acquired an aggregate of approximately
$248.0 million of Nabors Delaware common stock, or 6.2 million shares. Pursuant
to Bermuda law, any shares, when purchased, will be treated as cancelled, the
amount of Nabors' issued capital will be diminished by the nominal value of
those shares repurchased and retained earnings will be reduced by the
incremental difference between the cost of issuance and the cost of the shares
repurchased. A repurchase of shares will not have the effect of reducing the
amount of Nabors' authorized share capital. Additionally, the Board approved the
repurchase of up to $400 million of outstanding debt securities of Nabors and
its subsidiaries. These amounts may be increased or decreased at the discretion
of the Board, depending upon market conditions and consideration of the best
interest of shareholder value. Repurchases may be conducted either on the open
market, negotiated transactions, or by other means, from time to time, depending
upon market conditions and other factors.

On July 23, 2002, we entered into a private transaction with a
counterparty in which we sold 1.0 million European-style put options for $2.6
million with a maturity date of October 23, 2002. If the price of our common
shares is below $26.5698 on the maturity date, we anticipate that the
counterparty will exercise the put option which will result in, at our option
(1) our purchase of 1.0 million of our common shares at a price of $26.5698 per
share or (2) our payment, in cash or Nabors common shares, of an amount equal to
the difference between $26.5698 and our stock price on October 23, 2002
multiplied by 1.0 million. If the price of our common shares is above $26.5698
on the maturity date, we anticipate that the counterparty will let the option
expire. In either case, we retain the $2.6 million in proceeds which was
recorded as an increase in capital in excess of par value in July 2002.

On August 2, 2002, Nabors acquired, through a subsidiary, 91,000 of its
common shares in the open market for $27.30 per share for an aggregate price,
including commissions, of $2.5 million. The shares will be recorded by the
subsidiary as an investment in Nabors, and will be eliminated in consolidation.
So long as the Nabors common shares are held by a subsidiary, they will be
issued and outstanding and will have the same rights as other outstanding
shares.

19

Interest Rate Hedge Transaction

On July 24, 2002, we entered into an interest rate hedge transaction
with a third party financial institution to manage and mitigate interest rate
risk exposure relative to a contemplated debt financing transaction of an
indeterminate amount. Under the agreement, we agreed to receive (pay) cash from
(to) the counterparty based on the difference between 4.43% and the 10-year
Treasury rate on August 23, 2002, based on a $100.0 million notional amount with
semi-annual interest payments over a 10-year maturity. In accordance with SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended, we will account for this transaction as a cash flow hedge.

Proposed Acquisition of Ryan Energy Technologies, Inc.

On August 12, 2002, Nabors entered into an arrangement agreement with
Ryan Energy Technologies, Inc., Canadian corporation that provides drilling
technology and services and data management solutions for the energy industry.
Pursuant to the agreement, Nabors, through a Canadian subsidiary, will offer
Cdn. $1.85 for each Ryan common share. Ryan shareholders will have the option to
elect to receive Cdn. $1.85 in cash or the equivalent value in exchangeable
shares of Nabors Exchangeco (Canada) Inc., which shares will be exchangeable for
Nabors common shares. The exchangeable shares will have the same voting rights,
dividend entitlements and other attributes as Nabors common shares, will be
exchangeable, at each shareholder's option, on a one-for-one basis, into Nabors
common shares and will be listed on the Toronto Stock Exchange. The exchangeable
shares will be automatically exchanged upon the occurrence of certain events.
The transaction is to be effected by way of a Plan of Arrangement.

The arrangement agreement has been unanimously approved by the Board of
Directors of Ryan and the Plan of Arrangement will require the approval of the
Court of Queen's Bench of Alberta and the approval of at least 66 2/3% of the
Ryan shareholders and optionholders, voting as a single class, at a meeting to
be held for that purpose. The Board of Directors of Ryan has received an opinion
from its financial advisor, Peters & Co. Limited, that the consideration under
the arrangement is fair, from a financial point of view, to the Ryan
shareholders. The arrangement agreement contains certain closing conditions,
including Nabors being satisfied regarding certain due diligence reviews of
Ryan's technology, customary non-solicitation provisions and a termination fee
payable by Ryan of Cdn. $1.75 million under certain circumstances. Nabors
retains the right to match competing proposals should they arise.

Certain shareholders and optionholders of Ryan who own or control an
aggregate of 4,454,058 Ryan common shares and 450,000 options to acquire Ryan
common shares, which constitute approximately 21% of the outstanding common
shares of Ryan (diluted for in-the-money options), have agreed, subject to the
terms and conditions of those agreements, to vote their Ryan common shares and
options in favor of the arrangement. As a result of such agreements, Nabors may
be considered to have acquired ownership, control or direction over such shares.
Nabors did not previously own or exercise control or direction over any
securities of Ryan.

20

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have reviewed the accompanying consolidated balance sheet of Nabors
Industries Ltd. and its subsidiaries as of June 30, 2002, and the related
consolidated statements of income for each of the three-month and six-month
periods ended June 30, 2002 and 2001 and the consolidated statements of changes
in stockholders' equity and of cash flows for the six-month periods ended June
30, 2002 and 2001. These financial statements are 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 to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, 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 statements for them
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, 2001, and the related consolidated statements of income, changes in
stockholders' equity and of cash flows for the year then ended (not presented
herein), and in our report dated January 23, 2002, except for Note 16, as to
which the date is March 18, 2002, we expressed an unqualified opinion on those
consolidated financial statements.

/s/ PricewaterhouseCoopers LLP
Houston, Texas
July 17, 2002, except for Note 11, as to which the
date is August 13, 2002

21

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

RESULTS OF OPERATIONS

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 2001

Operating revenues and Earnings from unconsolidated affiliates for the
second quarter of fiscal year 2002 totaled $356.5 million, representing a
decrease of $255.0 million, or 42%, as compared to the prior year period.
Current quarter income derived from operating activities and net income totaled
$37.5 million and $25.4 million ($.17 per diluted share), respectively,
representing decreases of 77% and 76% compared to the prior year period.
Operating revenues and Earnings from unconsolidated affiliates for the first six
months of fiscal year 2002 totaled $743.4 million, representing a decrease of
$409.3 million, or 36%, as compared to the prior year period. Income derived
from operating activities and net income totaled $98.6 million and $67.4 million
($.45 per diluted share), respectively, representing decreases of 65% and 64%
compared to the prior year period. Income derived from operating activities is
computed by: subtracting direct costs, general and administrative expenses, and
depreciation and amortization expense from Operating revenues and then adding
Earnings from unconsolidated affiliates.

The decrease in our operating results during the current three-month
and six-month periods as compared to the prior year periods is due to the
continuing weak environment in several key markets, driven primarily by lower
levels of activity resulting from the weakness in the price of natural gas and
oil that began in the second half of 2001. Natural gas prices (per the Bloomberg
average US natural gas spot price), which averaged $2.77 per mcf during the
first six months of 2002, were down significantly from the $5.17 per mcf average
during the prior year period. Oil prices (per the Bloomberg average West Texas
Intermediate crude oil spot price) averaged $24.01 per barrel during the first
six months of 2002, down from $28.31 per barrel during the prior year period.
The corresponding decline in our rig activity resulted in declining overall
profitability for Nabors. These lower activity levels have been experienced by
most of our business units, with the sharpest decline coming from our US Lower
48 land drilling business, as the number of working rigs and their average
dayrates and gross margins continued to decline. The decrease in North American
land and offshore drilling activity is illustrated by the drilling industry's
lower total active land and offshore rig count. The average US land, Canadian
land and US offshore rig counts during the six months ended June 30, 2002 were
all lower by 32% than the corresponding prior year period.

Looking forward, we expect improvements in most of our operations
through the end of the year with the largest increase coming from our Canadian
and international units. The anticipated improvement in Canada is expected to
result from the seasonal increase in activity following spring breakup and the
contributions from our recent acquisition of Enserco Energy Service Company,
Inc. Our markets outside of North America have a favorable near-term outlook,
particularly in our international offshore markets where we anticipate a number
of further rig deployments and continued strong bid prospects. In the US Gulf of
Mexico, we expect a modest improvement in the near term with a more meaningful
increase likely longer term. The remainder of our businesses, primarily those
that are largely directed to the North American gas markets, are stable and we
anticipate improving market conditions throughout the remainder of the year.

22

The following tables set forth certain information with respect to our
reportable segments, rig, vessel and well-servicing activity, and certain
industry data:

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
INCREASE INCREASE
2002 2001 (DECREASE) 2002 2001 (DECREASE)
-------- -------- --------------- ------ ----------- -----------------

(IN THOUSANDS, EXCEPT PERCENTAGES)
Reportable segments:
Operating revenues and
Earnings from unconsolidated
affiliates:
Contract drilling(1) $326,173 $572,687 $(246,514) (43%) $ 684,605 $1,075,921 $(391,316) (36%)
Manufacturing and
logistics(2) 40,214 74,168 (33,954) (46%) 79,933 138,940 (59,007) (42%)
Other(3) (9,869) (35,375) 25,506 72% (21,183) (62,214) 41,031 66%
-------- -------- --------- ----------- ---------- ---------
Total $356,518 $611,480 $(254,962) (42%) $ 743,355 $1,152,647 $(409,292) (36%)
-------- -------- --------- ----------- ---------- ---------

Income derived from operating
activities(4):
Contract drilling(1) $ 39,719 $145,846 $(106,127) (73%) $ 100,889 $ 259,059 $(158,170) (61%)
Manufacturing and
logistics(2) 7,235 27,769 (20,534) (74%) 16,441 50,701 (34,260) (68%)
Other(5) (9,434) (12,729) 3,295 26% (18,753) (24,845) 6,092 25%
-------- -------- --------- ----------- ---------- ---------
Total $ 37,520 $160,886 $(123,366) (77%) $ 98,577 $ 284,915 $(186,338) (65%)
-------- -------- --------- ----------- ---------- ---------

- ------------------------
(1) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $7.1 million and $4.2 million for the three-month periods
ended June 30, 2002 and 2001, and $13.5 million and $8.4 million for the
six-month periods ended June 30, 2002 and 2001, respectively.

(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $3.3 million and $5.8 million for the three-month periods
ended June 30, 2002 and 2001, and $7.9 million and $11.8 million for the
six-month periods ended June 30, 2002 and 2001, respectively.

(3) Includes the elimination of inter-segment manufacturing and logistics
sales.

(4) Income derived from operating activities is computed by: subtracting direct
costs, general and administrative expenses, and depreciation and
amortization 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. However, management does evaluate the
performance of its business units and the consolidated company based on
income derived from operating activities because it believes that this
financial measure is an accurate reflection of the ongoing profitability of
our company.

(5) Includes the elimination of inter-segment transactions and unallocated
corporate expenses.

23

(1) Excludes labor contracts and well-servicing rigs. Includes our percentage
ownership of rigs from unconsolidated affiliates.

(2) 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.

(3) Vessel years represents a measure of the number of equivalent vessels
operating during a given period. For example, one vessel operating 182.5
days during a 365-day period represents 0.5 vessel years.

(4) Well-servicing hours represents the total number of hours that our US and
Canadian well-servicing rig fleet operated during the period.

- ----------------

(1) Source: Bloomberg
(2) Source: Baker Hughes

24

Contract drilling. This segment includes our drilling, workover and
well-servicing operations, on land and offshore. Second quarter 2002 Operating
revenues and Earnings from unconsolidated affiliates for the contract drilling
segment totaled $326.2 million and income derived from operating activities
totaled $39.7 million, representing decreases of 43% and 73%, respectively,
compared to the prior year quarter. Equivalent rig years (excluding labor
contracts and land well-servicing rigs) decreased to 194.6 years during the
second quarter of 2002 from an average of 353.6 years during the prior year
quarter. For the six months ended June 30, 2002, contract drilling Operating
revenues and Earnings from unconsolidated affiliates totaled $684.6 million and
income derived from operating activities totaled $100.9 million, representing
decreases of 36% and 61%, respectively, compared to the prior year period.
Equivalent rig years decreased to 203.9 years from an average of 349.3 years
during the prior year period.

Alaskan drilling revenues decreased during the current quarter due to
lower equivalent rig years, partially offset by higher average dayrates and
increased year-to-date due to higher average dayrates. Equivalent rig years in
Alaska decreased to 9.6 years during the current quarter from 10.5 years in the
prior year quarter and decreased slightly to 10.5 years during the six months
ended June 30, 2002 from 10.6 years during the prior year period.

US Lower 48 drilling revenues decreased dramatically during the current
quarter and year-to-date as a result of decreased demand for drilling services.
The protracted weakness of the North American natural gas market has resulted in
significant declines in both equivalent rig years and dayrates. US Lower 48
equivalent rig years decreased to 105.6 years during the current quarter from
242.5 years during the prior year quarter and decreased to 106.7 years during
the first six months of 2002 from 231.8 years during the prior year period.

US land well-servicing operations decreased during the current quarter
and year-to-date due to decreased activity primarily resulting from lower oil
prices and, to a lesser extent, lower natural gas prices. US land well-servicing
hours decreased to 415,000 hours during the current quarter from 505,000 hours
during the prior year quarter and decreased to 815,000 hours during the six
months ended June 30, 2002 from 984,000 hours during the prior year period.

US Offshore revenues decreased during the current quarter and
year-to-date due to decreased drilling activity resulting from lower natural gas
and oil prices. Offshore equivalent rig years decreased to 14.5 years during the
current quarter from 34.1 years during the prior year quarter and decreased to
14.7 years during the first six months of 2002 from 32.7 years during the prior
year period.

Canadian revenues increased during the current quarter and year-to-date
due to the increase in well-servicing revenues resulting from the acquisition of
Enserco in April 2002. Drilling revenues decreased due to lower activity.
Equivalent rig years in Canada decreased to 11.4 years during the current
quarter from 14.9 years during the prior year quarter and decreased to 19.1
years during the firs