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Land drilling contractor Nabors Industries Ltd. (NBR - Analyst Report) has entered into a deal with Bristol Bay Native Corporation a diversified privately held company.

Per the contract, Nabors will divest its entire interest in Peak Oilfield Service Company LLC (Peak). Alaska-based Peak has been providing services like maintenance, construction, power generation, transportation and industrial cleaning primarily to energy firms for the last 25 years. Nabors expects the agreement, which is dependent on regulatory approvals, to close by the fourth quarter of 2013. The divestment represents Nabors’ objective to focus primarily on core operations.

Nabors reveals that it will utilize the net proceeds from the divestiture and from other asset divestment programs during the third quarter of 2013 to refinance existing debt. The company plans to refinance its $785.0 million debt, for lowering its yearly interest expense by more than $40.0 million. For this, the company needs to pay a premium of roughly $207.0 million to the debt holders.

Barbados-based Nabors divides its operations into two principal business lines: Drilling and Rig Services and Completion and Production Services.  An imbalance in the demand-supply of rigs in the U.S. land drilling market presents considerable risk for the company in our view. Moreover, the challenging near-to-intermediate term outlook for Nabors’ international business will likely hamper its profitability in the coming months.

Additionally, Nabors’ relatively weak balance sheet in this severely credit-constrained environment (debt-to-capitalization ratio of 41%) is also a cause for concern. Over the last few years, the company kept adding debt to its balance sheet for a fleet recapitalization program.

Nabors currently retains a Zacks Rank #4 (Sell), implying that it is expected to underperform the broader U.S. equity market over the next one to three months.

Not all stocks are performing as poorly as Nabors. One can look at better performing oil and gas drilling firms like Tesco Corp. (TESO - Snapshot Report), Pacific Drilling SA (PACD - Snapshot Report) and Parker Drilling Co. (PKD - Snapshot Report) that offer value. Tesco sports a Zacks Rank #1 (Strong Buy), while Pacific Drilling and Parker Drilling carry a Zacks Rank #2 (Buy).

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