Nabors Just Misses, Eyes Recovery

Nabors Industries Ltd. (NBR - Analyst Report) – North America’s largest onshore oil and natural gas driller – yesterday reported marginally weaker-than-expected third quarter results on the back of lower rig demand, as producers continued to scale back operations in the midst of falling commodity prices. Earnings per share, excluding non-cash items, came in at 15 cents, missing the Zacks Consensus Estimate by a penny.
 
Revenue & Profitability
 
Compared to the third quarter of 2008, Nabors’ adjusted earnings per share declined 77.6% (from 67 cents to 15 cents) due to persistent weakness in its North American gas-centric businesses combined with less robust international results. Revenues were down 44.2% to $804 million as sales declined in all of the company’s segments.
 
Nabors’ main operating segment is ‘Contract Drilling’, which accounts for bulk of the company’s revenues and operating earnings. Its operations are spread across 6 sub-segments: U.S. Lower 48 Land Drilling, U.S. Well Land Servicing, U.S. Offshore, Alaska, Canada, and International.
 
Contract Drilling Segment: Analysis
 
During the quarter, contract drilling revenues were down 43.7% year over year to $738.3 million, while the segment’s operating income declined approximately 64% to $134.1 million. The negative comparison reflects lower activity levels during the quarter, which was down 44.6% to 249.8 rig years.
 
Both the U.S. Lower 48 Land Drilling and the U.S. Land Well Servicing sub-segments suffered year-over-year declines in their sales and profitability, affected by lower operating hours in the company’s area of operations.
 
In Canada, revenues were down more than 50% and the company incurred a loss, as business did not improve coming out of the seasonally slow second quarter. 
 
Regarding international operations, revenues and operating income were lower than expected and declined year over year. This primarily reflects the suspension of a large number of maturing contracts, resulting in lower utilization.
 
Nabors’ U.S. offshore operations recorded quarterly revenue below the year-ago level and posted its first ever loss on the back of a continued slump in drilling activity that led to a 59.4% dip in activity levels.
 
Alaska posted solid quarterly results as revenues and operating income both went up from the previous-year period, benefiting from lump sum payments in settlement of two contracts that would have expired at the end of the year. This more than offset an 18.2% decrease in rig years.
 
Balance Sheet
 
At the end of the quarter, the company had $1.1 billion in cash and short-term investments and $4.1 billion in long-term debt, with a net debt-to-capitalization ratio of approximately 44.1%.
 
Outlook
 
Management indicated that drilling activity is picking up and hoped that the third quarter represented the eventual bottoming of the North American natural gas driven land drilling operations, though the company’s international operations may take a further quarter or two to rebound. Nabors anticipates activity levels to pick up next year, buoyed by a demand recovery.