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Global land drilling contractor Nabors Industries Ltd. (NBR - Analyst Report) reported mixed third-quarter 2012 results, owing to greater contributions from U.S. Land Well Servicing and International operations plus favorable tax rate. These were partially negated by reduced domestic drilling activities along with the effects of natural calamities and seasonal fluctuations.

Earnings per share from continuous operations (excluding special items) came in at 42 cents, breezing past the Zacks Consensus Estimate of 36 cents. However, comparing year over year, results dropped 6.7% from 45 cents (adjusted) earned in the year-ago quarter.

Revenues of $1,674.1 million were above the third-quarter 2011 sales of $1,642.9 million, aided by strong activities across some of the business units. However, the result was below the Zacks Consensus Estimate of $1,706.0 million.

Segment: Analysis

Nabors reports its operations into two major segments: Drilling and Rig Services – comprising U.S. Lower 48 Land Drilling, U.S. Offshore, Alaska, Canada, and International; and Completion and Production Services – including  U.S. Well Land Servicing and U.S. Pressure Pumping.

During the quarter, Drilling and Rig Service segment revenue was up 7.8% year over year at $1,209.5 million, while the segment’s operating income nudged up approximately 1.9% to $184.6 million. The company’s rig years remained flat at 364.4 compared to third quarter 2011.

The company’s U.S. Lower 48 Land Drilling division – which faces competition from peers like Patterson-UTI Energy Inc. (PTEN - Analyst Report) and Helmerich and Payne Inc. (HP - Analyst Report) – registered year-over-year upsides in its sales (up 7.2%) and profits (up 9.5%).

Nabors’ U.S. Offshore operations recorded quarterly revenues of $66.7 million, up 44.7% from the year-ago level. However, the segment experienced a loss of $3.7 million, as against a profit of $2.5 million in the third quarter of 2011 due to the freeze of operations in many locations for the hurricane.

The revenue of the Alaska operations remained almost at the same level as that of the prior-year quarter, while operating income improved 30% year over year.

Although the Canadian market registered a year-over-year decline of 6.7% in revenue at $135.8 million, operating profit increased 6.0% to $22.9 million with the help of better rig activity.

The company’s international operations saw a substantial improvement in revenue generation (up 16.9% year over year) and operating income moved up 4.5% from third-quarter 2011. Payments received due to early termination of contracts aided the segment’s performance.

Revenue of the U.S. Land Well-servicing segment of Nabors improved 17.2% year over year, while operating income escalated 43.9% from the prior-year quarter. The results were influenced by higher average rates rigs and trucks.

U.S. Pressure Pumping posted revenue and operating income of $381.2 million (up 10.9%) and $47.2 million (down 27.5%), respectively.

Balance Sheet

As of September 30, 2012, the company had $619.6 million in cash and short-term investments and $4,679.3 million in long-term debt (inclusive of current portion), with a debt-to-capitalization ratio of approximately 44.4%.

Outlook

Nabors expects to see slight improvement in its performance in the last leg of 2012, with much better result coming in from 2013. The entry of new rigs along with enhanced utilization rates and less of pricing pressures will likely boost the results toward the end of the year.

However, not-so-favorable situations in the international circuit and cautious outlook for offshore drilling will remain major roadblocks in the coming months. The weakness in the North American onshore rig count is also anticipated to persist for sometime.

Moreover, with natural gas fundamentals remaining weak, we do not see any robust driving factor for the Nabors stock, going forward, and maintain our long-term Underperform recommendation on the stock, supported by a Zacks #5 Rank (short-term Strong Sell rating).
 

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