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Nabors Beats Earnings, Down YoY

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Land drilling contractor Nabors Industries Ltd. (NBR - Free Report) reported a year-over-year decline in first-quarter 2013 results, due to the seasonal depression in the Completion Services segment and weaker U.S. operations.

Earnings per share from continuous operations came in at 33 cents, beating the Zacks Consensus Estimate of 29 cents. This was aided by better results by Production Services segment and seasonal peak in Canadian operations. However, the results declined 32.7% from 49 cents earned in the first quarter of 2012.

Revenues of $1,661.0 million were below the first-quarter 2012 sales of $1,842.0 million, due to the decline in activities in most of the business units. The top line also failed to meet the Zacks Consensus Estimate of $1,663.0 million.

Segment Analysis

Nabors reports its operations in 2 major segments: Drilling and Rig Services – comprising U.S., Canada, International and Rig Services; and Completion and Production Services – including Production Services and Completion Services.

During the quarter, Drilling and Rig Service revenues were down 15.7% year over year at $1,112.5 million, while the segment’s operating income decreased approximately 47.4% to $137.3 million. The company’s rig years fell to 352.3 from 405.5 in first quarter 2012.

Nabors’ U.S. operations recorded quarterly revenues of $484.8 million, down 22.7% from the year-ago level. Additionally, operating income decreased 53.5% year over year to $77.6 million due to a decline in activity in the U.S. Lower 48 portion of the segment.

The Canadian market registered a year-over-year decline of 12.3% in revenues of $126.9 million and 29.3% in operating profit of $30.5 million.

Nabors’ international operations saw a substantial improvement in revenue generation (up 4.9% year over year) and operating income moved up 1.6% from first-quarter 2012. Increase in rig activity aided the segment’s revenue.

The revenues of the Rig Services segment were down 25.8% at $179.3 million from the prior-year quarter and operating income decreased 74.1% year over year.

Revenues of the Production Services segment decreased 2.2% year over year, while operating income decreased 7.2% from the prior-year quarter. The results were down due to adverse weather condition in the Northern districts.

Completion Services posted revenues and operating income of $262.1 million (down 34.1%) and $17.8 million (down 72.6%), respectively.

Balance Sheet

As of Mar 31, 2013, Nabors had $690.5 million in cash and short-term investments and $4,380.2 million in long-term debt (inclusive of current portion), with a debt-to-capitalization ratio of approximately 42.3%.

Zacks Rating

The company currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Nabors Industries is the leading North American land drilling contractor, with a large, high-quality fleet of drilling and workover rigs. Over the years, the company has grown through cash flow reinvestments and acquisitions. In the process, Nabors has not only increased its rig fleet, but also extended its geographic reach and diversified its operating assets beyond land rigs.

However, an imbalance in the demand-supply of rigs in the U.S. land drilling market presents considerable risk for the company. Moreover, the challenging near-to-intermediate term outlook for Nabors’ international business will likely hamper its profitability in the coming months.

Meanwhile, there are other drilling contractors in the energy sector that are expected to perform well in the coming 1 to 3 months. These include Tesco Corporation with Zacks Rank #1 (Strong Buy) as well as Vantage Drilling Company and Hercules Offshore Inc. with Zacks Rank #2 (Buy).

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