Nabors Beats, Cautious on Outlook – Analyst Blog

 

Nabors Industries Ltd (NBR) – North America’s largest onshore oil and natural gas driller – reported marginally better-than-expected second quarter results on the back of strength in its U.S. operations.

 

Earnings per share, excluding non-operational items, came in at 19 cents, beating the Zacks Consensus Estimate by a penny. Revenues of $917.8 million also surpassed the Zacks Consensus Estimate of $869 million.

 

 

Compared with the year-ago period, Nabors’ adjusted earnings per share declined 40.6% (from 32 cents to 19 cents), pulled down by higher expenses and lower margins. However, revenues were 4.5% greater than that achieved during the second quarter of 2009, reflecting robust U.S. land drilling sales.

 

 

Nabors’ main operating segment is ‘Contract Drilling’, which accounts for bulk of its 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.

 

During the quarter, contract drilling revenues were almost flat year over year at $818.4 million though the segment’s operating income declined approximately 27.8% to $137.4 million. The negative profit comparison reflects the slower-than-expected ramp-up in international drilling activity, mainly on the back of weakness in Mexico and the Middle East. However, activity levels during the quarter were up 8.9% to 306.6 rig years.

 

Both the U.S. Lower 48 Land Drilling and the U.S. Land Well Servicing sub-segments registered year-over-year increases in their sales but at the same time saw its profit decline, as improvements in rig activity were more than offset by higher costs/expenses.

 

In Canada, revenues were up 33.1%, while operating loss narrowed from $10.5 million in the year-ago period to $9.5 million. The improvements can be attributed to higher rig activity.

 

Regarding international operations, revenues and operating income were lower-than-expected and declined year-over-year, by 18.5% and 35.9%, respectively. This primarily reflects the ongoing deferrals of rig startups in Mexico and the more competitive environment in the Middle East.

 

Nabors’ U.S. offshore operations recorded quarterly revenues 7.1% below the year-ago level but its operating income rose 20.5%, reflecting impressive operating performance. Management pointed out that it lost $2 million in offshore business income due to the suspended operations in the Gulf of Mexico.

 

Alaska posted weak quarterly results as revenues and operating income both went down from the previous-year period, adversely affected by the winding down of the winter exploration season.

 

 

At the end of the quarter, the company had $892.9 million in cash and short-term investments and $3.7 billion in long-term debt, with a net debt-to-capitalization ratio of approximately 41.5%.

 

 

Management indicated that land-based rig activity may slow during the remainder of 2010 and that income for the second half is likely to be reduced by over $25 million due to the Gulf of Mexico turmoil. In fact, Nabors did not rule out the possibility for a third quarter loss.

 

Taking these factors into account, we maintain our cautious outlook on the company. We rate Nabors shares as Neutral with a Zacks #3 Rank, indicating a short-term Hold recommendation.