Global land drilling contractor Nabors Industries Ltd (NBR) reported better-than-expected fourth quarter and full-year 2010 results benefiting from the addition of the Superior Well Services and a strong North American market.
Earnings per share from continuous operations (excluding special items) came in at 44 cents, surpassing the Zacks Consensus Estimate of 37 cents and above 12 cents earned in the year-ago quarter.
Full-year 2010 earnings from continuous operations were $1.03 per share, a penny ahead of our projection. However, on a year-over-year basis, earnings plunged 23.1%.
Revenues of $1.33 billion surpassed the Zacks Consensus Estimate of $1.26 billion and fourth quarter 2009 sales of $727.2 million.
Nabors generated total revenue of $4.21 billion in 2010, up 18.6% year over year from $3.55 billion and 1.4% above our estimate of $4.15 billion.
Contract Drilling Segment: Analysis
Nabors’ main operating segment is Contract Drilling, which accounts for the bulk of its revenues and operating earnings. Its operations are spread across 7 sub-segments, namely U.S. Lower 48 Land Drilling, U.S. Well Land Servicing, U.S. Offshore, Alaska, Canada, International and U.S. Pressure Pumping.
During the quarter, contract drilling revenues were up 62.1% year over year at $1.23 billion, while the segment’s operating income shot up approximately 59.4% to $246.0 million. The positive profit comparisons reflect improved activity levels during the quarter, with rig years rising 3.2% year over year to 338.2.
The newly formed U.S. Pressure Pumping segment (through the acquisition of Superior in September 2010) posted impressive revenue and operating income of $259.7 million and $54.7 million, respectively.
Both the U.S. Lower 48 Land Drilling and the U.S. Land Well Servicing sub-segments registered handsome year-over-year increases in their sales and profits, aided by additions of newbuild rig contracts, which led to higher average margins.
Greater activities in oil and liquids directed fields pumped revenue (up 56.7% year over year) and operating income (up 2522% from the prior-year quarter) in the Canadian market.
On the other hand, Alaska operations witnessed a year-over-year decline in revenue and operating income, weighed down by the demobilization of two rigs due to the completion of long-term projects.
Nabors’ U.S. Offshore operations recorded quarterly revenues of $20.1 million, down 31.4% from the year-ago level. The segment also incurred a $5.1 million loss, as compared with a profit of $7.1 million in the year-ago period, due to the absence of permission in the Gulf of Mexico.
The company’s international operations presented mixed results with revenue rising a modest 1.9% and operating income slipping 3.5%.
Balance Sheet
As on December 31, 2010, the company had $801.2 million in cash and short-term investments and $5.46 billion in long-term debt (inclusive of current portion), with a debt-to-capitalization ratio of approximately 50.5%.
Outlook
Nabors expects a 50% to 60% increase in earnings in 2011, fueled by greater prospects of the fluids management division and completion of a high-value project in the Alaskan region. Management also expects that the deployment of two new build high-spec deepwater rigs toward the end of 2011 and growing demand for oil to boost the company’s performance.
We believe that Nabors stands to benefit from strength in the U.S. and Canadian land drilling markets in the near-to-intermediate term. However, with natural gas fundamentals remaining weak and a high debt level, we do not see much upside potential for the company in the coming months. Thus, we are maintaining our long-term Neutral recommendation on the stock.
Nabors competes with peers such as Pride International (PDE) and Ensco plc (ESV), and currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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