Solid Quarter for Nabors - Analyst Blog

Nabors Industries Ltd (NBR) – North America's largest onshore oil and natural gas driller – reported better-than-expected third quarter results on the back of strength in its North American onshore activity levels.

Earnings per share (excluding special items) came in at 29 cents, 6 cents ahead of both the Zacks Consensus Estimate and the year-ago profit. Revenues of $1.1 billion surpassed the Zacks Consensus Estimate of $948 million and the third quarter 2009 sales of $804.5 million.

Contract Drilling Segment: Analysis

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 up 32.4% over year to $977.8 million, while the segment's operating income increased approximately 26.8% to $170.1 million. The positive profit comparisons reflect robust U.S. land drilling activity. Activity levels during the quarter were up 31.1% to 327.6 rig years.

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, as improvements in rig activity and contributions from newbuilds led to increase in average margins.

In Canada, revenues were up 47.3%, while operating income came at just over $1 million, a considerable improvement over the $10.4 million loss incurred during the third quarter of 2009. The improvements can be attributed to higher rig activity (in the British Columbia shale plays, the traditional oil areas of Alberta and Saskatchewan, and the emerging oil shale plays in the Cardium Shale in south central Alberta) and cost control initiatives.

Regarding international operations, revenues and operating income were lower than expected and declined year over year by 6.2% and 25.9%, respectively. This primarily reflects a decrease in average rates and the more competitive environment in the Arabian Gulf.

Nabors' U.S. offshore operations recorded quarterly revenues 3.1% above the year-ago level but the segment incurred a $1.1 million loss, much wider than the year-ago period. As expected, the segment's performance suffered due to the lower levels of activity in the Gulf of Mexico following the Macondo blowout. 

Alaska posted higher-than-expected quarterly results as revenues and operating income both went up from the previous-year period, favorably affected by higher rig activity.

Balance Sheet

At the end of the quarter, the company had $772.5 million in cash and short-term investments and $4.5 billion in long-term debt (inclusive of current portion), with a debt-to-capitalization ratio of approximately 46.4%.

Outlook

Management indicated that it is cautiously optimistic regarding near-term U.S. land drilling trends, where activity is being driven by oil and liquids rich plays, thereby making the reduction in gas activity less meaningful.

Taking these factors into account, we remain comfortable with Nabors' Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.