Global land drilling contractor Nabors Industries Ltd. (NBR) reported impressive third quarter 2011 results, backed by strong performances by the Canadian and Pressure Pumping units and lower interest expense.
Earnings per share from continuous operations (excluding special items) came in at 44 cents, surpassing Zacks Consensus Estimate of 40 cents. Comparing year-over-year, results improved 51.7% from 29 cents earned in the year-ago quarter.
Revenues of $1,659.3 million were above third quarter 2010 sales of $1,080.4 million, aided by strong contributions from most of the regions.
Contract Drilling Segment: Analysis
Nabors’ main operating segment is Contract Drilling, which accounts for the bulk of its revenues and operating earnings. The segment’s 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 22.3% year over year at $1,120.6 million, while the segment’s operating income shot up approximately 16.2% to $183.3 million. The positive profit comparisons reflect improved activity levels during the quarter, with rig years rising 11.2% year over year to 364.4.
Both 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.
Canadian market registered revenue of $145.6 million (up 69.9%) in the quarter that helped the company to generate an operating profit of $21.6 million, against the prior-year profit of $1.0 million. High operating rigs and increased activity in the oil plays enhanced the company’s performance.
On the other hand, Alaska operations witnessed a year-over-year decline in revenue and operating income due to weather-related disturbances.
Nabors’ U.S. Offshore operations recorded quarterly revenues of $46.1 million, up 73.9% from the year-ago level. The strong sales enable the segment to witness profit of $2.4 million, against a loss of $1.1 million in third quarter 2010.
The company’s international operations presented disappointing results with revenue dropping a marginal 2.5% and operating income slipping 54.9%, due to delayed execution in contracts, geo-political turmoil in overseas and deferred operational start-up in Iraq and Saudi Arabia.
The U.S. Pressure Pumping segment (through the acquisition of Superior in September 2010) posted impressive revenue and operating income of $343.7 million (up 457.9%) and $65.0 million (446.2%), respectively, boosted by long-term contracts.
Balance Sheet
As of September 30, 2011, the company had $395.3 million in cash and short-term investments and $4.36 billion in long-term debt (inclusive of current portion), with a debt-to-capitalization ratio of approximately 43.6%.
Outlook
Nabors is hopeful of robust results in the last quarter of 2011, fueled by additions of new and advanced rigs, better pricing and commencement of several pending projects. Management also expects attractive expansion opportunities and growing demand for oil to boost the company’s performance.
We believe that Nabors stands to benefit from the strength in the U.S. 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 Patterson-UTI Energy (PTEN) and Ensco plc (ESV), and currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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