North America’s largest onshore oil and natural gas driller Nabors Industries Ltd (NBR) reported marginally better-than-expected first quarter results on the back of strong North American onshore activity levels.
Earnings per share from continuing operations (excluding 6 cents in unusual costs and lost income) came in at 35 cents, a penny above the Zacks Consensus Estimate and were comfortably ahead of the year-ago adjusted profit of 23 cents. Revenues of $1.4 billion surpassed the Zacks Consensus Estimate of $1.3 billion and the first quarter 2010 sales of $896.4 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 7 sub-segments: 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 58.0% year over year to $1.3 billion, while the segment’s operating income increased approximately 37.7% to $216.5 million. The positive profit comparisons reflect robust U.S. land drilling activity. Activity levels during the quarter were up 15.8% to 350.5 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 sales and profits, as improvements in rig activity, a continuing shift from dry gas to oil and liquids-rich wells, and contributions from newbuilds led to the increase in average margins.
In Canada, revenues were up 49.2%, while operating income soared 162.0% from the first quarter of 2010. The improvements can be attributed to strong seasonal activity and the transition to liquids-rich drilling.
Regarding international operations, revenue was 7.0% higher than the year-ago level but operating income declined 33.8%. The dip in profitability primarily reflects the demobilization of two high-margin jackups for regulatory inspections/upgrades, the shutdown of six land rigs in preparation for long-term gas drilling contracts, and lower rates for the three renewing jackups.
Nabors’ U.S. offshore operations not only recorded lower year over year quarterly revenues but the segment also incurred a $4.0 million loss. As expected, the segment’s performance suffered due to the lower levels of activity in the Gulf of Mexico.
Alaska posted disappointing quarterly results as revenues and operating income both went down from the previous-year period, adversely affected by the movement of some key projects into the second quarter.
The recently formed U.S. Pressure Pumping segment (through the acquisition of Superior Well Services Inc. in September 2010) posted impressive revenue and operating income of $257.9 million and $43.7 million, respectively.
Balance Sheet
At the end of the quarter, the company had $730.3 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 44.9%.
Outlook
Management indicated that it is optimistic regarding the sustainability of improving outlook for nearly all of the company’s businesses. Nabors expects to be in an even better position during the second half of the year, capitalizing on the powerful leverage that exists across all of its segments.
Our Recommendation
In the near-to-intermediate term, Nabors Industries – which competes with other U.S. drilling companies including Patterson-UTI Inc. (PTEN) and Helmerich & Payne Inc. (HP) – is poised to benefit from the strength in the U.S. and Canadian land drilling markets, which will more than offset the delays in the Gulf of Mexico.
With leading positions in most natural gas and oil-based shale plays, we expect the company to benefit from higher activity and pricing. The ‘Superior Well’ acquisition will further boost Nabors’ earnings visibility by expanding its pressure pumping capabilities and geographic footprint.
Nabors shares currently retain a Zacks #2 Rank, which translates into a short-term Buy rating.
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