Global land drilling contractor Nabors Industries Ltd. (NBR) reported lackluster second quarter 2011 results, hurt by slow international activities along with weather-related difficulties and operational hindrances.
Earnings per share from continuous operations (excluding special items) came in at 23 cents, lagging Zacks Consensus Estimate of 25 cents. However, on a year-over-year comparison, results improved 53.3% from 15 cents earned in the year-ago quarter.
Revenues of $1.36 billion were above second quarter 2010 sales of $907.2 million, but failed to meet the Zacks Consensus Estimate of $1.48 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 21.6% year over year at $994.9 million, while the segment’s operating income shot up approximately 13.8% to $156.3 million. The positive profit comparisons reflect improved activity levels during the quarter, with rig years rising 8.7% year over year to 333.4.
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 higher revenue of $87.9 million (up 44.6%) in the quarter. Therefore the company was able to narrow its operating loss of $2.5 million, from the loss of $9.5 million in the prior-year quarter.
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 $40.3 million, up 3.3% from the year-ago level. However, the segment incurred a $1.1 million loss (as compared with a profit of $8.1 million in the year-ago period), still suffering the aftereffects of the Gulf of Mexico tragedy.
The company’s international operations presented disappointing results with revenue dropping a marginal 0.7% and operating income slipping 44.8%, due to delayed execution in contracts, geo-political turmoil in Middle East and deferred operational start-up in Mexico and Colombia.
The newly formed U.S. Pressure Pumping segment (through the acquisition of Superior in September 2010) posted impressive revenue and operating income of $265.9 million and $43.9 million, respectively.
Balance Sheet
As of June 30, 2011, the company had $673.0 million in cash and short-term investments and $4.26 billion in long-term debt (inclusive of current portion), with a debt-to-capitalization ratio of approximately 42.9%.
Outlook
Nabors expects to see a promising results in second half 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.
ENSCO PLC (ESV): Free Stock Analysis Report
NABORS IND (NBR): Free Stock Analysis Report
PATTERSON-UTI (PTEN): Free Stock Analysis Report
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