Global land drilling contractor Nabors Industries Ltd. (NBR) reported soft second quarter 2012 results, hurt by declining crude oil and natural gas prices plus rising operating expenses.
Earnings per share from continuous operations (excluding special items) came in at 38 cents, missing the Zacks Consensus Estimate by a penny. Comparing year over year, results shot up 58.3% from 24 cents (adjusted) earned in the year-ago quarter.
Revenues of $1,608.2 million were above second quarter 2011 sales of $1,352.0 million, aided by strong activities across most of the business units. However, the result was below the Zacks Consensus Estimate of $1,730.0 million.
Segment: Analysis
Nabors has restructured its operations into two major segments: Drilling and Rig Services – comprising U.S. Lower 48 Land Drilling, U.S. Offshore, Alaska, Canada, and International; and Completion and Production Services – including U.S. Well Land Servicing and U.S. Pressure Pumping.
During the quarter, Drilling and Rig service segment revenue was up 24.2% year over year at $1,224.4 million, while the segment’s operating income shot up approximately 21.2% to $186.2 million. The positive profit comparisons reflect improved activity levels during the quarter, with rig years rising 13.2% year over year to 377.5.
The company’s U.S. Lower 48 Land Drilling division – which faces competition from peers Patterson-UTI Energy Inc (PTEN) and Helmerich and Payne Inc (HP) – registered year-over-year increases in its sales (up 22.1%) and profits (up 27.5%), aided by favorable cost conditions.
Nabors’ U.S. Offshore operations recorded quarterly revenues of $72.0 million, up 78.7% from the year-ago level, attributable to increased rig activity. The strong sales enabled the segment to record a profit of $9.9 million, as against a loss of $1.1 million in second quarter 2011.
The revenue and operating income of the Alaska operations remained at the same level as that of the prior-year quarter.
The Canadian market registered quarterly revenue of $92.4 million (up 5.0%). However, the segment suffered a wider operating loss of $3.7 million, compared with a loss of $2.5 million in the year-ago quarter, due to the slow recovery in rig activity.
Although the company’s international operations saw a substantial improvement in revenue generation (up 14.9% year over year), operating income slipped 54.3% from second quarter 2011. Delay in the commencement of new projects along with higher costs pulled down the profit level of the segment.
Revenue of the U.S. Land Well-servicing segment of Nabors improved 30.4% year over year, while operating income escalated 73.3% from the prior-year quarter. Higher utilization of rigs and trucks along with better pricing drove the segment’s performance.
U.S. Pressure Pumping posted revenue and operating income of $387.7 million (up 45.8%) and $46.1 million (up 5.0%), respectively, supported by new long-term contract commitments.
Balance Sheet
As of June 30, 2012, the company had $455.2 million in cash and short-term investments and $4,673.8 million in long-term debt (inclusive of current portion), with a debt-to-capitalization ratio of approximately 45.0%.
Outlook
Nabors remains a bit apprehensive about the outlook for the latter half of 2012, primarily due to an expected decline in rig count in the U.S. Lower 48 Land Drilling operations, inflationary cost scenario overseas as well as seasonal impact on the U.S. Offshore activities. However, management expects growing demand for the company’s services in the coming months to negate these dampeners to some extent.
With leading positions in most natural gas and oil-based shale plays, we expect the company to benefit from higher activity and pricing. However, with natural gas fundamentals remaining weak and a glut in the pressure pumping market, we do not see much upside potential for the company. Thus, we are maintaining our long-term Neutral recommendation on the stock.
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