Global land drilling contractor Nabors Industries Ltd. (NBR) reported impressive fourth quarter 2011 results, backed by strong performances by the U.S. Offshore and Pressure Pumping units and lower interest expense.
Earnings per share from continuous operations (excluding special items) came in at 52 cents, surpassing Zacks Consensus Estimate of 50 cents. Comparing year over year, results improved 18.2% from 44 cents (adjusted) earned in the year-ago quarter.
Revenues of $1,739.9 million were above fourth quarter 2010 sales of $1,318.9 million, aided by strong contributions from most of the regions. The result was also 1.3% above the Zacks Consensus Estimate.
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 26.3% year over year at $1,228.6 million, while the segment’s operating income shot up approximately 16.2% to $223.1 million. The positive profit comparisons reflect improved activity levels during the quarter, with rig years rising 15.3% year over year to 390.1.
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 newbuild rig contract additions, which led to higher average margins.
The Canadian market registered revenue of $168.8 million (up 32.7%) in the quarter that helped the company to generate an operating profit of $36.5 million, against the prior-year profit of $16.6 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.
Nabors’ U.S. Offshore operations recorded quarterly revenues of $53.9 million, up 168.2% from the year-ago level. The strong sales enabled the segment to witness a profit of $3.4 million, as against a loss of $5.1 million in fourth quarter 2010.
Although the company’s international operations saw a slight improvement in revenue generation (up 0.8%), operating income slipped 67.3%, due to reduced jackup rates and extensive shipyard drydock time.
The U.S. Pressure Pumping segment (through the acquisition of Superior in September 2010) posted impressive revenue and operating income of $369.8 million (up 42.4%) and $76.5 million (39.9%), respectively, boosted by long-term contracts.
As of December 31, 2011, the company had $539.5 million in cash and short-term investments and $4,623.8 million in long-term debt (inclusive of current portion), with a debt-to-capitalization ratio of approximately 45.2%.
Nabors is hopeful of robust results in 2012, fueled by 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.
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