Onshore Drillers

[dan_s]

IMO Wall Street has been way too bearish on the onshore drillers, expecting rig utilization and rates to fall with the natural gas prices. No rush here. I am expecting a slight dip in Q2 but I believe (assuming oil prices hold up) that rig utilization will surprise to the upside during the 2nd half of this year. Excellent first quarter cash flows for the E&P companies will expand capital spending in the liquid prone plays. - Dan
..
Global land drilling contractor Nabors Industries Ltd. (NBR) reported bright first quarter 2012 results, backed by strong contributions from most of the business units and lower interest expense.

Earnings per share from continuous operations (excluding special items) came in at 65 cents, surpassing the Zacks Consensus Estimate of 51 cents. Comparing year over year, results shot up 124.1% from 29 cents (adjusted) earned in the year-ago quarter.

Revenues of $1,842.0 million were above first quarter 2011 sales of $1,402.1 million, aided by strong activities across all business units. The result was also 2.1% above the Zacks Consensus Estimate.

Contract Drilling 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 36.5% year over year at $1,367.6 million, while the segment’s operating income shot up approximately 57.2% to $267.0 million. The positive profit comparisons reflect improved activity levels during the quarter, with rig years rising 15.7% year over year to 405.5.

The company’s U.S. Lower 48 Land Drilling division registered handsome year-over-year increases in its sales (up 30.9%) and profits (up 64.3%), aided by the addition of working rigs, which led to higher average margins.

Nabors’ U.S. Offshore operations recorded quarterly revenues of $69.1 million, up 126.6% from the year-ago level, attributable to increased rig activity and margins. The strong sales enabled the segment to witness a profit of $7.7 million, as against a loss of $3.9 million in first quarter 2011.

Alaska operations experienced year-over-year growth in revenue and operating income of 50.8% and 149.1%, respectively, mainly due to ample exploration work during winter.

The Canadian market registered revenue of $192.3 million (up 11.5%) in the quarter that helped the company to generate an operating profit of $49.3 million, against the prior-year profit of $39.0 million. The high rig count along with increased drilling activity enhanced the company’s performance.

Although the company’s international operations saw a substantial improvement in revenue generation (up 16.8%), operating income slipped 40.6% from first quarter 2011.

Revenue of the U.S. Land Well-servicing segment of Nabors improved 39.5% year over year, while operating income escalated 97.3% from the prior-year quarter.

U.S. Pressure Pumping posted impressive revenue and operating income of $398.0 million (up 54.3%) and $64.9 million (up 48.5%), respectively, supported by new equipment deployments.

Balance Sheet

As of March 31, 2012, the company had $493.9 million in cash and short-term investments and $4,773.3 million in long-term debt (inclusive of current portion), with a debt-to-capitalization ratio of approximately 45.0%.

Outlook

Nabors expects to see healthy results through the balance of 2012, buoyed by better activities in Alaskan, U.S. Offshore and U.S. well-servicing divisions along with benefits from the strong contract backlog. Management also expects international operations to improve in the coming days, boosting 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 glut in the pressure pumping market, we do not see much upside potential for the company, going forward. 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.