Nabors Posts Another Record Quarter
Nabors Industries Ltd. on Monday announced its results for the second quarter and six months ended June 30, 2006.
“Nabors once again posted a record quarter at $0.82 before the one-time tax charge, which is particularly impressive considering the seasonally lower results in Canada and Alaska,” said Gene Isenberg, Nabors’ chairman and CEO. “All of our major operating businesses achieved a more than 50% increase in year-over-year results, with our U.S. Lower 48 Land Drilling unit again leading the way with 30 incremental rigs and uniformly higher average margins.”
Nabors’ adjusted income derived from operating activities(2) was $349.5 million for the current quarter, compared to $173.8 million in the second quarter of last year and $370.5 million in the first quarter of this year. Net income was $233.4 million ($0.77 per diluted share) for the current quarter, compared to $131.8 million ($0.41(1) per diluted share) in the second quarter of last year and $256.8 million ($0.79(1) per diluted share) in the first quarter of this year.
Operationally, the company did $0.82 per share this quarter before a one-time net charge to income tax expense amounting to $0.05 per diluted share, as previously disclosed. Revenues totaled $1,127.4 million in the current quarter, compared to $770.5 million in the second quarter of last year and $1,168.3 million in the first quarter of this year. For the six months ended June 30, 2006, adjusted income derived from operating activities was $720.0 million compared to $345.8 million in the first six months of 2005. Net income for the first six months of 2006 was $490.2 million ($1.56(1) per diluted share) compared to $259.2 million ($0.81(1) per diluted share) in the first six months of 2005. Revenues for the first six months of 2006 rose to $2,295.7 million, up from $1,556.3 million for the first six months of 2005.
“We are acutely aware that there appear to be two distinct rig markets, the one which actually exists and the one that the majority of analysts expect to develop out of the current gas storage overhang,” noted Isenberg. “We fully recognize the potential for short-term softening in the rig market if gas prices cause significant customer spending reductions. While this situation reduces the degree of certainty of our outlook over the near-term, recent and prospective developments lead us to conclude that any impact on our results will likely be much less and shorter in duration than consensus expectations imply for both this year and next. We continue to see a high number of customers planning sizeable increases in rig requirements, particularly for new higher specification rigs, across our global businesses.”
Isenberg also made the following observations:
“Our U.S. Lower 48 Land Drilling business has seen no reduction in activity or pricing, nor are we aware of any more than a handful of customers who have specific issues that are leading to reductions in their expenditures. When this has resulted in Nabors rigs becoming available, we have been able to secure commitments from other customers on our waiting list, usually at higher rates and with term commitments. In some cases we have seen customers reallocate spending from shallower to deeper wells, or from gas to oil, or gas to tar sands. There are also instances where customers are shifting activity from the Gulf of Mexico to land, and we continue to see incremental activity in the testing of new shale and other unconventional gas prospects and in the expanding application of improved drilling and completion techniques. All of this drives demand for additional rigs, albeit fewer than the frenzied market of the last four quarters, and we continue to reallocate rigs to customers who are willing and able to commit to longer terms and/or higher rates. As a result, our U.S. Lower 48 Land Drilling unit realized a $1,257 increase in average margins per rig day during the second quarter, which was much larger than expected since rigs continue to renew at much higher current market rates.
“Going forward, we do expect the magnitude of sequential margin increases to moderate, as we have been predicting for the last six quarters. Future growth in this business will increasingly come from incremental volume, all of which is contractually assured. The only negative we actually see is slippage in the delivery of our new rigs. We now expect to have 31 new rigs operating by year-end along with 10 reactivated rigs, all with long-term contract commitments. The revised schedule anticipates another 45 new rigs commencing in the first three quarters of 2007. Collectively, all of these rig commitments will contribute an incremental 15 rig years in 2006, 65 in 2007 and 86 in 2008, not including any of the many additional commitments we continue to discuss. The start-up of these rigs will bring the volume of term contracts for our U.S. Lower 48 fleet to at least 150 by mid-2007, and this number could well exceed 200 depending upon the extent of renewals and extensions of the 57 existing contracts maturing during this period. This gives us an unprecedented ability to weather a short-term downturn with minimal impact on our consolidated results.
“In Canada, we are experiencing the same conditions as in our U.S. Lower 48 markets, with results nearly double what we anticipated as a result of the quick recovery from the spring thaw. We are realizing improved year-over-year summer season pricing in our middle and deeper depth rigs, which comprise roughly 90% of our fleet. The shallow rig market is experiencing flat summer season pricing, but this is having little to no impact on Nabors because we have very little exposure in this rig class other than our new state-of-the-art AC coiled tubing/stem drilling rigs, which have unique advantages and are enjoying enthusiastic customer acceptance. We currently have four of these units working and we expect to have 10 deployed by year-end, all of which have either existing or strong prospects for contracts. The interest level in this new technology is high in both Canada and the U.S. Lower 48, and the prospects for extending this new rig's depth capability from the current 1500 meters (5,000 feet) to 1,800 meters (6,000 feet) and eventually to 3,000 meters (10,000 feet) is opening up even more possibilities.
“Regardless of the near-term North American natural gas outlook, we still expect significantly higher year-over-year quarterly results throughout the balance of the year and next year for all of our major businesses. We expect our U.S. Lower 48 Land Drilling business to grow nicely over the next six quarters, but we expect even larger percentage gains in our International, U.S. Well-Servicing and U.S. Offshore units.
“Our International business particularly will be an increasingly large contributor to our future results as rates for both new and existing rigs move rapidly toward replacement pricing and a large and growing volume of rig deployments commences. The tightness of global rig supply is only beginning to be manifest in these markets. In the first half of 2006 we deployed 12 rigs and we expect to deploy another 15 in the second half, all at margins which are nearly double those of late last year. These rigs should contribute a net 13 rig years in 2006 and another 14 in 2007. Over the next 6-24 months, much of our existing fleet will be up for renewal, in many cases from margins which are as low as one-third of current renewal levels. In addition, two of our larger international jackups will come off multi-year contracts in early 2007 and are expected to renew at much higher rates. We continue to have near and longer-term prospects for an exceptionally large number of additional rigs which should commence in 2007 and beyond.
“In our U.S. Offshore unit, results have improved meaningfully and should continue to accelerate throughout the balance of this year as four new rigs deploy and pricing remains strong across all asset classes. We expect 2006 results to more than double last year's numbers despite some temporary weakness in the jackup market, where operators are hesitant to commence projects during hurricane season due to the new MMS rules.
“In U.S. Well-Servicing, where over 70% of our business is derived from oil related work, we continue to experience significant strength in activity and pricing. The impact of new rig deliveries began to materialize this quarter, with eight incremental rigs working compared to the first quarter. New rig deliveries will accelerate rapidly over the balance of this year, reaching 27 in the fourth quarter. In total, we should receive 100 new rigs by the third quarter of 2007, 80 of which are new 500 horsepower Millennium(TM) Rigs. These rigs are being well received in the market, as evidenced by the magnitude of the pricing premium they are commanding and the length of the waiting list for rigs yet to deploy. We are in the process of acquiring more of these highly successful state-of-the-art PLC rigs in a 400 HP class, and we will likely order more 200 HP rigs as well. We are also investing heavily in new capacity in our fluids storage, hauling and disposal business. Pricing also continues to be surprisingly strong in this unit. In early July we implemented another 15% price increase across all sizes of rigs with no commensurate loss in rig count. This reflects the continuing demand for expedient repairs to oil wells, which we expect to continue even with crude prices much lower than today's levels.
“In May we placed $2.75 billion in five-year convertible notes with an effective interest rate of 2.3% and a 55% conversion premium. The placement was accomplished in a two-step process. This was the most cost-effective and efficient means to accomplish an offering of this size and serves to offset any dilution at maturity until the stock reaches $54.64 per share. Concurrently, we utilized $1.0 billion of the proceeds to repurchase 28.5 million shares of our common stock from buyers. This transaction will be accretive to our results by roughly $0.26 per share in 2006 and $0.56 in 2007. At the end of the second quarter, the year-to-date repurchases of our common stock stands at 37.4 million shares at an average price of $35.03 per share. All of this leaves us with over $2 billion in cash and investments, which puts us in even better position to capitalize on opportunities.
“Competitive constraints and customer confidentiality make it impossible to convey fully the magnitude and breadth of opportunities we have before us across all of our 16 operating entities,” concluded Isenberg. “Our expectations for the longer-term continue to grow beyond those we outlined at our December analyst meeting, near-term concerns over North American natural gas notwithstanding. As a result, we remain confident in our ability to not only meet but exceed the forward results implied by consensus estimates."
The Nabors companies own and operate approximately 600 land drilling and approximately 800 land workover and well-servicing rigs in North America. Offshore, Nabors operates 43 platform rigs, 21 jack-up units and 3 barge rigs in the United States and multiple international markets. Nabors markets 29 marine transportation and supply vessels, primarily in the U.S. Gulf of Mexico. In addition, Nabors manufactures top drives and drilling instrumentation systems and provides comprehensive oilfield hauling, engineering, civil construction, logistics and facilities maintenance, and project management services. Nabors participates in most of the significant oil, gas and geothermal markets in the world.
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