Nabors Industries Ltd. has reported its financial results for the first quarter of 2009. The Company's results were again impacted by a non-cash, pre-tax adjustment of $75 million related to the ceiling test applied to the value of the reserves of one its oil and gas joint ventures using commodity prices on March 31, 2009. When these charges are excluded adjusted income derived from operating activities was $274.1 million compared to $286.4 million in the first quarter of last year and $364.2 million in the sequential quarter ended December 31, 2008. Likewise, net income was $184.4 million or $0.65 per diluted share compared to $212.0 million or $0.74 per diluted share in the first quarter of last year, and $208.0 million or $0.73 per diluted share in the fourth quarter of 2008, the latter also excluding a goodwill impairment in Canada. Similarly, Operating Revenues and Earnings from unconsolidated affiliates for this quarter totaled $1.13 billion compared to $1.30 billion in the comparable quarter of the prior year and $1.47 billion in the fourth quarter of 2008.
Gene Isenberg, Nabors Chairman and CEO, commented, "Our first quarter results were better than expected led by a strong International showing and solid performance from Alaska, US Offshore and our Other Operating Segments. Our US Land business performed relatively well due to the high number of term contracts covering not only our new PACE rigs, but also other premium rigs which constitute two-thirds of our fleet.
"The largest increase in year-over-year quarterly operating income came from our International business which was up 14% to $103.0 million. Our US Offshore business was up $10.4 million, posting $16.8 million in the quarter. Our Other Operating Segments, our Alaska business and even our US Lower 48 land drilling unit all posted smaller but meaningful increases over their respective prior year quarterly results. Conversely, our Canadian operations declined by nearly $29.0 million over the prior year and finished at $13.2 million, followed closely by US Well Servicing operations which declined to $13.7 million from 2008 first quarter results of more than $30.0 million.
"Our US Lower 48 land drilling business posted operating income of $129.2 million in the first quarter with 193 rigs employed. Average margins were $11,200 per rig day, or $9,725 excluding that portion of the lump-sum payments that would have been earned in future quarters. Today the number of rigs employed is 137, including 31 rigs which are not currently crewed or working but are receiving revenue.
During the first quarter we recognized $31.3 million in lump-sum contract settlements and we anticipate to recognize another $11.5 million in the second quarter, including approximately $5.4 million in income that would have been earned in each quarter of 2009 anyway. In addition, for a number of rigs, we are receiving daily standby payments or lump-sum early contract termination payments which are being amortized over the original duration of the contracts. In the aggregate, these amount to approximately $70 million with $48 million allocated to 2009. Meanwhile our market positions remain strong, especially in the most active areas such as the Haynesville Shale where Nabors enjoys the dominant position with an average of 35 rigs operating during the first quarter. The decline in our rig count is slowing and we are optimistic we will see it stabilize in the near future.
"Our International business continues to anticipate more than a 20% increase in year-over-year income with the only weakness confined to lower contributing markets and asset classes. These are more than offset by deployments of incremental higher specification rigs during the year. In January one of our new offshore rigs commenced operations on a high-profile project in the Congo. We expect to start up three more rigs in the second quarter followed by another three in the second half, with potential for several more in 2009 pending the outcome of current discussions. We have recently seen significant decreases in activity in some areas, most notably Argentina and Colombia. However, these are having minimal effect since our margins in the Latin American markets are significantly lower than in other areas, particularly Argentina where operations primarily consist of workover and small drilling rigs. This is reflected in the quarter's lower rig count and the corresponding sizeable increase in average per rig day margins. These higher average margins in the face of a flat rig count will generally characterize this unit's performance for the balance of the year.
"As indicated, our US Well Servicing unit has experienced a large decrease in quarterly income primarily attributable to a more than 30% decrease in rig hours and a rapidly deteriorating pricing environment. While rig hours are beginning to show signs of stabilization, rig rates continue to decrease, most notably in the Mid Continent area and the West and South Texas regions. This has tempered our outlook for the full year, although the impact on Nabors should be muted by our performance in less susceptible markets.
"Our US Offshore operations are faring relatively well at more than double last year's first quarter results. Significantly weaker activity among our barge and SuperSundowner platform rigs is essentially offset by ongoing high utilization of our MASE and MODS platform drilling rigs, which has recently been augmented by the January deployment of newly constructed MODS Rig 202 on a term contract. We currently expect the full year to be essentially flat to the prior year.
"The outlook in Canada continues to deteriorate as this unit posted a very weak first quarter during the period that historically accounts for 40% of the year's income. Our Canadian management team is taking aggressive steps to reduce costs while preserving our ability to react to the inevitable recovery. The emergence of the British Columbia shales is shifting the rig market in Canada in favor of Nabors. This development along with our strategic customer alliances puts us in a position to recover quickly when this market corrects.
"Our Other Operating Segments posted its best quarter ever on seasonally high and record contributions from our Peak Oilfield Services joint venture. The outlook for the balance of the year is lower with slowing activity in our Canrig and directional drilling businesses and seasonally lower contributions from our Alaskan joint ventures. New products in Canrig and essentially flat results in our Alaskan joint ventures will limit the downside.
"As previously noted our Oil and Gas Operations again incurred a significant non-cash impairment in the value of reserves related to the ceiling test. The impairment amounted to $75 million in the first quarter based upon a quarter ending gas price of $3.59 per MCF. Despite these impairments the long-term potential of this business is very good given the portfolio of properties it has in multiple producing and rapidly emerging areas. We also continue to pursue attractive investment opportunities.
"Our financial position is strong and we took additional steps during the quarter to assure that it remains healthy should our markets deteriorate further than we expect. On January 7, 2009 we placed $1.125 billion in 10-year Senior Unsecured Notes due 2019 at a rate of 9.25%. A sizeable portion of these funds was used to affect open market purchases of our shorter term debt. To date we have purchased $771 million face value of our 0.94% convertible notes due May 2011 at a weighted average price of $85.55, and $57 million of our 4-7/8% notes due August 2009. We continue to aggressively reduce both operating and capital expenditures and anticipate free cash flow to increase as the year progresses. Our cash and investments stood at $1.4 billion at the end of the quarter and are currently projected to be higher by year end assuming no additional debt purchases.
"There are increasing signs that our business may well be bottoming out in the seasonally low second quarter, but the timing of the inevitable recovery remains difficult to predict. The strength of our International business and our smaller Alaskan and US Offshore operations should serve to mitigate the loss of income from our US and Canadian drilling and well servicing operations. Our investments in new and upgraded rigs over the last four years have substantially been returned through term contracts in force in our US land drilling unit. These rigs should support our results through 2010 and will enhance our leverage when market conditions improve."
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