Nabors Industries Reports on Third Quarter Results
Nabors Industries has announced its results for the third quarter and nine months ended September 30, 2009. Adjusted income derived from operating activities was $112.8 million for the third quarter compared to $364.5 million in the third quarter of 2008 and $143.9 million (excluding non-cash items) in the second quarter of this year. Due to the distortion caused by the level of non-cash charges incurred earlier this year, the majority of which is attributable to the ceiling test and other impairments in our oil and gas operations, the below numbers are presented excluding those non-cash charges and applying the current estimated full year tax rate while backing out the tax effects of the non-cash charges. On that basis, net income was $42.5 million ($0.15 per diluted share) for the third quarter compared to $194.0 million ($0.67 per diluted share) in the third quarter of 2008 and $90.9 million ($0.32 per diluted share) in the second quarter of 2009. For the nine months ended September 30, 2009, adjusted income derived from operating activities was $530.7 million compared to $916.0 million in 2008. Net income for the first nine months of 2009 was $317.9 million ($1.12 per diluted share) compared to $582.4 million ($2.01 per diluted share) in the first nine months of 2008.
Gene Isenberg, Nabors' Chairman and CEO, commented, "We expect this quarter to represent the bottom in our consolidated results for this cycle. This is best illustrated by the bounce we have experienced in our US Lower 48 land drilling operations where we have seen over 20 rigs return to work since the low point in early August. We have also seen modest rate increases on high efficiency rigs in selected markets. In addition, we are receiving an increasing number of inquiries regarding incremental first quarter start-ups. These positive indications are also evident in our US Offshore business where we already have a 2010 contract backlog which is approximately 20 percent higher than the anticipated full year results for 2009. Although our International unit will not bottom out for another quarter or two, inquiries have increased significantly in the last quarter pointing to improved results in 2010 in this unit also.
"Operationally, results in our US Lower 48 land drilling and Alaskan drilling operations were better than we had previously indicated, substantially offsetting weaker than expected results in our International, Canadian, US Offshore and US Well Servicing businesses. The operating income result implies $0.18 in non-GAAP EPS before the adverse effects of numerous items that ultimately reduced non-GAAP EPS to $0.15 per share. The principal reasons for the net income shortfall were foreign exchange losses of $0.03 and a $0.01 decline in the value of our holdings in the Chinese rig manufacturer Honghua Group. These charges were slightly offset by a net tax benefit of $0.01 that resulted from a catch up adjustment in our estimated full year effective tax rate, which reduced to 10 percent from the previous estimate of 15 percent. The revised estimate is a result of lower income expectations in our higher taxed US and Canadian operations, with some entities actually operating at a loss, while our international tax rate remained at approximately 15 percent. The additional interest deduction associated with the 9.25 percent notes we issued in January 2009 is also serving to reduce the effective tax rate.
"In our US Lower 48 land drilling unit we believe the number of employed rigs has bottomed out, rebounding from its low point of 117 rigs in early August to average 123.6 rigs during the quarter, 20 rigs below the second quarter average. Today the contracted rig count stands at 137 including 22 rigs on standby. The recent increase in our rig count is exclusively the result of deployments for horizontal drilling applications in the higher profile shales. Increasingly we are seeing tangible evidence supporting our long-held conviction that rig demand and margins are a function of drilling efficiency differentials. This is borne out by recent increases in utilization and margins for our high end rigs in certain markets.
"Today the utilization of our 86 PACE® rigs is 91 percent with only eight uncommitted and bidding. During and subsequent to the third quarter we deployed another four new-built PACE® rigs, all with three year term contract commitments, and have 12 others contracted and scheduled to commence through the second quarter of next year. This will bring the total number of PACE® rigs in our US Lower 48 land rig fleet to 98. Rig margins during the quarter actually increased sequentially by $768 per rig day when the lump sum early termination payments of the prior quarter are excluded. Margins reached $9,673 per rig day in the third quarter with most of that increase attributable to the cost reductions that were effected during the quarter and that will be more fully reflected in the fourth quarter. Margins for our 62 PACE® rigs increased to an averaged of $11,957 per rig day while margins for the balance of our operating rigs declined slightly to $7,399 per rig day. Demand for our PACE® and higher efficiency SCR rigs remains healthy, particularly in deeper areas such as the Bakken, Haynesville and Eagle Ford shales.
"Our US Offshore business posted its first ever loss this quarter due to continuation of the slow down in activity that started in the second quarter in response to a drop in oil prices. While virtually all of this unit's activity during the last two years has been oil related, what proved to be a rapid rebound in oil prices did not lead to higher rig activity due to the onset of hurricane season. As a result, MODS(TM) platform rigs on deep water applications constituted almost all of the rig activity this quarter, activity that was insufficient to offset the complete shutdown of every other class of rig. We expect the fourth quarter to realize a modest improvement as eight rigs return to work late in the quarter, some on short term commitments. The outlook for 2010 and beyond is relatively strong as evidenced by the fact that next year's contract backlog already exceeds 2009's projected results by 20 percent, with several large, long-term incremental projects likely to materialize.
"Our International results were lower than projected as a large number of maturing contracts were suspended rather than renewed, in contrast to previous indications from customers. This precipitated what is expected to be a further modest decline in the fourth quarter, which should reach bottom by year end or early in the first quarter. Nearly all of the reduced expectations for this year result from this lower utilization. We averaged 97 rigs operating in the third quarter, down from 104 rigs in the second quarter and 121 rigs at this time last year. Margins have fared much better averaging $17,802 per rig day in the third quarter, down only slightly from the second quarter peak of $18,084. The forward outlook is brighter as some of these recently idled rigs, plus others that have been stacked longer, are beginning to return to work, with indications that even more of these rigs will return to service during 2010.
"Our US Well Servicing business was also down to breakeven levels and would have been even lower were it not for aggressive cost reduction efforts that will aggregate to nearly $50 million annually. Lower rig and truck hours had the greatest impact on the quarter's results, with rig hours at roughly one-half of the same quarter last year and truck hours off by one-third. Revenue per hour was down 15 percent for rigs and 20 percent for trucks. We expect to post a modest loss in the seasonally slow fourth quarter with hours falling further due to shorter work days and the number of non-working holidays. Visibility as to an upturn in this business is still lacking, but the onset of a new budget year with a higher oil price environment augurs for improved activity in 2010.
"In Canada we incurred a loss as business did not improve coming out of the seasonally slow second quarter spring thaw period. Third quarter activity was essentially flat with an average of 12 rigs operating at an average margin per rig day of $8,248 compared to 11 rigs at $10,156 in the second quarter. In the fourth quarter we expect to realize further cost savings plus an increase in rig activity that should be sufficient to achieve at least a return to breakeven operating income. There is very limited visibility for full year 2010. However, we think that first quarter results will be in line with the first quarter of 2009, reflecting further cost reductions and the seasonal high in activity. Most of the increased activity will be in the further delineation and development of the highly promising Horn River and Montney shale plays of northeast British Colombia, areas particularly well suited to our rig fleet. Longer term we believe Canada is vital to the North American gas supply and will restore rapidly once gas prices stabilize at economic levels, which the longer term strip implies.
"Alaska results reflected the seasonal low point and benefited modestly from lump sum payments in settlement of two contracts that would have expired at the end of the year. These accelerated payments will reduce fourth quarter results accordingly. We expect next year to be a trough year with income down by as much as 50 percent as a result of three fewer rig years and a weak dayrate environment. There are several significant opportunities that are likely to materialize between now and mid next year that would provide a basis for a more promising longer term outlook starting in 2011. This includes the potential for incremental Coiled Tubing / Stem Drilling rigs.
"Our Other Operating Segments unit was adversely impacted by lower activity, most notably a reduction in the quantity of third party top drive shipments during the quarter. We expect the fourth quarter to post a modest improvement as top drive shipments are expected to be higher, partially offset by lower seasonal results in our Alaskan Joint Ventures. Our Oil and Gas operations were at a breakeven level as profitability in our existing hedged gas production was offset by unhedged gas volumes.
"Our financial position remains strong and we expect our free cash flow generation to increase in subsequent quarters as cost controls contribute further and capital spending decreases. We believe these and other measures will allow us to increase cash and investments to a level where net debt to capitalization will be reduced to the high twenty's percentile range. This should provide sufficient liquidity to redeem our convertible debt due May 2011. When combined with our ready access to capital including our plan to establish a $400 to $500 million revolving credit facility, this gives us the additional flexibility to take advantage of any attractive investment opportunities that may arise.
"In summary, I am confident this quarter represents the low point for our US Lower 48 drilling, US Offshore, Canadian and Other Operating Segments entities, leading to a bottoming out of our consolidated operating income. We also expect the fourth quarter will represent the seasonal low point in the results of our US Well Servicing and Alaskan businesses and a likely bottoming out in our International unit. We believe the pace of the quarterly improvement in our results will be moderate for several quarters since the timing of significant increases in activity is not yet known. Nonetheless we are confident the upturn will soon be felt. One reason for our optimism is the higher forward prices for crude and gas which currently are over $85 and $7 respectively in 2011. Additionally, the performance by our rigs and their growing acceptance with the most discriminating customers is enhancing our market penetration. Regardless of the timing of the turnaround, the breadth of our market exposure and the suitability of our global fleet to today's changing rig requirements will allow us to outperform our peers."
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