Nabors: Little or No Growth in 2007 North American Drilling Price

Dow Jones Newswires

HOUSTON, Texas Oct 25, 2006 (Dow Jones Newswires)

The explosive growth in the rates drilling companies charge to operate rigs is over, Nabors Industries Ltd. (NBR) Chief Executive Gene Isenberg said Wednesday.

"We're not expecting a major increase in pricing in the U.S. and Canada," he said in a conference call with analysts.

As oil and gas producers have snapped up nearly all available rigs in the last two years, operators such as Nabors have reaped the rewards by charging ever-higher prices, known in the industry as dayrates, for their services.

But gas prices have in the last year been cut in half, leading analysts who follow the industry to predict a downturn in demand for rigs. More than 300 new rigs are also expected to enter the market over the next year, including 76 from Nabors alone, which some believe could create a glut.

Nabors has seen "more competitive conditions" in Oklahoma and West Texas, the company said in its release of third-quarter earnings, which saw net income rise 64% to $292.8 million.

Contradicting Wall Street's predictions, Nabors said Tuesday it is predicting a 20% increase in operating income from drilling in North America in 2007, with 80% of that growth driven by increased activity.

If U.S. drilling income rises as expected from $840 million to $1.045 billion in 2007, $170 million of that increase would come from higher rig activity, while only $35 million would stem from higher dayrates.

"We're not counting on higher margins in the U.S. or Canada," Isenberg said. "That's not what's going to drive our return on capital."

Drilling activity will receive an even bigger boost if the continent sees a normal winter, Isenberg said.

Cold weather would increase demand for gas, used in heating, which would keep prices at $8.50 a million British thermal units or higher, well above what most producers need to justify expanding their drilling budgets, Isenberg said.

"I'm not ashamed or pessimistic about the North American natural gas market," he said.

Of the major oil-field services companies that have reported third quarter earnings in the last week, all have expressed concern that the best days of the drilling boom may be in the past.

Executives with Weatherford International Ltd. (WFT) and Schlumberger Ltd. (SLB) predicted an outright decline if the winter is warmer than normal.

Nabors joins Halliburton Co. (HAL) in forecasting a less dire slowing in the rate of growth for dayrates, rather than any downturn in drilling.

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