Nabors Beats Estimates; Operating Income at $138.5MM
Nabors Industries reported its financial results for the first quarter of 2010. Adjusted income derived from operating activities was $138.5 million compared to $274.1 million in the first quarter of last year and $133.0 million in the sequential quarter ended December 31, 2009. Net income was $40.2 million, or $0.14 per diluted share, compared to $184.4 million, or $0.65 per diluted share, in the first quarter of last year, and $51.5 million, or $0.18 per diluted share, in the fourth quarter of 2009. Operating Revenues and Earnings from unconsolidated affiliates for this quarter totaled $905.7 million compared to $1.2 billion in the comparable quarter of the prior year and $841.1 million in the fourth quarter of 2009. For comparison purposes, all of the prior period results exclude certain non-cash charges which were primarily related to ceiling-test impairments in the Company's oil and gas joint venture entities.
Gene Isenberg, Nabors' Chairman and CEO, commented, "Our first quarter operating results were modestly ahead of both consensus estimates and our fourth quarter results, and were primarily attributable to larger-than-expected increases in our US Lower 48 Land Drilling business and our Alaskan and Canadian segments. These gains more than offset the much larger-than-anticipated decrease in our International operations. The quarter's results would have reflected an even larger increase were it not for weather- related startup delays in our US Offshore segment.
"Net income and earnings per share were also in line with consensus estimates when we exclude certain items specific to the first quarter aggregating $17 million, or $0.06 per diluted share, and a spike in the first quarter effective tax rate of $4 million, or $0.01 per share. The charges emanated primarily from three sources: the devaluation of the Venezuelan Bolivar; a market price adjustment of the carrying value of a portion of our holdings in the Chinese rig manufacturer Honghua; and a book loss on $110 million in additional first quarter purchases of our convertible debt at an average price of $99.04. While the average purchase price of these notes represents a better yield than our cash portfolio, it is higher than the discounted value at which we carry these notes in accordance with the applicable convertible accounting rules. We still expect the full-year effective tax rate to be approximately 12%, although the first quarter rate was 20% primarily as a result of an adjustment to our final 2009 tax liability in Mexico and Canada.
"Our US Lower 48 Land Drilling operations posted $60.3 million in operating income, which represented an increase of $11.3 million over the fourth quarter. These improved results were generated by a quarterly increase of nearly 20 rigs, bringing the average rig count to 158.6. Today this unit's rig count stands at 173, including 11 rigs that are idle but recording revenue. This is down significantly from the 27 idle rigs under contract at the beginning of the fourth quarter. These remaining rig contracts are expected to expire at the rate of roughly one per month going forward. Notably, the quarter's net increase occurred despite the expiration of a number of long-term contracts, virtually all of which were recontracted at rates that represent an increasingly smaller reduction in average margin. Many of our PACE® rigs are now rolling over at higher rates.
"Average daily rig margins for the quarter declined by only $720 per rig day, significantly less than the $1,200 we previously indicated. This represents a sequential improvement in margins and reflects more than a $300 per day improvement in pricing, when adjusted for the $275 per day cost of first quarter federal unemployment taxes and the absence of a $700 per day benefit to our fourth quarter margins that resulted from a reduction in worker's compensation reserves. The worker's compensation benefit was a result of the excellent safety record this unit achieved last year.
"Despite the anemic natural gas price environment, we believe this business will continue to post modest improvements in subsequent quarters, albeit at a slower pace than the last two quarters. Although activity in the gas shales appears to be flattening, we continue to benefit from increasing activity in our oil and liquid-rich gas directed markets, which now employ nearly one-third of our operating rigs.
"Internationally, we expect this quarter's results to represent the bottom, although the $16 million reduction in operating income relative to what consensus implies was much deeper than we previously expected. This was due to lower activity, project deferrals and contract execution delays in numerous venues, the most significant being in Mexico and Saudi Arabia, followed by Algeria. The reductions in these three areas, partially offset by improved results in other areas, yields a reduction in forecasted 2010 operating income of $50-$60 million.
"In Mexico, PEMEX has encountered funding constraints which continue to defer the restart of many of our rigs that were unexpectedly idled. In Saudi Arabia, our rig count has declined from 33 to 24 over the course of the last 18 months, while the total rig count in the Kingdom declined even more percentagewise. The emphasis in this market has been shifting from oil to gas development which requires significant lead times to solicit bids and upgrade rigs, resulting in significant activity interruptions. This ultimately benefits Nabors, as illustrated by our 37% share of the gas drilling market compared to our 25% overall market share in the Kingdom. We are currently modifying six rigs for a recent gas drilling contract award, three of which are in-country upgrades, with the other three incremental to the market. Additionally, management changes at Sonatrach, the Algerian national oil company, have delayed the commencement of a few rigs.
"Rig activity in this unit improved slightly in the last quarter. As the year progresses, we plan to restart many of our idle rigs which, when combined with recent contract awards for incremental rigs, yields higher visibility toward modestly improving results throughout the balance of this year and a much improved 2011 outlook.. We anticipate margins to be flat for the balance of this year, with some improvement next year.
"Our U.S. Land Well Servicing operation posted slightly lower income of $7.2 million compared to $8.8 million in the sequential quarter, but this obscures the overall upward trend in this business. The fourth quarter included a net contribution of $7.5 million from favorable adjustments to worker's compensation, insurance, depreciation and management bonuses, while the first quarter includes only $1.4 million in similar items.
"Rig hours in this unit have steadily improved since the beginning of the fourth quarter, with March representing a 27% increase over October. Visibility is improving as customer plans are finally responding to favorable oil prices. Indications are that we can expect rig hours to continue to advance, which could benefit pricing in the second half of the year. Otherwise our management reinforcement efforts are complete, and we are capitalizing on our sister company's dominant drilling position in the Bakken Shale to expand into that rapidly growing oil market.
"Our US Offshore business posted $7.4 million in operating income, reflecting a slight increase over the previous quarter although significantly lower than we had anticipated. While we averaged three additional lower-margin rigs working, we had a number of higher-margin rig startups that were deferred until the second quarter, primarily as a result of adverse weather. When combined with the usual first quarter payroll tax impact, margins declined sequentially. The fourth quarter also saw a benefit of $2 million from a favorable worker's compensation reserve adjustment. We remain confident of a 30% increase in full-year operating income, as we previously indicated.
"In Alaska, operating income of $14 million was generally in line with the fourth quarter, but significantly below the prior year due to three fewer rigs operating. We expect lower results for the next two quarters with the end of seasonal winter exploration programs and the incurrence of summer maintenance expenses. While we are pursuing several longer-term strategic projects, the intermediate term remains very challenging. We are still achieving good returns on average capital employed and enjoy leading positions in coiled tubing drilling and AC rig technology. Today's oil prices augur for an improved longer-term outlook although we still expect this year's results to approximate 60% of those achieved in 2009.
"Our Other Operating Segments posted a sequential increase with seasonal high activity in both our Alaska joint ventures and our Canadian directional drilling operations. These results were augmented by a sizeable increase in third-party sales by Canrig. Canrig's third-party backlog is also expanding, which should offset weaker second-quarter results in our seasonal operations and provide growth in the second half.
"Our Oil and Gas operations saw a significant sequential increase, although we still reported a modest loss as seasonal seismic expenses incurred by our wholly owned entities in Colombia and Alaska offset the quarter's income. We continue to analyze the optimal means and timing of the monetization of these assets.
"Meanwhile, our financial position remains strong with $1.16 billion in cash and investments at the end of the quarter, even after funding $155 million in capital expenditures and the aforementioned debt purchases. We still expect significant free cash flow generation for the full year and for the first half of next year which, when coupled with good access to the capital markets, should provide adequate resources to fund the redemption of the remaining $1.57 billion in convertible notes due in May of next year.
"In summary, we are cognizant of the challenging natural gas environment, but we do not believe the current price is sustainable over the longer term or even over the intermediate term. To date, we have not seen this weakness manifested in our US Lower 48 Land Drilling operations other than a flattening in the growth of shale gas drilling, which continues to be overshadowed by significant activity increases in our oil and liquid-rich gas markets. We are also confident this quarter will mark the bottom of our international business and the second half will show signs of resuming the robust growth trajectory that characterized this business prior to 2009. Likewise, all of our other businesses have improving near-term outlooks with the only exceptions being Canada and Alaska, although the long- term outlook in these two markets is promising."
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