Unconventional drilling in the U.S. onshore boosted Nabors Industries Ltd. quarterly revenues to their highest level in more than two years, as customers sought better technology to finesse their wells.
What Nabors reports is key because in North America it runs 542 land workover and well servicing rigs. With 800,000 hydraulic hp in service, it also is one of the largest providers of hydraulic fracturing (fracking), cementing, nitrogen and acid pressure pumping services.
The latest period's results reflected a healthy progression in operating margins, which reached 11.2% in the quarter, a 297 basis point improvement over the second quarter. Most of the company's operating segments took advantage of favorable market conditions between August and September. Except for seasonally lower activity in Alaska, there was a "meaningful improvement in the U.S. Lower 48 operations," CEO Tony Petrello said.
In the U.S. onshore, the completion/production services business line was hit by weather interruptions following rain that swept across parts of Texas, including heavy flooding in the Permian Basin. However, the completions unit still recorded a "significant improvement...on a record stage count and higher pricing...Margins increased during the quarter, but the extent was limited by higher logistics costs. The record pace of activity continues and additional price increases are being implemented; however, higher costs persist and interruptions are expected with the holiday season and the onset of winter in the northern regions."
A second dual-frack spread in the U.S. onshore is expected to begin operations by the end of the year, bringing Nabors' working hp to 750,000, which represents effective full utilization. The operation currently has 17 of 19 active crews working on a 24-hour basis.
"A recent increase in inquiries for 24-hour heavy workover rigs appears to indicate that the long-awaited inflection in rework associated with long horizontal completions is commencing," said the CEO. "The rapidly expanding population of these long-length horizontal wells supports a strengthening market despite the near-term pockets of weakness."
In North America, U.S. drilling operating results overall improved year/year and sequentially from gains in the Lower 48, partially offset by lower exploration activity in Alaska.
The regional results reflected an "improvement in both utilization and pricing in the Lower 48 operation: an incremental four rigs working and an increase of $191 in daily rig margins," said the CEO. "Pad-rig demand continues, particularly in the Permian and South Texas, as indicated by the award of three additional Pace-X rigs," the company's top-of-the-line high-tech alternating current (AC) walkers. Nabors also runs silicon-controlled rectifier (SCR) rigs, some with walking systems.
To date, Nabors has been awarded 43 Pace-X contracts in the United States, "with 28 deployed and the ramped-up build schedule committed into the second quarter. Utilization for AC rigs is currently 96%, while SCR rig utilization is 52% overall and 83% for the pad-capable units," management said. The operation expects to deliver seven more Pace-X rigs in the fourth quarter, increasing to 12 during the second quarter of 2015.
"While we are acutely aware of the potential ramifications of further downside in commodity prices, our nine new contract awards are indicative of today's strategic planning by several of our key customers," Petrello said. "The Pace-X rigs facilitate improved returns associated with the migration toward higher density pad drilling. Interest..remains high as these rigs consistently outperform, and our ramped up production capability provides us a more competitive delivery timeframe."
Within its rig services business, operating income in the latest period more than doubled from the second quarter, primarily on increased shipments of third-party capital equipment by subsidiary Canrig. The unit's backlog "remains at near-record levels even with an uptick in deliveries," Nabors noted. The business unit also has acquired a development-stage rotary steerable technology to integrate additional drilling services capability.
Petrello said the "sequential progression of our results in both our drilling and completions operations" was a success. "Despite the third quarter performance of our production services operation, I continue to believe we will see improvement in this business as 2015 progresses, assuming supportive oil prices. The recent new contract awards and the volume of ongoing discussions support our positive bias and appear to indicate a resiliency among most of our customers regarding temporary swings in oil prices.
"Nonetheless, we are acutely aware of the potential for further weakness in crude oil prices and the associated impact on our customers' spending plans, particularly in North and Latin America. Our business is much better positioned to weather and potentially capitalize upon any significant downturn in industry activity. This is a result of the actions we have taken over the last three years to improve our financial flexibility, streamline our operations and improve our cost structure."
The "longer-term focus of our international customers, the large proportion of our U.S. fleet now comprised of higher capability AC rigs, and the enhanced economics associated with continued migration to higher density pad drilling should enable us to maintain a higher level of utilization for our fleet relative to the industry," he added. "Meanwhile, we will continue to execute our numerous initiatives to improve our service quality and cost structure, and to deploy our backlog of new rigs on schedule and within budget."
Net income in 3Q2014 from continuing operations was 57% higher sequentially at $57.4 million (19 cents/share) from $65.7 million (21 cents). Nabors reported a net loss in 3Q2013 of $90.5 million (minus 30 cents/share) on one-time charges. Operating revenues in the latest period rose sequentially 12% to $1.81 billion and were 17% higher year/year. Revenues for drilling were up 10% from 2Q2014, while completion and production revenues increased 14%. Operating cash flow increased year/year to $490 million from $439.3 million and sequentially from $416.3 million.