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Don't Count on 'V' Recovery For U.S. Onshore, Says Nabors CEO

Land drilling expert Nabors Industries Ltd. saw its average U.S. rig utilization rate drop to 78% in the fourth quarter, with its active domestic rig count down by one-third from the peak a year ago. Customers are "indifferent" to the types of rigs they are dropping, the company’s CEO said.

The rig services and completion and production (C&P) business units were pummeled in the final period by lower activity and increased pricing competition, CEO Tony Petrello told analysts during a conference call last Monday.

The Bermuda-based oilfield services company operates the largest land drilling rig fleet in the world, with about 500 rigs (490 land rigs) working in more than 25 countries and nearly every significant oil and natural gas basin, including the offshore, Alaska and in North America, its biggest market.

Only last October management had said the "rapidly expanding population" of long-length horizontals in the U.S. onshore was signaling a strong market (see Shale Daily, Oct. 22, 2014). However, prices, like the weather, can change rapidly.

Management is confident the company can manage through the downturn by lowering costs "in ways that do not inhibit our core capabilities and flexibility," Petrello said. "For example, we have significantly scaled back our pace of new U.S. rig construction and will make further adjustments based on the outcome of ongoing discussions regarding additional rig awards."

Across the energy sector, jobs are being lost, and Nabors has joined in, axing 12% of its 29,000-member workforce. About 20% of the U.S. jobs are gone. Up to 15% more jobs could be at stake worldwide if the operating environment doesn't improve.

"We are not counting on the 'V,'" Petrollo said of a potential V-shaped -- rapid -- recovery. A long-term downward spiral in oil prices now is anticipated. The impacts of pricing and reduced activity "will be evident" in the first quarter results. "Based on the current trajectory of the decline in our rig count, we expect financial results to further decline" in the second quarter.

Last year Nabors was awarded multi-year contracts for 23 newbuilds, including 16 high-spec Pace-X rigs to 10 different customers. Thirty-six new or upgraded rigs also were deployed, with 16 new Pace-X rigs for U.S. customers. Things began to go south in the United States during the fourth quarter, Petrello said.

"As we entered the fourth quarter, we had plans to ramp our Pace-X newbuild program to four per month, starting during the first quarter. In view of the deteriorating environment, we have taken rapid action to drastically cut back on our newbuild schedule for 2015. At this point, we anticipate completing 17 rigs during this year; four of those have already been deployed; five of the remaining 13 already have contracts.

"We are also continuing our investments in advanced rig and downhole technologies with great prudence. We believe our customers will increasingly demand high performance drilling solutions that improve well economics, especially in this environment. Nabors is fully committed to driving that progress."

The quarterly results for all of the drilling segments actually improved sequentially in the three-month period. Total revenue of $1.78 billion slightly exceeded the third quarter, despite the steep decline in commodity prices, which impacted volumes in our U.S. and Canadian drilling segments. The drop in oil prices also drove a decrease in volumes in the C&P business.

Even on the downturn, Petrello said enthusiasm remains high for the pending deal with C&J Energy Services Inc. to buy its completions arm for $2.86 billion, creating one of the largest hydraulic fracturing fleets in North America (see Shale Daily, June 26, 2014). The transaction is set to be completed before month's end.

"We believe the combined operations will be formidable competitors in their target markets," Petrello said. "The new company, led by Josh Comstock, will have a deep management bench with some of the best people in the sector. Its asset base and geographic footprint will provide ample opportunities for future growth. At the same time, we will sharpen our focus on the drilling business. The transaction enhances our financial flexibility, and our shareholders should benefit from Nabors' ownership of just over half of the new entity."

That said, Nabors' outlook for the U.S. business isn't too bright.

"The steep drop in oil prices and uncertain prospects have caused an extraordinary rapid drop in drilling activity in the U.S." the CEO said. "The industry has shut approximately 35% of the rigs that were working at the peak in the fourth quarter. Our Lower 48 rig count is down approximately 32% from our peak. It currently stands at 138 rigs, including 21 stacked on rate. Thus far, the downturn has been largely indifferent to rig types and capabilities.

"In this environment, operators are slashing their capital spending commitments. They are shutting rigs based on the lack of term contracts, rather than on the quality of the rigs or the drilling performance. Utilization of our U.S. Lower 48 AC [alternating current] rigs has declined to 68% from 94% at our peak rig count. Among our AC rigs, our 1,000 hp M-class rigs have experienced the largest decline in utilization, while our 1,500 hp rigs have held up better."

Utilization rates for the Pace-X rigs "remains at 100%. Legacy rig utilization has dropped to 20% from 40% in the same timeframe. By geography, the Rockies, as expected, including the Bakken and the Midcontinent, have seen the greatest slowdown in the number of rigs working."

From this point on, Nabors is forecasting "continued erosion in both the industry's and our rig count. The impacts of pricing and reduced activity will be evident in our first quarter results. Based on the current trajectory of the decline in our rig count, we expect financial results to decline further in the second quarter. As we look further out and as the market stabilizes, we anticipate operators will high grade their rigs after they rightsize their drilling programs.”

There are customers interested in upgrading to higher performance rigs -- but those would be for future drilling plans once existing contracts with competitors expire, the CEO said. And there's a lot of competition, particularly in the C&P business, where price competition has intensified as the market contracts. Nabors expects the unfavorable environment to persist.

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