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Nabors Jabbed by One-Two Punch from Pressure Pumping, Costs

Nabors Industries Ltd., North America's largest onshore drilling contractor, said last week operating results in the second quarter will fall below Wall Street expectations, primarily because of a slump in pressure pumping services and higher operations costs. To improve efficiencies, the company plans to consolidate its U.S. well servicing and pressure pumping operations.

"This quarter's shortfall is disappointing, notwithstanding the progress we are making in streamlining and focusing the company's operations," said CEO Tony Petrello. "The largest component of the shortfall is attributable to the increasingly competitive spot market in pressure pumping where pricing and utilization continued to deteriorate while costs spiked in the quarter.

"Nonetheless, our U.S. pressure pumping results will reflect operating cash flow [of] $70-75 million as a result of our favorable mix of term versus spot work." The quarterly results are scheduled to be issued Tuesday.

Onshore rig redeployment has been ongoing since early this year. In February Nabors began redeploying nearly all of its 58 dry gas rigs in the Haynesville Shale to liquids areas (see NGI, Feb. 27). Only 35 of Nabors' operating rigs in dry gas projects were not subject to take-or-pay contract commitments through this year, Petrello said in February.

For several months Nabors has been formulating a plan to realign its U.S. drilling and rig-related operations to improve efficiencies and customer satisfaction, the company said. To that end the Bermuda-based operator has taken "initial steps" to consolidate the U.S. well-servicing and pressure pumping operations into Nabors Completion and Production Services, "which we believe will better position the company to serve our customers in a more unified and disciplined manner," said Petrello. The consolidation will result in an intangible asset value impairment of about $75 million.

Combined with the impairment of inactive Canadian drilling rigs, miscellaneous completion and production services assets and $26 million of goodwill in the international and U.S. offshore units, noncash charges in 2Q2012 are expected to be about $150 million. "Despite these cost issues and a more than $80 million seasonally driven sequential decrease in our Alaska and Canada operations, our operating cash flow remains healthy at nearly $500 million for the seasonally low second quarter and nearly $1.1 billion for the first half," Petrello said.

Analysts at Tudor, Pickering, Holt & Co. said last week the lower expected earnings results were a "negative but not a big surprise as pressure pumping cost inflation is also hurting others," and Nabors' international operations "have struggled for awhile" (see related story).

The Nabors board of directors also has put in place a shareholder rights plan to prevent an unsolicited takeover. The plan would allow shareholders to receive rights to purchase shares of a new series of preferred stock. Shareholders in June approved an industry-first, nonbinding resolution giving them power to oust members of the drilling contractor's board of directors; Chesapeake Energy Corp. shareholders followed suit by passing a similar resolution days later (see Shale Daily, June 11).

"The plan adopted by the board is designed to ensure the fair and equal treatment of the company's shareholders in connection with any initiative to acquire effective control of the company," Nabors said. "It is intended to reduce the likelihood that any person or group would gain control of Nabors by open market accumulation or otherwise without paying a control premium for all common shares."

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