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Haynesville Gas Drilling Dries Up, Says Nabors

Thirty-two of the dry natural gas rigs operated by Nabors Industries Ltd. in the Haynesville Shale have been redeployed to liquids areas "and we expect more of the remaining 26 to be diverted" soon, CEO Tony Petrello said late Tuesday.

Weakness in natural gas prices "may well result in a more rapid decrease in gas-related rig activity," but "we expect the effects of any such decrease and potential rate softness to be significantly offset by the deployment of 21 new rigs at higher average margins, coupled with the ongoing redeployment of rigs from dry gas areas to more active oil and liquids rich areas."

The dry-gas Haynesville/Bossier play has fallen on hard times over the last year. According to NGI's Shale Daily Unconventional Rig Count, the Haynesville/Bossier has experienced the largest drilling rig decline of any North American unconventional play over the last year. The play had 73 rigs operating for the week ending Feb. 17, which is down 46% from the 136 rigs that were active one year ago. Producers over the last couple of earnings periods have noted that rigs have been steadily migrating from the dry-gas Haynesville to the more liquids-rich plays.

In North America's onshore Nabors owns and operates close to 500 land drilling rigs and 755 land workover and well-servicing rigs. It also is one of the largest providers of hydraulic fracturing (fracking), cementing, nitrogen and acid pressure pumping services with more than 780,000 hp now in service. Only 35 of the rigs now operating on dry gas projects are not subject to take-or-pay contract commitments throughout 2012, Petrello noted.

The Bermuda-based operator reported net income from continuing operations of $89.5 million (30 cents/share) in 4Q2011, versus $152.1 million (52 cents) in 4Q2010. In 2011 Nabors earned $342 million ($1.17/share), versus $256 million (88 cents) in 2010. Revenues were $1.7 billion for the latest quarter and $6.1 billion for the full year. Income from continuing operations in the latest quarter included a $100 million (22 cents/share) charge related to a change in the employment contract for former CEO Gene Isenberg.

"The quarter's results reflect solid operational improvement across all of our North America businesses," said Petrello. "Accelerating monetization of our oil and gas assets to enhance the flexibility of our balance sheet has been a priority since October. We are also reviewing the strategic fit, execution effectiveness and rate-of-return criteria for every business unit. This process will likely result in modifications to the alignment and scope of our services over the course of the year.

"This realignment will result in two lines of business: drilling and rig-related operations that are involved in well construction; and pressure pumping, workover/well-servicing and fluids management operations that conduct well completion and maintenance. We expect this realignment to enhance our quality and cost efficiency, and improve our interface with our customer base."

Nabors' U.S. Lower 48 land drilling operation, which comprised the largest component of the results, achieved a sequential increase from 3Q2011 in operating income of $25.2 million, resulting in $130 million in the quarter and $414 million for 2011. Canadian operations were up from a year ago as the winter season got underway. Rig activity improved by three rigs from 3Q2011 and by six rigs over the same period of 2010. Margins also increased to $12,061/rig day, representing increases of $1,741 over 3Q2011 and $2,828 from 4Q2011.

"We expect results for the first quarter and for the full year 2012 to show further improvement, although probably at lower than previously anticipated levels given the weak natural gas environment," said the CEO. "This increase is based on the premise that we will see a continued ramp up in oil-directed activity that should mitigate the effects of a leveling off in activity in the British Columbia shales.

"In the fourth quarter, two new slant service rigs were deployed, and we expect to deploy another two in the first quarter of 2012 when we will also deploy five upgraded drilling rigs. Interest in new builds continues in this market, but because contract terms in [Canada] often do not yield returns that are as attractive as those we obtain elsewhere, we have become increasingly selective in availing ourselves of those opportunities."

Nabors' workover, well servicing and coiled tubing rigs, fluids management and logistics operations, and pressure pumping services collectively achieved operating income of nearly $101 million in 4Q2011 and $303.9 million for the year. Most of the gains were in the pressure pumping operations. Operating income margins improved sequentially to 20.8%, up from 18.9%.

"We have not experienced significant limitations in obtaining proppant or other materials since we made plans in late 2010 to secure supplier commitments in anticipation of the increase in activity," said Petrello. "We do, however, continue to encounter significant logistical challenges, particularly with the doubling of our volumes in less than a year. This provides opportunities for efficiency improvement, which will further benefit margins or at least mitigate the effects of increasingly competitive markets, brought on by an influx of equipment.

"The inevitable adverse effects of weaker natural gas pricing will be mitigated by the fact that we have only one frack crew currently working on dry gas projects. More important, 72% of our projected 2012 operating cash flow is subject to take-or-pay obligations."

At the end of 2011 Nabors had 22 of 27 fracking spreads totaling 733,000 hp, along with five coiled tubing packages. Two more spreads deployed into the Rockies/Bakken region and Marcellus Shale markets in January and a third is scheduled to deploy into the Rockies/Bakken in May. Two other 20,000 hp spreads are expected to deploy in Canada before the end of March.

"Once the remaining equipment is in service, our total hydraulic fracturing horsepower will be 857,500, with another 100,000 hp in cementing, acid and nitrogen pumping equipment," said Petrello. "We also have seven additional coiled tubing packages and 10 cementing units yet to deliver, which will complete our currently planned equipment additions. We have decided to suspend further capacity additions until warranted by the markets. Longer term, we are exploring a number of prospects for work in emerging international venues where our existing infrastructure, labor sources and favorable tax position should provide competitive advantages."

In its U.S. well servicing business Nabors expects "customary seasonal effects" to be "more pronounced in the first quarter, but overall we expect meaningful improvement throughout 2012," said the CEO. "We expect pricing trends to improve as an overhang of refurbishable stacked rigs dissipates and oil-directed activity remains strong. Long term, the high number of new oil wells creates future demand as these wells generally move to artificial lift systems, the primary driver of this segment of our business."

The business outlook the North America drilling and production/well services businesses "looks promising, a weaker natural gas environment notwithstanding," he said.

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