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Nabors Sees 'Pronounced' Shortfall in Pressure Pumping, Top Drives

Oilfield services giant Nabors Industries Ltd. last week warned that operating results for the second quarter will fall below consensus estimates because of a "pronounced" shortfall in the pressure pumping and top drive completion service lines.

The Bermuda-based company, which reports its quarterly results later this month, said operating income now is projected to be $88-91 million in 2Q2013, well below Wall Street forecasts of around $111 million.

"Within Rig Services, lower sales of capital equipment and reduced service and rental activity impacted financial performance," management noted. "Adverse weather and intense competition negatively affected results in Completion and Production Services, particularly for pressure pumping in the U.S. and Canada."

CEO Tony Petrello said "for some time, our outlook for the second quarter has been cautious, with results improving in subsequent quarters. Unfortunately, the lingering winter weather and subsequent flooding in our northern markets, together with a slower recovery in Canrig, have resulted in a weaker than expected quarter."

Canrig Drilling Technology Ltd. is a subsidiary of Nabors that manufacturers top drive systems and software for drilling equipment.

"Our other operations appear to be in-line to favorable compared to expectations," Petrello said. "Efficiency gains appear to be consuming operator budgets more rapidly than anticipated and could result in year-end weakness absent favorable mid-year budget revisions. We remain particularly cautious in our outlook for pressure pumping.

"Although industry activity appears to be increasing slightly, the combination of improving pumping efficiency and increasing competitive intensity tempers our view. Nonetheless, the improving near and longer term outlook for our other business lines remains intact."

Nabors markets 474 land drilling rigs for U.S. operations and 20 countries worldwide. It also markets 442 rigs for land well servicing and workover work in the United States and 106 rigs for land well servicing and workover work in Canada. In addition, the company provides offshore platform workover and drilling rigs, including 36 platform, 12 jackup and four barge rigs in the United States, including the Gulf of Mexico.

"Despite the shortfalls and no asset sales, we still realized a significant reduction in gross debt of nearly $300 million in the second quarter," said Petrello.

The pre-announcement for 2Q2013 is an "inauspicious precursor" to the official start of oil and gas industry earnings season that officially kicks off this week, said Tudor, Pickering, Holt & Co. (TPH) analysts, who had pegged operating income in 2Q2013 to be $30 million more. What could be a "bigger impact," however, is that Nabors raises "the specter in their release of another second half 2013 North American [NAM] slowdown," which "will be a hot button topic this earnings season."

The news doesn't appear to point toward specific actions later this year by customers, but Nabors is "just acknowledging that the spend rate year-to-date continuing means budgets in some cases need to go up...This call is ultimately an oil/gas price one, so it seems premature other than to acknowledge 4Q2013 seasonality."

The implications for other oilfield operators is "sure to stir up hornets' nest among investors" regarding the second half outlook for NAM activity. "While we think some Nabors-specific factors are at play in 2Q2013...,we can't ignore the continued flat line U.S. horizontal rig count given now halfway through the year."

Earlier this month Barclays Capital published "A Pressure Pumping Recovery: The Biggest Surprise for 2013?" emphasizing the firm's optimistic outlook for an improved pressure pumping market despite slower-than-expected rig count growth.

Analyst James West said spot commodity price had stabilized and in some cases had increased, with the largest pressure pumpers almost fully utilized -- despite "little to no" pressure pumping supply into the NAM market for the foreseeable future.

Baker Hughes Inc. recently said industry utilization is near 75% while Halliburton Co. said it is closing in on 80%, West noted. Utilization rates above 80% "will drive pricing up near-term."

Instead of focusing on the rig count, West advised -- as other energy analysts have said -- to focus on the well count, which increased about 10% in 1Q2013, while footage drilled also up 10%. Those metrics "more closely approximate" the demand for hydraulic fracturing stages, which drives revenue" for the pressure pumpers.

"The number of active drilling rigs is a long-standing proxy for activity levels; however, for a number of products and service lines offered in onshore basins, particularly in the unconventional shales that now dominate the U.S. market, the active rig count is a misleading indicator," West said.

Jefferies & Co. analyst Brad Handler last week put a "hold" rating on Nabors and raised the price target to $15.00 from $14.00.

"Drilling efficiencies and an even-more muted gas outlook could leave the U.S. rig count flat for two years," Handler said. "We think drillers likely chase the ongoing displacement of mechanical rigs by AC rigs." The result, he said, is ongoing higher capital spending, less earnings growth and a less-than-attractive share price for the sector overall.

Meanwhile, Goldman Sachs removed Nabors from its "conviction" buy list on the quarterly earning. However, the shares remain a "buy" with a $19.50 price target.

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