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Nabors Issues Earnings Warning on Weak Gas Operations in North America

Nabors Industries Ltd., the world's largest land-based driller, warned Wednesday that its 4Q2006 earnings will fall well short of Wall Street estimates on weaker-than-expected natural gas operations in the Lower 48 states and Canada. The news, coming as several energy analysts slashed gas price forecasts (see related story), sent oil service stocks tumbling, pushing Nabors' share price down 6% in early trading.

The Hamilton, Bermuda-based driller currently estimates that its quarterly earnings will range between $0.95 and $1.00 per share, substantially below the $1.11/share average forecasts by Thomson/First Call analysts. Nabors expects full-year 2006 earnings to range between $3.53 and 3.58 per share; analysts' average expectations are $3.70/share.

"A lower level of activity in our North American-directed gas markets is the primary factor leading us to reduce our expectations for the fourth quarter and full year, which had been in line with the First Call mean," said CEO Gene Isenberg. "The shortfall in operating rigs was equally split between our U.S. Lower 48 and Canadian operations with each operating 13 fewer rigs."

Isenberg said some of the shortfall in the Lower 48 followed "slippage in delivery and delayed start-ups of new rigs." The actual margins, he said, will be in line with expectations for the Lower 48, but below margin expectations in Canada.

"The lower rig count in Canada is about equally attributable to the general weakness in the shallow drilling market in Canada and protracted weather-induced start-up delays for our mid-depth and deeper drilling rigs. We also retired some Canadian assets in the fourth quarter, adding to the quarter's lowered expectations. Meanwhile, our international, Alaskan and U.S. land well servicing operations are growing in line with our previous expectations as is our U.S. offshore business, albeit modestly slower."

On the prospect of idled gas rigs in North America, Goldman Sachs energy analyst Daniel Henriques reduced his rating on the oil services sector to "neutral" from "attractive." Henriques said he expects the sector to be "range-bound" in the next few months because of "weather-driven weakness" in gas prices. In North America, the number of gas drilling rigs has fallen 5.5% year-over-year.

Raymond James energy analysts, who revised their 2007 gas price deck downward to $7.50/Mcf on Wednesday (see related story), expect lower earnings for most North American-based land drillers, "as over 80% of North American land drilling is geared towards natural gas production." However, any downturn "should correct itself in the back half of the year...Accordingly, we believe that land drillers will ultimately finish 2008 up an average of 5-10% [over] 2007."

The Nabors companies own and operate 600 land drilling and 800 land workover and well-servicing rigs in North America. Offshore, Nabors operates 46 platform rigs, 22 jack-up units and five barge rigs in the United States and multiple international markets. Nabors also markets 29 marine transportation and supply vessels, primarily in the U.S. Gulf of Mexico.

In its benchmark study of supply activity in the Western Canada Sedimentary Basin, where most of the country's gas drilling takes place, Canadian energy analysts Peters & Co. noted basin drilling is expected to fall. Using 839 rigs as the 100% benchmark, the analysts are forecasting drilling to drop to a range of 60-65%, or 510-553 active units, in 1Q2007. In the same period of 2006, the rig count peaked at 90%, or 688 active rigs.

"We do not believe the sense of urgency that led to a ramp-up of activity levels in late December of 2005 is present this year," wrote Peters analyst Todd Garman.

Peters' survey noted that recent announcements to cut budgets, which impact Canada's top 13 gas producers, will reduce Canadian production by about 330 MMcf/d, or 3%, by the second half of 2007. Raymond James energy analysts said last month Canadian gas exports to the United States, which currently total about 9 Bcf/d, could decline by more than 1 Bcf/d by the end of 2007 because of the country's reduced drilling activity, rising field decline rates and higher gas demand (see Daily GPI, Dec. 19, 2006).

Don Herring, president of the Canadian Association of Oilwell Drilling Contractors (CAODC), said that even though most of 2006 was good for the Canadian oil services industry, the "last four months were unsettling."

This year, the CAODC is projecting 19,023 well completions, or a 15% decline from 2006. "Virtually all of the anticipated decline, or 3,275 wells, is focused at shallow or deliverability gas areas, as well as coalbed methane."

The CAODC expects an average of 427 active rigs in 2007, essentially the same as 2003. The 2007 utilization rate is expected to be "just above the 46% recorded in 2002," which was the last year dominated by weak commodity prices.

Even though Canadian well counts are predicted to be lower in 2007, Herring said "it won't be like the slowdowns we've seen in the past." He said 2007 will still be a "good year" because "overall, the industry is very healthy...Essentially, what we're forecasting is a slower summer."

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