Nabors Industries Ltd. (NYSE: NBR) today reported its financial results for the first quarter of 2008. Adjusted income derived from operating activities was $287.2 million compared to $340.0 million in the first quarter of last year and $307.9 million in the quarter ended December 31, 2007.
Net income from continuing operations was $230.5 million or $0.81 per diluted share compared to $256.9 million or $0.90 per diluted share in the first quarter of last year and $222.2 million or $0.78 per diluted share in the fourth quarter of 2007. Operating Revenues and Earnings from unconsolidated affiliates for this quarter rose to $1.30 billion compared to $1.25 billion in the comparable quarter of the prior year and $1.32 billion in the fourth quarter of 2007.
Gene Isenberg, Nabors' Chairman and CEO, commented, "This quarter represented an important confirmation of the factors on which we base our optimism regarding Nabors' performance in the intermediate and long term. First, the performance in our US lower 48 land drilling unit clearly indicated a bottoming out of roll-over rates as existing contracts that were executed at the height of the market renew at lower although higher than anticipated rates. More importantly, it represented the near elimination of the start up issues associated with the new technologies incorporated into our new rigs. As a result operator enthusiasm is increasing and almost weekly we hear of record wells being drilled by many of our PACE rigs in various important lower 48 markets. Similarly, in our important International operations we are seeing a further increase in the already high level of bidding activity and we are enjoying a high success rate in capturing these bids in all of the important global markets, including the Middle East, North Africa, South America, Russia, and even Eastern Europe. Our other smaller operations in Alaska and in manufacturing and technology all demonstrated very good results and experienced favorable developments during the quarter that should positively impact future performance. This very positive picture was not enhanced by continued negative performance in Canada, a very slow start in our U.S. Offshore business and the disappointing but still flat U.S. Land Well Servicing business.
"The GAAP results incorporate a number of items that, in my opinion, understates the quarter's operating results and income taxes. Without these non-cash items, operating results would have been $18.1 million higher at $305.2 million as opposed to the $287.1 million reported and earnings per share would be essentially the same. The operating items occurred in our Oil and Gas operations and do not affect our other operations in any way. We incurred approximately $8.1 million in pre-tax charges representing the mark-to-market values of forward gas sales through swaps and price floor guarantees utilizing puts. Additionally, we incurred non-cash charges of $10.0 million related to the impairment of certain Canadian reserves which would never have occurred if the measurement date was just two quarters later. On the other hand, net income benefited by approximately $10.9 million, or $0.04 per share, due to a reduction of certain foreign tax accruals which reduced the quarter's required GAAP tax rate to 19.7%, even though we still expect the rate to be in the 22-24% range for the full year 2008 which we believe is more appropriate in analyzing the first quarter's operations.
"The lower results in our U.S. Lower 48 Land Drilling unit actually represented a significant improvement over what we projected as recently as three months ago, which bodes well for the remainder of the year and thereafter. In addition, there were several noteworthy achievements and trends that portend an improving future for this unit. Margins during the quarter averaged $8,917 per rig day which reflects a decrease of only $270 inclusive of a $250 per rig day increase in payroll taxes that is specific to the first quarter. This compares very favorably to the $700-$800 decrease we had previously indicated and is partially attributable to the renewal of contracts for 20 of our older rigs at dayrates that were lower than previous rates but much higher than anticipated.
"The most impactful offset to these lower priced renewals is the rapidly improving performance of our previously deployed new PACE rigs. This performance is reflected in lower downtime and costs and in a number of record setting wells, the most significant of which were set for key customers in the Barnett Shale and Piceance Basin and which were achieved in head to head competition against a number of our competitors' new rigs. We continue to see a high level of interest in additional new PACE rigs which we expect will lead to more contracts for new-built rigs in the near future. The outlook for this business has improved materially over the last two months and we expect to see improving market conditions as the year progresses, even though we still have another 26 long-term contracts for older rigs expiring, 16 of which are during the second quarter. The largest component of the pending incremental demand will be 1,000 and 1,500 horsepower rigs with upgraded pump capacity and power. These rigs are in short supply today and will be at a premium in any recovery. As a result, a significant number of additional new-built rigs in this horsepower range are likely to be needed. Nabors currently has 85 stacked rigs with roughly 50 of these capable of returning to service with limited expenditures since virtually all of the stacked rigs have worked in the last 18 months. Approximately 30 of these rigs are in this highly desirable 1,000 to 1,500 horsepower class. In addition, we have several rigs that have been allocated to our International operations that could be readily redirected to the U.S. market. This gives us a broad range of efficient rigs in good condition to expeditiously satisfy customer requirements. In summary, we expect 2008 to be down from 2007 in this unit but the decrease should be modest and we expect we will exit the year on a positive note.
"Our International business was down slightly compared to the fourth quarter and off only marginally from the moderate quarter-to-quarter increase that had been forecasted. The shortfall occurred due to a number of activity-related factors, primarily downtime in Mexico. Also, our jackup 657 was out of service for the full quarter as it entered the shipyard to commence the necessary modifications for a three-year contract with Saudi Aramco at rates that are at least $70,000 per day higher than its prior rate. We expect the balance of the year to return to the high growth rate that has characterized the last three years, during which time we increased operating income by 270%. This pending growth is fueled by the anticipated commencement of our Jackup rig 660 this week and the anticipated startup of Jackup 657 in June, with another ten new rigs scheduled to commence operations by the end of the year. Additionally, we anticipate securing contracts for up to 13 additional rigs that could commence in the next twelve months. Bid flow continues to be strong and we still have a large number of rigs yet to renew contracts at higher rates in the coming year.
"Alaska's seasonally strong first quarter more than doubled its fourth quarter results and represented a smaller but meaningful increase over the same quarter last year. We expect to achieve increases in the average number of rigs working throughout the remainder of the year and at significantly higher average dayrates, leading to a large percentage increase in year-over-year results, although subsequent quarters this year will be slightly lower as the winter season contains a number of additional income streams. We anticipate commencing a long-term contract with our new, leading edge 15,000 ft. Coiled Tubing / Stem Drilling rig on the North Slope around year end. The two new heli-transportable rigs that deployed recently are working well and there is interest in additional units in Alaska and internationally. Activity in our Alaskan logistics and construction joint ventures also posted improved results from both a more robust environment and the higher activity that characterizes the winter season. These operations are reflected in our Other Operating Segments breakdown.
"Our Canadian operations also posted a large sequential improvement in the seasonally high first quarter, although they were well below last year and less than one-half of 2006's record results. While we expect the next two quarters to set further record lows in income for their respective quarters, the outlook is beginning to show signs of recovery. However, we expect Canada to lag the recovery in North America primarily because of the reduced wellhead margins that reflect the lower value of the U.S. dollar relative to the Canadian dollar, as well as higher costs generally. The improving gas price strip, eminent declines in Alberta gas production and the prospects for accelerating activity in new shale plays like the Montney and Horn River Basin are encouraging.
"Our U.S. Land Well Servicing operation was essentially flat with the sequential fourth quarter but significantly lower than the same quarter of 2007. While rig hours improved slightly over the fourth quarter, this was offset by lower pricing particularly in South Texas, which is now the most price competitive of all of our markets. At the end of the quarter all of our new 500 HP Millennium rigs had been deployed and many of the issues that have inhibited these rigs from fully realizing their potential have been rectified. We expect that these rigs will better demonstrate their superior performance in the coming quarters and be able to achieve the premium margins and better utilization they should be yielding. We expect 2008 to be essentially flat to last year as activity seems to be firming up in most areas and remaining strong in our California market where 40% of our rigs are located.
"Our U.S. Offshore operations posted results that were modestly lower than the fourth quarter and less than one-half of the first quarter of 2007. Depressed results for this unit over the last three quarters have beenprimarily attributable to low utilization and falling pricing for our shallow water workover jackups and deep drilling barge rigs, both of which have seen an improved outlook lately. We expect that the remainder of this year will show steadily improving results as jackup and barge utilization increases, with pricing likely to follow. We have been encouraged by the renewed interest in platform and Jackup workover rigs by some large operators after five years of minimal activity in this segment of our fleet. On the bright side our platform drilling rigs have stayed essentially fully utilized, particularly those that are adapted to deep water applications. Even though this unit had a slow start to the year we still look for significant improvement, although it may not come until early 2009.
"Our Other Operating Segments continue to post excellent results on the strength of a strong construction and rig support season in Alaska, solid results in Ryan Energy Technologies, and ongoing improvement in Canrig and EPOCH.
"Our Oil and Gas operations are achieving numerous successes, but near-term results continue to be dampened by front loaded expenses related to seismic and geologic evaluation costs. As previously mentioned, the current quarter was significantly impacted by the accounting for swaps and hedges and an impairment to reserves in Canada. We are party to numerous other discoveries in high profile areas and have sizeable net acreage holdings within some of the industry's most promising new plays. We have approximately $300 million invested in our joint venture with First Reserve and I would estimate these assets could be sold for about twice what we paid for them. We also have remaining investments of approximately $200 million in Ramshorn and the value of our Oil and Gas holdings taken collectively could be as much as $1 billion.
"During the quarter we took advantage of the contraction in treasury rates to secure $575 million in ten year Senior Unsecured debt at an attractive rate of 6.15%. We expect that these funds will be used to redeem our outstanding issue of $700 million in zero-coupon, zero-yield convertible notes due 2023, which are callable at anytime after June 15, 2008 and subject to a fifth anniversary put feature on that date. Investment income benefited from a $31 million unrealized gain with the classification of 3.6% of our 13.5% holdings in Hung Hua as trading securities in anticipation of a future sale.
"It is becoming increasingly likely that we may have already seen a bottoming out in the results for our large, important Lower 48 Land Drilling unit. Many of our key customers in this market are planning incremental activity and even our Canadian management is becoming less pessimistic about the prospects for a sooner than expected turnaround. This enhanced outlook for North American gas is augmented by the continuing strong outlook for our international business. The outlook also is strong for our other operating segments, primarily Canrig, Ryan, and our Alaskan logistics and construction joint ventures. The potential for large increases in gas directed activity in North America will not be limited to the US Land drilling business, but likely will encompass our Gulf of Mexico, US workover and Canadian drilling and workover businesses. In the aggregate these five segments of our business have seen a reduction in terms of consensus EBIT expectations for 2008 of over $500 million or 43% compared to our record 2006 results, yet our consolidated earnings per share are expected to be lower by just six percent. This arguably gives Nabors the largest exposure to any prospective gas recovery which, when it occurs, will commence from a near record level in Nabors' earnings per share. It should be noted here that the growth we are seeing in our International operations is firm and as a result we expect the company to do well even if the improvement in the North American gas market does not occur quickly." -- www.cnxmarketlink.com
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