Getting Paid Not to Drill at Nabors

Even though their shares have bounced back lately, onshore contract drillers still aren't many investors' cup of Texas tea. If you're wary, I can't blame you. Just last week, Chesapeake Energy (NYSE: CHK  ) choked back production for the umpteenth time. The rest of the E&Ps, most of which don't maintain an in-house fleet of rigs, are dropping contractors like they've got something contagious.

Operators are so eager to back out of prior drilling commitments that they're actually paying Nabors Industries (NYSE: NBR  ) for the privilege. The land drilling dynamo yesterday discussed this phenomenon on its quarterly conference call, pointing to $26 million of income from prepaid, canceled domestic rig deals. I argued last fall that Nabors' term contracts would protect it to some degree this year, and that idea's being borne out.

Overall, the company reported results that were about as good as could be hoped for, given the brutal drilling downturn. International, Alaskan, and even U.S. offshore segments were highlights, while Canada cratered. A ceiling test writedown in the oil and gas business hit the earnings numbers pretty hard, but such non-cash charges are nothing to worry about as long as your debt covenants aren't strained.

On that front, Nabors is in fine shape, having paid down most of its shorter-term debt with new 10-year notes issued in January. Nabors borrowed the new funds at 9.25%, a rate favorable to the terms on Petrohawk's (NYSE: HK  ) offering around that time. This funding also came without any of the equity dilution attendant to Precision Drilling's (NYSE: PDS  ) painful placement.

In addition to Nabors' financial strength, it holds a strong position in places like the Haynesville shale, where it runs between 40% and 50% of the working rigs. In absolute terms, at least, that dwarfs the presence of competitors like Helmerich & Payne (NYSE: HP  ) and Patterson-UTI (Nasdaq: PTEN  ) . Of course, H&P is a much smaller outfit, and may well have a greater percentage of its fleet drilling in top shale plays today, but Nabors continues to strike me as a stalwart player that's not going anywhere.