It can be hard to get really excited for earnings releases for companies without a lot of public exposure, but Nabors Industries' (NYSE:NBR) earnings report today did give both good and bad news on the health of the oil and gas market.
Surviving the times
The drilling and rig services giant met analysts' expectations for revenue at $1.77 billion, but the earnings numbers gave a more nuanced result. Overall EPS for the company was $0.22 per share, well below the expectation of $0.36. This does include a $0.20 one-time ceiling test impairment for its affiliate NFR, though. So from an operational standpoint, Nabors beat expectations.
Some of the smaller operations, such as production services and International rig services, showed promising growth, but it simply wasn't enough to make up for the less-than-stellar results for drilling and rig services, its largest sector, in the lower 48 states. We'll see whether production services has a more sustainable niche within the oil and gas space when National Oilwell Varco (NYSE:NOV) posts earnings tomorrow.
On the conference call, Nabors CEO Anthony Petrello outlined how almost all total rig counts for the company are down across the board. Some were expected, such as the seasonal shutdown for offshore rigs in the Gulf for hurricane season. Other shutdowns result from the slump in oil and gas prices, making production less profitable in North America. Despite this lull, Nabors has been able to pass along lower use of rigs in use by increasing the price per rig day across all geographic areas. It has just launched several of its new Pace-X rigs, which will generate a much higher margin than some of its older offerings.
What a Fool believes
For oil and gas companies, these aren't the glory days of the pre-financial collapse, where a barrel of oil was $140 . Heck, this isn't even the same market from a year ago. Several production and exploration companies jumped on the natural gas wagon too fast and overproduced for current demand. Low prices from oversupply brought down oil prices as well. Look no further than the Q3 results of Halliburton (NYSE:HAL) or Baker Hughes (NYSE:BHI) to see companies highly exposed to American markets backing down production. Halliburton posted 11% lower earnings compared with Q3 2011, and Baker Hughes' $0.73 EPS missed analysts' expectations by 15%. With so many production and exploration companies backing down their output, all ancillary companies in the oil and gas sector are going to suffer.
Nabors' abnormally high debt load could concern investors. Nabors is well aware of this, though. In the conference call, the management team outlined an ambitious plan to pay off about $900 million in debt by selling older equipment and some of its subsidiaries that are tangential to the core business. These divestments should be a good sign for investors. After they're done, the company will look leaner and be better focused on its bread and butter.
Today's earnings report gives no convincing reason to buy or sell. This company has "hold, or hold off" written all over it until the market for oil and gas starts to pick up. This doesn't mean you should stay away from the market completely, though. The Motley Fools has identified The Only Energy Stock You'll Ever Need. To get a free report outlining this company's potential, click here.
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