When the original estimates for capital expenditures for 2013 came out, it looked as though oil services might be the place to be. Based on the recent earnings release from Nabors Industries (NBR +1.52%), though, you might think otherwise. Here's the problem: Nabors is stuck between two emerging trends that could put a big squeeze on the rig company. Let's look at these two trends and Nabors' one hope for a better future.
Not everybody wins with greater efficiency
In comparison with the rest of the oil and gas industry, horizontal drilling and hydraulic fracturing are still very young technologies. As exploration and production companies have become more familiar with the processes, they have also been able to eke out more efficient drilling. One major revolution that has brought along big savings is the concept of pad drilling, or drilling multiple wells within a couple of feet of each other to tap different parts of the oil formation below. Thanks to these gains in efficiency, companies have been able to drill more wells while using less drilling rigs.
Baker Hughes' most recent rig count shows U.S. onshore rigs are down by almost 200 year over year. So overall, the industry is making big strides in efficiency. Some of the most tangible evidence of this, though, is in the Bakken Region. In 2013, Kodiak Oil & Gas (NYSE: KOG) is on track to drill more wells than last year, while at the same time spending $35 million less in capital expenditures to do so.
While this may be a big help for exploration and production companies, it puts a lot of pressure on Nabors' revenue. Fewer rigs mean the competition for rig companies gets tighter, and with it comes lower day rates. In this past quarter, Nabors saw an 18% decrease in revenue year over year. The one consolation prize for Nabors is that it has a solid foothold on pad drilling-capable rigs. The company has more than a 33% market share in these particular types for rigs that are in high demand, and further construction of its PACE-X rig should improve that market share.
Potential market slowdown?
U.S. production has had a pretty good run over the past 18 months, but there may be some signals that the run could end. Brent crude prices are below $100 for the first time in almost a year, and WTI, the American benchmark, is below $90. Core Laborotories (CLB +0.00%) CEO David Demshur recently stated that his company expects a large pullback in U.S. oil exploration if U.S. crude prices were to remain below $90 for a sustained amount of time. Core believes that the rate of return on plays that are outside the sweet spot of the best plays in the U.S. is just not worth it if prices remain that low. If this prediction were to come true, this could deal another blow to Nabors. A slowdown in production would be seen in companies such as Nabors before almost any other part of the oil industry.
A savior in the far north?
If there's one way out of this trouble for Nabors, it could be in Alaska's new tax policy for oil and gas production in the state. On the company's most recent conference call, Nabors CEO Anthony Petrello stated that the change in tax policy will have a significant impact on the company's earnings over the next couple of years. Certainly, the move to change taxes in the state has exploration and production companies reconsidering their position in the state. ConocoPhillips (COP 2.10%) recently announced that it sees modest gains in Alaska production thanks to these rules just days after the company announced that it would be suspending offshore drilling operations for the foreseeable future.
With a modest position in Alaska -- the company has 6% of its U.S. onshore rigs there -- the company could expect a decent uptick in rig use there.
What a Fool believes
Nabors has been trying to weather a pretty bad storm for quite a while. Some of it is from less than perfect management decisions, and others are from the conditions in the oil and gas space that were out of their control. These next couple of quarters will probably not be much easier, as total rig use throughout the industry becomes less thanks to more efficient operations. The future of the company lies with its new PACE-X rig, which is one of the top-tier drilling rigs in the industry. The faster the company can get these top-end rigs on the market, the better off it will be.
