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Nabors: International Market 'Not Enough' to Offset Domestic Drop
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Nabors Industries Ltd. reported first-quarter revenue and earnings from unconsolidated affiliates of $1.42 billion, compared to $1.78 billion in the fourth quarter of 2014 and $1.59 billion in the first quarter of last year. Revenue in the International segment was up 3% sequentially, while revenue for the U.S. and Canada drilling operations decreased by 17% and 34%, respectively. Completion and Production Services revenue fell by 39% partially reflecting the timing of the C&J Energy Services transaction, which closed on March 24.
Net income from continuing operations reported for the first quarter was $124.4 million or $0.43 per diluted share. Adjusted net income was $58.3 million, or $0.20 per share, after excluding a $61.9 million after-tax net gain from the C&J Energy Services transaction, tax benefits of $10.5 million, and $6.3 million in after-tax severance charges from workforce reductions. This compares to adjusted net income from continuing operations of $96.3 million ($0.33 per share) in the fourth quarter and $49.0 million ($0.16 per share) in the same quarter of last year. Adjusted net income for the fourth quarter of 2014 excludes the effect of asset impairments and other charges. The Company's financial results for the first quarter of 2015 include the Completion and Production Services business through March 23, 2015. For the first quarter up to the closing date, this business reported an operating loss of $58.5 million, representing a negative impact to earnings per share of approximately $0.15.
Anthony Petrello, Nabors' Chairman and CEO, commented, "Solid improvements in our International, Alaska and Rig Services operations were insufficient to offset the combined effects of the sharp drops in activity we experienced in Completion and Production Services, as well as in our U.S. Lower 48 and Canada rig operations. The strength of our International operations this quarter was attributable to the startup of a number of impactful new and upgraded rigs, and favorable operating results in several venues. I would also like to highlight the significant efforts made by our North America operations in aligning our structure to the new activity level. Since the end of last year, we have reduced our global workforce by more than 18%, including reductions of 41% and 26% in the U.S. Drilling and Canada segments, respectively. In addition, excluding the impact of the first-quarter severance charges, we have reduced SG&A by approximately $20 million from fourth-quarter levels. It has been a painful but necessary exercise given the expected duration of this downturn.
"Despite the weakening environment, the first quarter included several positive developments. First of all, we closed on the merger transaction with C&J Energy Services. Our 53% equity ownership in the combined entity allows us to maintain exposure to these markets with a highly capable and efficient operator while improving our financial flexibility. We remain confident in the ability of the C&J team to materially improve the results of our contributed business and to capture significant synergies from this combination.
Second, our International unit secured awards for six new PACE®-X rigs, validating the desirability and global applicability of this rig.
Third, our remaining businesses, excluding Completion and Production Services, delivered an incremental $22 million in operating income compared to the fourth quarter of last year, excluding severance charges. This improvement reflected the strength of our International results and initial cost reduction efforts by our management team. Although revenues for the remaining drilling businesses fell by 12%, our operating margins increased by 300 basis points to 14.4%."
Drilling & Rig Services
Adjusted income derived from operating activities in the Drilling and Rig Services business line increased 6% to $201.3 million, up from $189.6 million in the fourth quarter. Adjusted EBITDA in this unit was $428.8 million, primarily attributable to the International segment.
International operating income increased by 39% sequentially to $105.0 million, demonstrating the strength and earnings potential of Nabors' global operations. In contrast to the U.S. Lower 48, this segment was minimally impacted by lower oil prices and benefitted from a number of favorable operating events. During the coming months, diminished pricing and activity is expected to impact the profitability of this segment as the effects of weakening oil prices progressively influence international markets. Going forward, the Company anticipates a 10% decline in the international rig count through the year, which should only begin to impact results later in the year. Despite the softening conditions, full-year results for the International segment are still expected to increase compared to 2014.
In North America, drilling activity within the Lower 48 and Canada significantly declined throughout the quarter, resulting in a decrease in U.S. Drilling operating income of $13.5 million and a decrease in Canada operating income of $8.2 million. In the Lower 48, activity has particularly slowed in the Bakken and Mid-Continent regions with utilization rates dropping 20% across all regions. Although the decline in the U.S. has begun to moderate, further weakening is expected in the Lower 48 and Canada during the second quarter. Meanwhile, activity in Alaska continues to be strong, with year-over-year increases anticipated as results from recent new rig awards are realized. Finally, the Company expects lower results in the Gulf of Mexico until the fourth quarter, when its new deepwater platform rig is scheduled to commence operations.
Rig Services' operating income was up sequentially with an increase of $4.0 million, primarily due to higher-margin mix and strict expense control in Canrig. Although Ryan's revenue continued to deteriorate, operating income was in line with the prior quarter.
Completion and Production Services
The Completion and Production Services business line recorded an operating loss of $58.5 million, primarily due to sharp declines in utilization and pricing in the Completion Services business. Activity for the year started slowly with clients generally delaying well completions and weather affecting operations in West Texas and in the Rockies. Revenue started to rebound late in the quarter. Direct cost and overhead reductions lagged those achieved in the drilling business, as the pending transaction delayed actions that would have otherwise been completed during the first quarter.
Financial Discussion
The Company's first-quarter results included several items whose net impact obscured the otherwise positive performance in the global drilling business. These items related to the C&J Energy Services transaction, tax benefits, and severance costs incurred to adjust the Company's structure to the new market situation. In addition, the first-quarter results included the Completion and Production Services business up to the closing date. Post-closing, the Company's proportionate share of C&J Energy Services' net income is reported using the equity method.
Operating income for the drilling business, including corporate expenses, improved from $135.4 million in the fourth quarter of 2014 to $152.0 million, despite a $127.1 million reduction in revenue. The increase in operating income was driven by improvements of $29.4 million in the International business and $4.0 million in Rig Services. North America operating income held up relatively well in a tough environment, as the number of working rigs fell sharply during the quarter with a commensurate drop in revenue.
U.S. Drilling revenue declined 17%, while operating margins (excluding severance) improved to 17.5%. This performance reflected effective cost management in the Lower 48 operations and strong revenue and operating income improvements in Alaska. Lower 48 operations experienced a 27% revenue reduction, but held its operating margin (excluding severance) at 12.7%. In the Lower 48, daily drilling margins per rig increased by $676 to $11,134, including lump sum early termination revenue equivalent to $105 per day. Dayrate reductions were offset by mix effects, as our proportion of older, lower-margin rigs decreased, and by proactive cost reduction efforts.
Canada drilling revenue fell by 34%, with operating margins falling by 330 basis points to 13.2%. This margin resiliency reflected early action on adjusting the cost structure to anticipated revenue reductions and aligning the overhead structure to the falling activity levels.
Income tax benefits during the quarter totaled $10.5 million from releases of tax provisions and reserves in various jurisdictions. In addition, the tax expense for the quarter included $9.3 million of net tax benefits related to the C&J Energy Services transaction. Excluding these benefits and other discrete items mentioned above, the normalized effective tax rate for the quarter was in the low single digits, as pre-tax income was more heavily weighted to lower tax regimes.
William Restrepo, Nabors Chief Financial Officer, stated, "Although we have started to demonstrate the validity of our strategy based on global operations, highly capable, advanced rigs, and development of innovations in drilling technologies and solutions, we remain extremely focused on managing through this severe downturn:
- We have expanded our commercial efforts in marketing our drilling rigs, as well as cross-selling and seeking new opportunities for additional drilling-related services;
- We have rapidly aligned our direct costs with the current activity level;
- We have implemented reductions in SG&A overhead and expect to deliver year-over-year reductions of at least $70 million dollars, while already reducing our total workforce by almost 5,500;
- We target 2015 capital expenditures below $1 billion, half our initial expectation;
- We continue to work with our suppliers to reduce costs of consumables, services and capital equipment; and
- We have reduced our debt materially while negotiating increased credit facilities at favorable rates.
Although much remains to be done and we expect a challenging market environment for the remainder of the year, we believe our ongoing efforts will enable us to exit this downturn well prepared to continue strengthening our position as the leading global land driller."
Summary and Outlook
Looking ahead, results are expected to be lower in the second quarter as activity and pricing weaken in the U.S. Lower 48 and international markets soften. Second-quarter results will also be impacted by the usual seasonal declines in Alaska and Canada.
Petrello concluded, "Nabors plans to emerge from the current market in a stronger competitive position and has several strategies underway to achieve this objective. At the same time, we are committed to maintaining our technology development initiatives, several of which are already deployed in the field. We are well positioned financially, operationally and technically to endure the effects of a protracted down cycle, and plan to take advantage of attractive risk-adjusted newbuild and strategic opportunities as they present themselves."