Nabors Industries (NYSE:NBR) delivered an upside surprise when it reported third-quarter earnings this week, but the report masks rapidly deteriorating fundamentals in the land rig market.

Nabors is a drilling rig company that owns a total of 1,225 land-drilling, workover (existing-hole) and well-servicing rigs. The company also has a small offshore fleet.

Nabors reported net income of $210.3 million, or 73 cents per share, in the quarter on revenue of $1.4 billion. Analysts were expecting 72 cents per share, according to Reuters estimates. Just to show how unpredictable the business can be, Nabors lowered its guidance only three weeks ago, on Oct. 1, to a range of 65-68 cents per share. (For background on this sector, read Unearth Profits In Oil Exploration And Production.)

Optimism Reigns
Nabors management, like that of other oilfield services companies, was optimistic about the company avoiding any downturn in North American drilling. Nabors CEO Gene Isenberg said that the large presence the company has in many shale plays would be less susceptible to customer cutbacks. He also cited 36 new rigs joining the Nabors fleet next year. Thirty percent of the Nabors rig fleet is working in shale plays, as are essentially all of its new rigs, Isenberg added.

Management at Halliburton (NYSE:HAL) made a similar argument during a conference call. Management said the cutback in drilling is directed mostly toward "conventional and shallower drilling activities", while unconventional drilling, where the company is strongest, is stable.

Isenberg also discussed the percentage of earnings before interest and taxes (EBIT) that are under contract for 2009 and 2010, to demonstrate to investors that the company would be somewhat protected during a downturn. Forty-nine percent of 2009 EBIT is already under term contracts, as is 38% of 2010 EBIT.

The company is taking several actions in case future conditions deteriorate. Nabors is cutting discretionary capital expenditures that are not underpinned by term contract commitments. It is also reducing working capital by $400 million over the next 18 months. Finally, the company bought back stock during the quarter, purchasing 3.9 million shares with an average price just above $30 per share. The stock closed Thursday at $13.64 per share.

Nabors' customers are rapidly cutting back capital expenditures due to falling commodity prices and the inability to access capital. Chesapeake Energy (NYSE:CHK) cut its drilling spending by more than $3 billion through 2010, and Petrohawk (NYSE:HK) also cut its 2009 drilling plan by 33%, or $1 billion.

Rig Count Forecast Gloomy
When pressed on the size of the drop in the rig count, Isenberg said the company was prepared for an industry drop of 300 rigs, with Nabors' share of that drop to be 40-50 rigs.

Several industry analysts have cut back rig count forecasts for 2009. Raymond James cut its forecast twice in the last month, with the firm now calling for a 1,699 rig count in 2009. This would be an 11% decline from 2008.

Bottom Line
Nabors is a clear example of why it's important to pay attention to more than just the latest earnings results. A closer examination reveals a company and industry clouded in uncertainty and risk. Earnings may get the headlines, but the savvy investor knows to watch for long term trends.