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.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!