Warning from Nabors Highlights Concerns for Oil Field Services Results

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Oil and gas driller Nabors Industries Ltd. (NYSE: NBR) warned this morning that the company expects second-quarter operating results to miss consensus estimate, mainly as a result of higher costs:

The shortfall is attributable to lower than expected results primarily from its Pressure Pumping and, to a lesser extent, its International operations, partially offset by better results in its other US land operations. The lower results are primarily attributable to higher costs.

The company’s chairman and CEO was a little more specific:

The largest component of the shortfall is attributable to the increasingly competitive spot market in pressure pumping where pricing and utilization continued to deteriorate while costs spiked in the quarter.

Translation: costs are rising and rig counts are falling. Nabors is a land-based driller, and that business has been hit by the reduction in onshore U.S. natural gas drilling. As fewer wells are drilled, the rig operators are forced to compete on price, even as their costs rise. It is not a pretty sight.

Nabors expects to take a noncash impairment charge of approximately $150 million in the second quarter, as well as another $150 million reduction in its carrying value on reserves for its ownership share of NFR Energy.

Just to be on the safe side, Nabors also announced that it has adopted a shareholder rights plan that allows current shareholders to purchase a new series of preferred stock. The plan will remain in effect until July 16, 2013, unless extended, redeemed or exchanged by Nabors.

Poison pill aside, Nabors’ warning could signal problems for other services companies. Schlumberger Ltd. (NYSE: SLB) and Baker Hughes Inc. (NYSE: BHI) report earnings this Friday, and Halliburton Co. (NYSE: HAL) reports next Monday. National Oilwell Varcol Inc. (NYSE: NOV) and Weatherford International Ltd. (NYSE: WFT) also report later next week.

Crude prices were about $20 a barrel higher in the first quarter than they are now, and while natural gas prices have risen they are still barely above a breakeven point. Like Nabors, land-based drillers are likely to see higher costs, somewhat lower rig counts or both.

Schlumberger is expected to post EPS of $1.00 on revenue of $10.4 billion. In the second quarter of 2011, the company offered up EPS of $0.87 on revenue of $9.62 billion. Earnings expectations have fallen by $0.05 per share in the past 90 days.

Baker Hughes is expected to post EPS of $0.77 on revenue of $5.26 billion. A year ago the company reported EPS of $0.93 on revenue of $4.74 billion. Earnings expectations have fallen just $0.01 in the past 90 days.

Halliburton is expected to post EPS of $0.75 on revenue of $6.96 billion. A year ago the company’s EPS came to $0.81 on revenue of $5.94 billion. EPS expectations have fallen by $0.13 per share in the past 90 days.

National Oilwell Varco’s EPS forecast is $1.40, on revenue of $4.43 billion. Last year the company posted EPS of $1.14 on revenue of $3.51 billion. EPS expectations have dropped by $0.03 in the past 90 days.

Weatherford is expected to post EPS of $0.24 on revenue of $3.64 billion. The company posted EPS of $0.17 on revenue of $3.05 billion a year ago. EPS expectations have fallen by $0.03 in the past 90 days.

Offshore drillers are faring no better, primarily due to lower activity as crude prices decline. Transocean Ltd. (NYSE: RIG) and Diamond Offshore Drilling Inc. (NYSE: DO) are expected to post quarterly EPS and revenue well below last year’s second quarter.

The Nabors warning and the lower expectations for other services companies are having no negative impact on share prices in the first half-hour of trading this morning, likely because the news already had been priced in, and expectations are high today that Ben Bernanke will signal another round of quantitative easing in his testimony before a Senate committee.

Nabors shares are up 1.2% at $13.36 in a 52-week range of $11.05 to $27.63. However the offshore companies, Transocean and Diamond, are both down slightly.

Paul Ausick

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