Nabors Industries (NBR)

Q1 2011 Earnings Call

April 27, 2011 11:00 am ET

Executives

Joseph Hudson - President of U.S. Land Drilling Business

Eugene Isenberg - Chairman of the Board, Chief Executive Officer and Chairman of Executive Committee

Dennis Smith - Director of Corporate Development at Nabors Corporate Services Inc

Unknown Executive -

David Wallace - Chief Risk Officer

Analysts

Brian Uhlmer - Global Hunter Securities, LLC

Robert MacKenzie - FBR Capital Markets & Co.

Kurt Hallead - RBC Capital Markets, LLC

Janice Rudd - Pritchard Capital Partners, LLC

Scott Gruber - Bernstein Asset Management

Arun Jayaram - Crédit Suisse AG

James Rollyson - Raymond James & Associates, Inc.

Tom Curran - Wells Fargo Securities, LLC

James Crandell - Dahlman Rose & Company, LLC

David Wilson - Howard Weil Incorporated

John Daniel - Simmons & Company International

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc.

Geoff Kieburtz - Weeden & Co., LP

Unknown Analyst -

Robin Shoemaker - Citigroup Inc

Daniel Boyd - Goldman Sachs Group Inc.

Presentation

Dennis Smith

Welcome to our Conference Call this quarter. My name is Dennis Smith, the Director of Corporate Development. With me today, obviously, is Gene Isenberg who will be doing most of the call. We'll do the format as we usually do. Gene will give 20 or 30 minutes of comments about the quarter and more particularly about the outlook as we see it. And then, we'll open it up to Q&A and limit to approximately 1 hour the total duration of the call. In addition to Gene and myself, Tony Petrello, our President Chief Operating officer; Laura Doerre, our General Counsel; Clark Wood, our Principal Accounting Officer and the Presidents of our Bay Area's major business units.

Before we begin, I just want to remind everybody that we will be discussing the outlook that constitutes forward-looking statements under the SEC Act and as such, they're subject to a lot of risk factors and changes in outlook, which are elaborated upon our various filings, particularly our 10-Ks, and we encourage you to read that.

With that, I'll turn it over to Gene to get started.

Eugene Isenberg

Thanks, and welcome again to Nabors' conference call for the first quarter. I want to thank everyone for participating again this morning. As usual, we have posted to the Nabors website a series of slides that contain details about the performance during the quarter, which I suggest you look at as we talk.

First quarter operating income was generally in line modestly below first call consensus at $191 million. However, we would have reported another $24 million or $0.06 per share were it not for certain items, which obscured a solidly improving outlook for virtually all of our business units. Most of the items included in that $24 million are unique to the first quarter and will not recur. In fact, approximately $8 million of that is deferred and will be recovered during actually this calendar year. The most significant of these items occurred in our Pressure Pumping unit, the weather delays and additional cost for fuel and repairs. And also those associated with or the ramp-up we helped planning resulted in a $30 million hit. These costs, the ongoing cost other than the buildup cost will be recovered in pricing as we go forward.

Additional negative impact of approximately $7 million resulted in a supply-chain interruption at Canrig, which delayed the delivery of 10 rigs. The supply chain pump is repaired, and the income, in fact, will be recovered over the remainder of this calendar year. Internationally, we incurred a couple of million in unusual cost during the period. The onetime payment to Saudi nationals, that's to be [indiscernible] Saudi Aramco, which in principle, they have agreed we would cover in day rates, and the details of that are being firmed up. We had to suspend the operation of a couple of rigs in Yemen when we evacuated our next batch due to the obvious political risk there and a short labor strike in Oman that have [indiscernible] and ended the impacted our operations there.

Lastly, we took a $1.7 million hit in our U.S. Rail Services unit due to the unusually cold weather. In addition to these items, the highly effective tax rate for our continuing operations adversely impacted EPS by $0.02 a share. The tax rate is now about 30%, 31% compared to the effective tax rate of 24% if we combine continuing and discontinued operations. This is primarily due to the reduction in the International income, which is taxed at a lower rate and increasing contributions from our domestic operations, which are obviously taxed at a higher rate. In particular, the acquisition of Superior, which at the moment is 100% domestic, increased the average tax rate. The sale of our Colombian units, which will be affected on a tax-free basis or no-tax-paid basis will also affect the overall tax rate. Collectively, these items are to reduce our earnings per share by about $0.06. So we employed $0.29, these items would have made it $0.35.

In summary, although I look at the noise in the quarter, it's becoming increasingly clear that the underlying fundamentals are strong in nearly all of our business especially in all of the financially significant businesses. Sequentially, our quarter should progressively confirm this view our projection. By the end of the year, nearly all of our units will likely be growing at a solid pace with improving the visibility even in our financially less-significant Offshore and Alaskan operations.

Our financial position our balance sheet remains firm. As we have discussed previously, we'll be redeeming approximately $1.4 million in convertible notes due in about 2 weeks. This will be funded from a combination of cash on hand and a partial drawdown under our revolving lines. Their lines of total approximately $135 million at the moment. We have $800 million cash approximately at the moment, and we can borrow on this line extremely attractively at LIBOR plus 150 basis points, which the 3-month LIBOR means we'll be borrowing at 1 3/4%. Near term, we will receive over $250 million for our Colombian E&P transactions, which should be closed -- this part of the sale should be closed in the next 3 weeks. So that's going to go to the cash to pay off the debt, and we continue to generate cash flow from operations. So we'll pull down the revolver, but gradually we'll pay it back so that at the end, we'll have paid off the $1.4 million and we'll have increased use of the revolver by a net above $700 million or $800 million.

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