Nabors Industries Management Discusses Q2 2012 Results - Earnings Call Transcript

Nabors Industries (NBR)

Q2 2012 Earnings Call

July 25, 2012 11:00 am ET

Executives

Dennis A. Smith - Director of Corporate Development for Nabors Corporate Services Inc

Anthony G. Petrello - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Technical and Safety Committee

Joe M. Hudson - President

Analysts

James M. Rollyson - Raymond James & Associates, Inc., Research Division

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

Waqar Syed - Goldman Sachs Group Inc., Research Division

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Nabors Industries Limited Second Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, July 25, 2012. I would now like to turn the conference over to Dennis Smith, Director of Corporate Development. Please go ahead, sir.

Dennis A. Smith

Thank you, Liz, and good morning, everyone. Thank you for joining us today on our second quarter earnings conference call. Our format today will be same as we customarily follow. We'll have Tony Petrello, our Chairman and CEO, provide you with our perspective on the quarter's results and give you some insight into how we see our business and markets evolving. In support of his remarks, we have posted some slides to our website, which you can access to follow along if you desire. They're accessible in 2 ways. First, if you're participating by webcast, they're available as a download within the webcast. Alternatively, you can download them from our website, nabors.com, under Investor Relations then the submenu Events Calendar where you'll find them listed as supporting materials for this conference call. With us, in addition to Tony and myself today, are Laura Doerre, our General Counsel; Clark Wood, our Principal Accounting Officer; and all the heads of our various business units.

Since much of our remarks today will concern our expectations of future, they are subject to numerous risk factors as elaborated on in our 10-K and other filings. These comments constitute forward-looking statements within the meaning of the Securities Act of 1933. For such forward-looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in its filings with the Securities and Exchange Commission, as a result of these factors, we actually encourage you to look at those filings, and the results may materially differ from those that we think are going to develop.

Now I will turn the call over to Tony to begin.

Anthony G. Petrello

Good morning. Welcome to the conference call for the second quarter. I'd like to thank everyone for participating. As Dennis said, we do have the slides posted, and I will be referring to them by page number.

So before I get into the details, let me start with some macro comments, particularly those involving North America. First, let me say we would like to be cautiously optimistic about our overall outlook. But it is dependent upon a couple of factors that are not in our control or within our ability to predict, specifically commodity prices. The direction of domestic and global GDP, and there are problematic numbers out there that I'm sure you've all seen, will be a major determinant of these prices, along with the production decline rates and supply availability. Given the overall demand uncertainty and several real-time indicators we will mention, it is more prudent and very cautious and conservative over the near term.

As you may recall in our fourth quarter earnings call last February, we expected a flattening to modestly declining U.S. land rig count in the second half, a moderation in the number of new build contract awards and the further deterioration of the spot market for pressure pumping. Many of those things have happened. This view was based on the lower gas -- natural gas price, leading to reduced customer cash flows and spending. In reality, the first quarter drop in gas prices caused an initial reaction that was largely offset by increased liquids-directed drilling. This gas-to-liquids offsetting continued throughout most of the second quarter. However, conditions became much worse towards the end of the second quarter as oil prices fell and the effects of declining NGL prices began to be felt.

As you can see on Slide 3, U.S. blended NGL prices are down 34% from the beginning of the year and 22% since April. This further erodes operators' cash flows and decreases drilling budgets. We see these same forces at work in Canada but not yet as impactful.

The upper section of Slide 4 shows the Baker Hughes U.S. land rig count over recent cycles and, in the lower section, from its peak in mid-November to last week. Since the peak in November, we have seen a decline of 108 U.S. land rigs, 30 of which have occurred in just the last 2 weeks. This, coupled with recent customer conversations and competitive data points, support the lower end of our expectations.

Let me make clear, we do not yet foresee a sharp downturn but rather a moderate drop in rig count exacerbated by competitors offering uncontracted, newly built and existing rigs at lower rates and shorter terms in order to secure work. This is similar to the situation that played out earlier in the year with regard to Pressure Pumping, but we expect the extent of land rig oversupply to be much less.

Read the rest of this transcript for free on seekingalpha.com