Reuters: Global Markets: Nabors struggles in oversupplied fracking market

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Nabors struggles in oversupplied fracking market Jul 10th 2013, 18:41 Wed Jul 10, 2013 2:41pm EDT (Reuters) - A profit warning from Nabors Industries Ltd (NBR.N) highlights the struggles facing smaller companies as they get squeezed by bigger oil patch rivals such as Halliburton Co (HAL.N) in an oversupplied U.S. land drilling market. Nabors shares fell 6 percent on Wednesday after it said second-quarter earnings would be short of market estimates. Nabors said much of the shortfall was due to reduced rentals of pressure pumping equipment used in hydraulic fracturing, or fracking. "The North American pressure pumping market appears to remain one of 'haves' and 'have nots' with the larger, diversified service companies starting to approach full utilization and the smaller competitors still feeling the pain of an oversupplied market," Barclays analyst James West said in a note to clients. Nabors' stock has been the worst performer among the sector's top companies this year. It is now up only 4 percent year to date, while Halliburton is up 27 percent. Shares of Baker Hughes Inc (BHI.N) and Schlumberger (SLB.N), which offer more diversified services than Nabors and also have a bigger presence in the offshore drilling market, have risen 20 percent and 10 percent respectively. Analysts believe bigger companies with better technology will have an edge in capturing market share, even as the pressure pumping market recovers. West expects the margins of the larger companies to recover as onshore drilling activity increases in the coming months. Smaller companies would start to benefit only toward the end of the year, he said. The nearest rival of Nabors in pressure pumping, FTS International, had to withdraw its initial public offering late last year. [ID:nL1E8MSFNK] The market has not yet shown much sign of improvement for FTS either, with debt rating agency S&P expecting its core earnings to decline by 19 percent in 2013. Bermuda-based Nabors acquired its pressure pumping fleet, the sixth-largest in North America, through its acquisition of Superior Well Services in 2010. Helmerich & Payne Inc (HP.N), Nabors' most direct rival, focuses solely on drilling rig contracting, not pressure pumping. Nabors said second-quarter operating income would be in the range of $88 million to $91 million, falling short of market estimates. First-quarter operating income was $109.2 million. Analysts said it was the third time in three years that Nabors, which faces seasonal flux in the colder climates where it works, has warned on second-quarter profits. The warning also caps a challenging 2013 for the company behind the scenes, after an investor that took a 9.3 percent stake forced a board shake-up in April and put the management's strategy under public scrutiny. Another mid-sized player, Basic Energy Services Inc (BAS.N), on Wednesday reported an improvement in service utilization in June compared with May, with oil-driven markets better than gas markets, even as overall pricing remained competitive. "We anticipate further modest improvements in demand through the third quarter, in both oil and gas markets," Chief Executive Ken Huseman said. Renting out rigs remains the core business of Nabors, with drilling and rig services making up 70 percent of its revenue. The number working in North America has been capped as oil and gas companies cut costs by using more efficient rigs. Drilling efficiencies and an even-more muted natural gas outlook could leave the U.S. rig count flat for two years, Jefferies & Co analysts said on Tuesday, while downgrading their rating on Helmerich & Payne. West, who has an "equal weight" rating on Nabors shares, cut his price target by $1.00 to $15. Analysts at CLSA cut their rating to "under perform" from "outperform" and their price target by $3.00 to $17. Guggenheim Securities analyst Michael Lamotte cut his price target to $16 from $17, while maintaining his "neutral" rating. Nabors shares were down 6 percent at $15.00 in afternoon trading on the New York Stock Exchange. (Reporting by Sayantani Ghosh in Bangalore and Braden Reddall in San Francisco; Editing by Ted Kerr, Dan Grebler and Andrew Hay) Link this Share this Digg this Email Reprints

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