Oil Patch Offers No Great Earnings Assurances (NBR, NE, ESV, PDE)

Oilfield services company Nabors Industrial (NYSE:NBR) revised its guidance downward after the market closed yesterday and its share price is approaching a new 52-week low. And its bringing its competitors down with it. Noble Corporation (NYSE:NE) is off more than 7%, Ensco International (NYSE:ESV) is off more than 5%, and Pride International (NYSE:PDE) is off nearly 7% in early trading today. Both Pride and Noble have touched new 52-week lows.

Nabors now expects third quarter EPS of $0.65-$0.68, below analysts’ expectations of $0.80. The biggest component of thedownturn is an expected mark-to-market loss of $22 million on Nabors’s450 million-share investment in Honghua Group Ltd. Nabors alsoestimates $13 million in property losses due to Hurricanes Gustav andIke. The company also plans to record a tax adjustment of $0.06/share.On more than 280 million shares outstanding, that amounts to about $17million.

The nearly 19% drop in EPS is the headline number here. The componentsof that drop are probably unique to Nabors and don’t really have anyrelevance to other oilfield services companies. Operationally, evenNabors appears to be doing okay, although its international segment hasexperienced "excessive" downtime in Mexico and Saudi Arabia and otherdelays elsewhere.

The problem looks like cash flow. With the exception of Noble, theseoutfits had negative cash flows in the June quarter. It’s no secretthat credit is hard to get. Crude pricesare falling because of recession fears, and that means less drilling.Even if the US Congress approves the bailout/rescue plan, globaleconomic growth is likely to continue to be slow. E&P companieswon’t spend as much on capex or new exploration, and the drillers arelikely to contract even more. Growth looks to be out of the picture.

Paul Ausick
October 2, 2008