PDE Pride International (DE)

We are maintaining our long-term Neutral recommendation on Nabors Industries (NBR) reflecting its strong position in the majority of fertile natural gas and oil-based shale plays that is partially offset by weak natural gas fundamentals.

Nabors enjoys a large, high-quality fleet of drilling and workover rigs, making it the leading North American land drilling contractor. Over the years, the company has not only grown through cashflow reinvestments and acquisitions but has also extended its geographic reach and diversified its operating assets beyond land rigs.

With the company’s strong exposure to oil plays, owing to its presence in the Bakken, Permian and International plays, we expect Nabors to benefit from higher activity and pricing. The ‘Superior Well’ acquisition will further boost Nabors’ earnings visibility by expanding its pressure pumping capabilities and geographic foothold.

Moreover, we remain positive on the U.S. land rig market and expect the rig count -- now at around 1,860 -- to cross 1,900 by this year -end, spurred by oil-directed activities. As drilling picks up, we expect to witness improved demand for Nabors’ services.

However, our optimism was somewhat mitigated by disappointing second quarter 2011 results that were bruised by slow international activities along with weather-related difficulties and operational hindrances. Earnings per share from continuous operations (excluding special items) came in at 23 cents, lagging the Zacks Consensus Estimate of 25 cents. Revenues of $1.36 billion also failed to meet our forecast of $1.48 billion.

With businesses across the globe, Nabors’ operations remain susceptible to various risks such as war, civil disturbances and government actions. Any disturbances in international markets will likely limit or disrupt the company’s operations, and impose restrictions on the movement of funds, currency values and exchange controls.

Moreover, the glut in domestic gas supplies still exists, with storage levels remaining close to their five-year average. This will continue to weigh on natural gas prices in the near-to-medium term. Nabors remains particularly exposed to this situation since its North American business is heavily biased toward gas drilling.

Considering the aforesaid factors, we expect the company to perform in line with its peers Patterson-UTI Energy Inc. (PTEN) and Pride International Inc. (PDE). Nabors currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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