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North America’s largest onshore oil and natural gas driller Nabors Industries Ltd. (NBR) is scheduled to report its second quarter 2010 results on Tuesday, July 27, after the closing bell.

The Zacks Consensus Estimate for the to-be-reported quarter is 18 cents per share, compared with the 32 cents per share earned in the year-earlier period.

First Quarter Recap

Nabors reported profit of 21 cents per share in the first quarter of 2010, a penny above the Zacks Consensus Estimate. The company believed recovery in North American business helped it to top expectations, offsetting depressed international operations.

Second Quarter Expected to be Weak


With domestic natural gas storage levels still above their five-year average, we do not see any sustained price gains on the commodity front. This translates into limited upside for natural gas-weighted companies and related support plays like Nabors. In particular, we remain worried over the implications for much of Nabors' North American businesses.

Another factor that could pull down the company’s results is the slower-than-expected ramp-up in international drilling activity, mainly on the back of weakness in Mexico and Saudi Arabia .

Additionally, there is uncertainty regarding Nabors’ Alaska operations following significant curtailment in activity by the beleaguered oil giant BP Plc (BP), one of the largest operators in the region. As of now, Nabors has three rigs contracted with BP in Alaska, which are likely to go idle at the end of their contracts (one in July, and two at the end of 2010).

Agreement of Analysts

As a result of the above-mentioned negative factors, there has been a strong downbeat sentiment among the analysts regarding Nabors’ outlook. In particular, we see a notable number of estimate revisions over the past 30 days.

Out of 25 analysts covering the stock, 10 have revised downwards their estimates for the second quarter of 2010, while just 1 has gone in the opposite direction.

Magnitude of Estimate Revisions

As a result of the negative estimate revision trend over the past 30 days, the Zacks Consensus Estimates for the second quarter of 2010 has gone down by a penny (from 19 cents to 18 cents). The decrease is based on the weak natural gas fundamentals, slow international growth expectations, and lower activity levels in Alaska .

Surprise History

With respect to earnings surprises, we do not see Nabors’ fairly good track record to persist in the coming quarter.

The company has a history of positive earnings surprises, surpassing the Zacks Consensus Estimate in 3 of the last 4 quarters. Nabors has performed consistently well during this period with its average earnings surprise being 4.73%. This implies that the company has beaten the Zacks Consensus Estimate by that measure over the last four quarters.

Our Recommendation

We remain concerned about the North American natural gas price weakness and its impact on Nabors, whose business is heavily biased to domestic gas drilling. We believe that the current supply overhang in the natural gas market will continue to weigh on the company’s dayrates and margins during the next few quarters. Lower activity, project deferrals, and contract execution delays in a number of international regions (particularly in Mexico and Saudi Arabia ), also remains a concern.

As such, we are compelled to maintain our Zacks #3 Rank (Hold) rating on the stock over the coming 1-3 months. Our long-term recommendation for the stock remains Neutral.

Source: Nabors Industries: Earnings Preview