Nabors Industries (NBR) issued a profit warning today and said that it expects operating income for Q2-2012 to be in the range of $220-230 million. This figure is significantly less than $321 million that Nabors had delivered in the first quarter.
The company attributed the lower earnings to lower than expected performance of the pressure pumping division. Nabors categorizes its operations into contract drilling, pressure pumping, and oil and gas exploration (click here to read a complete analysis of the Nabors). The table below shows the revenue mix for the company.
Oil and Gas
Other Operating Segments
Revenue from the pressure pumping division had grown from $321 million in 2010 to $1.2 billion in 2011. The company attributed this poor performance to, "the increasingly competitive spot market in pressure pumping where pricing and utilization continued to deteriorate while costs spiked in the quarter." It remains to be seen if this phenomena is applicable only to Nabors or to other companies as well. Among its peers Patterson-UTI (PTEN) is another company which derives 33% of its revenue from pressure pumping. (Click here to read about Patterson-UTI)
Giving an update on the strategy to focus on the core business, Mr. Tony Petrello, Chairman and CEO, said, "We have taken initial steps to consolidate our US well-servicing and pressure pumping operations into one entity." Nabors, in 2007 and 2008 had forayed into Oil and Gas Exploration and Production. Given the risky nature of that business the company had earlier decided to totally exit the business. It had valued its oil and gas portfolio at around $400 million but given the recent cooling in oil and gas prices a sale will most likely fetch a lower price.
In my earlier report I had emphasized how Nabors was a risky bet for ordinary investors and the latest profit warning is a testament to it. The stock shooting up 4% on the back of a profit warning may be one of the rare chances to exit.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.