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Fitch Initiates Ratings on Nabors Industries at 'A-'; Stable Outlook

Posted on: Friday, 6 October 2006, 12:00 CDT

Fitch Ratings has initiated coverage of Nabors Industries, Inc. (Nabors), the wholly owned subsidiary of Nabors Industries, LTD. Fitch has assigned ratings of 'A-' to Nabors for the Issuer Default Rating (IDR) and to the company's senior unsecured debt and convertible notes. The Rating Outlook is Stable.

Fitch currently rates Nabors as follows:

--Issuer default rating (IDR) 'A-';

--Senior unsecured 'A-';

--Convertible debentures 'A-';

--Rating Outlook is Stable.

The ratings are supported by the company's conservative management team and the size, diversity and quality of the company's fleet of drilling and workover rigs. In addition, Nabors has a history of maintaining a robust credit profile throughout industry cycles and has capitalized on strong market conditions to lock in firm contracts to support the company's newbuild program. Offsetting factors include higher capital expenditures associated with the current newbuild program, execution risks associated with the company's newbuild program, the volatility associated with North American land drilling sector, and the potential for additional share repurchases.

Like other contract drillers, Nabors is generating significant cash from operations as upstream companies have increased capital expenditures to support significantly more aggressive drilling programs to capitalize on high commodity prices. Nabors is reinvesting this cash back into its business to grow and modernize its fleet of drilling and workover rigs. Cash flow from operations for the LTM ending June 30, 2006 totaled $1.34 billion with capital expenditures of $1.4 billion. Credit protection metrics remain strong as the company generated EBITDA of $1.61 billion during the LTM period, providing interest coverage of 34.1 times (x) and leverage, as measured by debt-to-EBITDA of 2.5x. Due to the sizable cash balances that Nabors maintains, as well as its historical willingness and ability to maintain these cash balances throughout the industry cycles, Fitch believes it is appropriate to view Nabors from a net debt-to-EBITDA perspective. For the LTM period, net debt-to-EBITDA was 1.2x. Liquidity remains very strong with over $2.0 billion of cash and equivalents on hand. Nabors does not currently have a credit facility, but the company does maintain three letter of credit facilities with a capacity of $132.5 million and $29.4 million of remaining availability as of June 30, 2006.

Nabors' high quality, diverse asset base was a key element of the company's rating. At the present time, the company has approximately 600 land drilling rigs, 800 land workover/well servicing rigs and is in the middle of a newbuild program to add approximately 200 additional drilling and workover rigs to its fleet. Approximately 45% of Nabors' land drilling rigs are powered by electric power systems with the remaining 55% composed of mechanical power systems. Further, Nabors' fleet includes rigs of virtually every size and in every major oil and gas drilling basin in the U.S. Lower 48. This diversity provides upstream operators an unmatched level of drilling alternatives and provides Nabors with the flexibility to meet the needs of its clients.

After spending the majority of the late 1980's and 1990's on acquiring additional drilling assets, the company has spent the last six years modernizing its fleet. This trend is expected to continue as Nabors progresses through its current newbuild/refurbishment program. Fitch expects Nabors to benefit from these investments in the event of a future industry downturn and as dayrates stabilize.

Additional stability in the company's financial performance is achieved via Nabors' other businesses. Nabors owns a fleet of 67 offshore rigs including jackups, platform and barge rigs. The company owns and operates a fleet of 29 offshore transportation vessels, a top drive manufacturing business, drilling instrumentation operations, oil and gas facilities and oilfield services businesses. Approximately 13% of revenues and 8% of operating income were derived from offshore drilling, E&P and other businesses in 2005. Further, in 2005 an additional 18% of revenues and 16% of operating income came from international and Alaskan land drilling operations which are more heavily weighted toward oil drilling and tend to be directed toward longer-term projects.

Nabors current newbuild/refurbishment program has resulted in capital expenditures exceeding cash flow from operations resulting in negative free cash flow of $61.1 million in the LTM period ending June 30, 2006. Capital expenditures are expected to remain high throughout the second half of 2006 and into 2007 and should consume a significant portion of cash flow from operations. In addition, the company remains exposed to execution risks on its newbuild program primarily related to cost overruns, as many contract drillers are experiencing cost overruns.

However, it's important to note that Nabors has significantly mitigated risks associated with the newbuild program by signing 115 firm contracts on new and refurbished rigs, many of which are take-or-pay contracts and extend for three years after the rig has been delivered. As of June 30, 2006, the company estimated capital expenditures associated with expanding and maintaining the fleet to exceed $2.0 billion over the next 12 months, with approximately $1.5 billion-1.6 billion for newbuilds/refurbished rigs with term contracts already in place. Of the $2.0 billion, Nabors' only had firm purchase commitments for $880 million, providing flexibility to reduce its newbuild activity should the company see market conditions begin to weaken. The company's existing firm contracts are expected to generate $450 million-460 million in operating income per year. With many of the term contracts extending for a three-year period, a vast majority of the capital expenditures undertaken to build the new rigs is expected to be earned during their first three years of operation.

While Nabors continues to perform very well in the current commodity environment, future rating increases appear limited at this time and would be driven by continued diversity in earnings and cash flow streams from international drilling operations and reduced leverage. Negative rating action would likely be considered if the company became more aggressive with share repurchases, particularly in the face of weaker market conditions, or if debt levels were to rise significantly above current levels (given the existing asset base).

Nabors is the largest North American land drilling contractor with a fleet of approximately 600 land drilling units and 800 land workover and well-servicing rigs. In addition to its large land fleet, Nabors owns a sizable offshore fleet consisting of 43 platform rigs, 21 jackup units and three barge rigs. Nabors markets a fleet of 29 offshore transportation and supply vessels primarily in the US GOM and owns businesses which manufacture top drives and drilling instrumentation systems, provide oilfield hauling, engineering, construction and project management services.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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