Facing Flood of New Rigs, Drillers Lose Grip on Pricing

Drillers have been able to play gas producers off one another the last few years, taking advantage of an historic shortage in manpower and equipment in North America. Now, producers are extracting a little payback.

The change can be seen in the recent performance of the two biggest land drillers: Nabors Industries Ltd. (NBR) and Patterson-UTI Energy Inc. (PTEN). Both companies revised fourth-quarter
earnings lower after easily beating Wall Street expectations in the previous three quarters. Both companies’ stocks are also off more than 25% from all-time highs hit in the first half of 2006, as investors brood over an expected glut of new drilling rigs projected in 2007.


In a research note last week on Nabors, Banc of Americas Securities said “earnings growth in 2008 will be muted even as the drilling cycle rebounds.” The investment bank set Nabors’ price target at $33, which is lower than the $36 previously projected, but above Nabors’ current valuation of $29.51.

But while the shift in the producer-oil services dynamic has dulled the earnings gloss of some drillers’ stocks, analysts continue to be generally positive on the sector. After all, while earnings are coming in weaker, producers are drilling more than at any point in the last 20 years; few expect that dynamic to change anytime soon.

Dow Jones Newswires