2nd UPDATE:Nabors Shrs, Default Protection Up On LBO Talk October 10, 2006 (Adds comment from Pickering Energy Partners starting in 17th paragraph.) By Christopher Hinton Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The value of Nabors Industries Ltd.'s (NBR) stock, options and credit-default protection all moved sharply Tuesday on speculation the drilling contractor could be the target of a leveraged buyout. Analysts were split on whether a deal would make sense, and a Nabors spokesman wouldn't comment. Still, there were strong moves in the equity and debt markets - and the moves have resonated with investors. Buyout activity is running high this year, and a number of recent deals have been preceded by moves in the options and default-insurance markets. Nabors' stock closed at $30.16, up $2.08, or 7.4%, Tuesday on volume of 21.8 million compared with average daily volume of 6.1 million. Meanwhile, options giving holders the right to buy Nabors' stock changed hands at almost 10 times the average daily volume, traders said. Trading was heaviest for options that allow investors to buy Nabors shares at $32.50 by the third week of November. In fixed-income markets, the cost of insuring Nabors' debt against default almost doubled. Protection on $10 million worth of debt for five years was going for around $55,000 a year, up more than $20,000 on the day. The rising cost of protection indicates a greater perceived risk of default, which often accompanies speculation of a leveraged buyout and the higher debt levels it implies. Shares hit a 52-week low Wednesday of $27.26. Oil-service companies' shares have come under pressure as the prices of oil and U.S. natural gas have plunged. Private-equity interest in the U.S. oil and gas sector has soared this year, with 23 deals worth $3.5 billion, according to Dealogic. That's already well beyond the $2.8 billion worth of deals the sector saw in all of last year and nearly equal to the $3.6 billion in deals in 2004. Nabors Industries would make a good candidate for a leveraged buyout, Dahlman Rose analyst Megan Bissell said. The company is the only U.S. land driller that has long-term, international contracts, guaranteeing cash flow and stability, Bissell said. Disclosures for Bissell weren't immediately available. Nabors announced Sept. 22 that it had formed a $1 billion joint venture with private- equity firm First Reserve Corp. to invest in oil and gas exploration. A First Reserve spokeswoman declined to comment Tuesday on any possible deal to take Nabors private. Through email, a Nabors' spokesman added it was policy for the company not to comment, describing talk of a deal as "rumor." Standard & Poor's rates the company's credit A- but has the ratings on watch for a downgrade. The agency has expressed concerns about Nabors' increasing debt load, capital-spending plans and share repurchases. Frederic Ruffy, analyst at Optionetics, said the buyout rumors should be taken with a grain of salt. "The increase in LBO chatter isn't surprising given all of the recent M&A activity," he noted. "This feels like market rumors that develop when the group just sort of wallows around, and people need something to talk about," added Dan Pickering of Pickering Energy Partners. Nabors' "smart" management, its relationship with First Reserve, its stock trading at just above it 52-week low as the company buys back shares "aggressively" - starting in the mid $30s and indicating the stock is undervalued - together make "good tinder for speculation," Pickering said. Pickering doesn't own any Nabors shares and there isn't a relationship between Pickering Partners and the company. In the options market, speculation about Nabors lacked details. Some traders, however, said the trading patterns were shrewd. Jeff Shaw, head trader at Timber Hill, the market-making unit of Interactive Brokers, noted that some investors weren't just buying options giving them the right to buy Nabors shares for around $32.50 in October and November. They were also selling options giving others the right to buy shares at much higher prices like $45 in 2008 and 2009. That is a "classic setup" for a leveraged buyout, Shaw explained, because in the event of a cash acquisition of between $32.50 and $45, the calls sold will lose a great deal of their value, while those purchased will jump in price - with the actual moves depending on the ultimate takeout price. More than 74,000 call options on Nabors changed hands during the session.