Nabors Industries Ltd.
/ (NBR-NYSE)/ Equity Research / NBR | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 04/07/2014
Current Price (02/04/15) / $12.15
Target Price / $13.00
SUMMARY
We are maintaining our Neutral recommendation on Nabors Industries before its fourth-quarter 2014 earnings release. With leading positions in most oil-based shale plays, Nabors is a big player in the North American land drilling market. Since 2013, the company has also been paying quarterly dividends, creating further value for shareholders. However, as the oil pricing environment has been weak since last June, we don’t see the company earning considerable cash flows this year. Lower dayrates, owing to oversupply of land drilling rigs, also remain a cause of concern. Nabors’ fairly debt-heavy balance sheet needs to be addressed as well./ Equity Research / NBR | Page 1
SUMMARY DATA
52-Week High / $30.0452-Week Low / $10.00
One-Year Return (%) / -25.88
Beta / 2.31
Average Daily Volume (sh) / 11,425,968
Shares Outstanding (mil) / 289
Market Capitalization ($mil) / $3,517
Short Interest Ratio (days) / 2.41
Institutional Ownership (%) / 86
Insider Ownership (%) / 4
Annual Cash Dividend / $0.24
Dividend Yield (%) / 1.97
5-Yr. Historical Growth Rates
Sales (%) / 16.4
Earnings Per Share (%) / -1.2
Dividend (%) / N/A
P/E using TTM EPS / 11.6
P/E using 2015 Estimate / 15.6
P/E using 2016 Estimate / 18.1
Zacks Rank *: Short Term
1 – 3 months outlook / 4 - Sell
* Definition / Disclosure on last page
Risk Level * / High,
Type of Stock / Large-Value
Industry / Oil&Gas-Drill
Zacks Industry Rank * / 236 out of 267
OVERVIEW
Barbados-based Nabors Industries Ltd. (NBR) conducts oil, gas, and geothermal land drilling operations and is the largest land-drilling contractor in the world. It is also one of the largest land well servicing companies and workover contractors in the U.S. The company offers a number of ancillary wellsite services, including oilfield management, engineering, transportation, construction, maintenance, well logging, and other support services in select domestic and international markets. Nabors owns about 485actively-marketed land drilling rigs. In addition, the company has approximately 549 land workover and well servicing rigs in North America. Nabors’ offshore fleet includes 38 platform rigs, 8 jackups, and 4 barge rigs that are located in the U.S. and other international markets. Further, Nabors deploys 20 marine transportation and supply vessels and certain related assets, primarily in the U.S. Gulf of Mexico. In addition to its activities in North America, Nabors has operations in almost every major energy-producing regions of the world. The company has a 51% ownership interest in a joint venture in Saudi Arabia, which actively markets 5 rigs.
Nabors divides its operations into two principal business lines:
Drilling and Rig Services: This unit includes the operations and services associated with rigs, accounting for the bulk of Nabors’ operating earnings. Its operations are spread across 4 sub-segments: U.S., Canada, International, and Rig Services.
Completion and Production Services:Nabors’ ‘Completion and Production Services’ segment is made up of the company’s workover, well-servicing and coiled tubing operations, together with the fluids management and pressure pumping activities.
REASONS TO BUY
Nabors Industries is the leading North American land drilling contractor, having a large, high-quality fleet of drilling and workover rigs. Over the years, the company has grown through cash flow reinvestments and acquisitions. In the process, Nabors has not only increased its rig fleet, but also extended its geographic reach and diversified its operating assets beyond land rigs.
Nabors remains well positioned with a sound mix of high performance rigs and new rigs working in the key shale plays. The company also enjoys good exposure to oil plays with its presence in the Bakken, Permian and International plays. Moreover, demand for new rigs remains far more robust compared to older commodity units, given their ability to drill the more challenging wells in the emerging resource plays. As such, these rigs are better suited for the new demands of the exploration business and, therefore, command higher dayrates and utilization than conventional rigs.
Since 2013, Nabors has started paying out a portion of its earnings in the form of shareholder dividends. We believe that the dividend start-up not only highlights Nabors’ commitment to create value for shareholders but also underlines the energy equipment supplier’s healthy financial condition and confidence in its business going forward.
The September 2010 acquisition of oilfield services provider Superior Well Services Inc. is part of Nabors’ long-term strategic plan and has added around 430,000 horsepower to its pressure pumping gear (an umbrella term used to describe a number of vital services performed on new and existing wells). Apart from significantly expanding its shale drilling ability, Nabors has also benefited from the expansion of its geographic foothold, particularly in the prolific Marcellus Shale play, a key natural gas drilling area located throughout Western Pennsylvania and much of the Appalachian Basin.
REASONS TO SELL
Nabors’ business is highly correlated to oil and gas prices. Among the commodities, crude price has been significantly weak since last June. Moreover, oil price is expected to remain low in 2015. Natural gas pricing environment, on the other hand, is also not good with forecasts of higher temperatures in certain regions of the U.S. Hence, we don’t expect the company to earn considerable cash flows in the near term.
We are concerned by the weakness in Nabors’ pressure pumping business. Deterioration in pricing and utilization, coupled with the spike in costs, is likely to adversely impact the company’s near-term results.
Low dayrates stemming from plentiful supply of the land drilling rigs in the U.S. market has been impacting the company’s earnings. Moreover, the challenging near-to-intermediate term outlook for Nabors’ international business might hamper its profitability in the coming months.
Nabors’ relatively weak balance sheet in this severe credit-constrained environment (debt-to-capitalization ratio of more than 40%) is also a cause for concern. Over the last few years, the company kept adding debt to its balance sheetfor a fleet recapitalization program.
RECENT NEWS
Fourth Quarter 2014 Results Announcement
Nabors Industries plans to release its fourth quarter and full year 2014 results on Feb 17, 2015 after the closing bell.
VALUATION
We believe that Nabors has good fundamentals, considering its high-quality fleet of drilling and workover rigs. The company also enjoys good exposure to oil plays with its presence in the Bakken, Permian and International plays. However, we remain concerned, as oil price – one of the primary components to determine the fate of the company’s business – has been significantly weak since last June.
Considering these factors, we expect Nabors to perform in line with the broader market and, therefore, maintain our Neutral recommendation.
Nabors’ current trailing 12-month earnings multiple is 11.6X, compared with the 8.1X industry average and 18.8X for the S&P 500. Over the last five years, Nabors’ shares have traded in a range of 6.8X to 37.5X trailing 12-month earnings.
Our $13 price objective reflects a 2015 P/E multiple of 16.7X, within the company’s historical trading range.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of NBR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1120 companies covered: Outperform - 15.6%, Neutral - 76.9%, Underperform – 6.8%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
/ Equity Research / NBR | Page 1