We are maintaining our Neutral recommendation on Nabors Industries Ltd. (NBR) with a target price of $18.
Nabors 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.
The company recently reported first-quarter results that marginally exceeded our estimates, reflecting recovery in its North American business. Drilling activity seems to be picking up and the second half of 2009 may have represented the bottom of the North American natural gas-driven land drilling operations.
Despite the lackluster natural gas price environment, management indicated that drilling activity is picking up in North America and will continue to post modest improvements in the coming quarters. Nabors also believes that the first quarter represented the eventual bottoming of the international business. The market is expected to return to its pre-2009 robust growth trajectory from the second half onward.
(Read our full coverage on this earnings report: Nabors Edges Past Estimate)
However, with natural gas storage levels still remaining above their five-year average, we do not see any sustained price gains on the commodity front. This translates into limited upside for natural gas-weighted companies and related support plays like Nabors. The company’s fairly debt-heavy balance sheet also remains a concern.
Considering these factors, we believe that Nabors’ current valuation adequately reflects its fairly balanced risk/reward profile. As such, we see limited upside from current levels and expect the company to perform in line with the broader market.
Nabors Industries is currently rated as Zacks Rank #3 (Hold), implying that the stock is expected to perform in line with the broader U.S. equity market over the next one to three months. This is supported by our Neutral recommendation, which implies that Nabors shares are expected to perform in line with the overall U.S. equity market over the next six to twelve months. Therefore, we advise investors to retain the stock over this time period.
Read the full analyst report on “NBR”
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