We are maintaining a Neutral rating on Nabors Industries (NBR) considering its strength in the U.S. and Canadian land drilling markets, partially offset by weak natural gas fundamentals.
Nabors possesses a large, high-quality fleet of drilling and workover rigs, making it the leading North American land drilling contractor. Over the years, the company has not only grown through cash flow reinvestments and acquisitions but has also extended its geographic reach and diversified its operating assets beyond land rigs.
With the company’s strong exposure to oil plays owing to its presence in the Bakken, Permian and International plays, we expect Nabors to benefit from higher activity and pricing. The ‘Superior Well’ acquisition will further boost Nabors’ earnings visibility by expanding its pressure pumping capabilities and geographic foothold.
The recently reported fourth quarter and full-year 2010 results testify benefits from the addition of the Superior Well Services and a strong North American market. Earnings per share (excluding special items) came in at 44 cents, surpassing the Zacks Consensus Estimate of 37 cents, while revenues of $1.33 billion surpassed the Zacks Consensus Estimate of $1.26 billion.
However, Nabors has its business spread globally and derives a significant portion of its income from the international markets. These operations are susceptible to various risks such as war, civil disturbances and government actions. Any disturbance in the international markets will likely limit or disrupt the company’s markets, impose restrictions on the movement of funds, currency values and exchange controls.
Moreover, the glut in domestic gas supplies still exists, with storage levels remaining close to their five-year average. This will continue to weigh on natural gas prices in the near-to-medium term. Nabors remains particularly exposed to this situation since its North American business is heavily biased toward gas drilling.
We also remain concerned about Nabors’ relatively weak balance sheet in this severe credit-constrained environment (net debt-to-capitalization ratio of approximately 50.5%). Over the last few years, the company kept adding debt to its balance sheetfor a fleet recapitalization program.
Taking into account the aforesaid factors, we expect the company to perform in line with its peers Patterson-UTI Energy Inc. (PTEN) and Pride International Inc. (PDE).
NABORS IND (NBR): Free Stock Analysis Report
PRIDE INTL INC (PDE): Free Stock Analysis Report
PATTERSON-UTI (PTEN): Free Stock Analysis Report
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