Note: This report contains substantially new material. Subsequent reports will have changes highlighted
Reason for Report: 1Q13 Earnings Update
Prev. Ed.: Apr 9, 2013; 4Q12 and 2012 Earnings Update (broker material considered till Mar 21, 2013)
Brokers’ Recommendations: Neutral: 61.1% (11 firms); Positive: 38.9% (7); Negative: 0.0% (0) Prev. Ed.: 11; 7; 1
Brokers’ Target Price: $18.22 (↓ $0.31 from the last edition; 16 firms) Brokers’ Avg. Expected Return: 14.4%
*NOTE: Though dated May 27, 2013, share price and broker material are as of May 14, 2013.
Note: A Flash Update was done on Apr 23, 2013; 1Q13 Earnings
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Nabors Industries Ltd. (NBR or the company) is a land drilling contractor. The company conducts oil, gas, and geothermal land drilling operations in the United States, Alaska, Canada, South America, Mexico, the Caribbean, the Middle East, the Far East, Russia, and Africa. It also operates as a land well-servicing and workover contractor in the United States and Canada. The company's customers include oil and gas companies, foreign national oil and gas companies, and independent oil and gas companies.
Of the 18 firms covering NBR, 7 firms assigned positive ratings and 11 firms provided neutral ratings. No firm gave a negative rating on the stock. The target price ranges between $14.00 and $24.00 with the average at $18.22
The firms continue to believe that Nabors represents one of the best value bets in the energy sector. According to the firms, NBR’s competitive advantages are its low-cost asset base, critical mass, diverse operations, premium assets, and economies of scale.
The following is a summarized opinion of the diverse brokerage firms’ viewpoints:
Neutral or equivalent (61.1%; 11/18 firms): The firms believe that Nabors will earn significant revenues from the recent Pace-X rigs contracts with atractive day rates. Moreover, the firms remain optimistic as the the company is now putting its idle rigs to work.
However, the firms remain cautious about Nabors’s decision of paying back its debt by freezing its capital investment programme for its bussiness units.The firms believe that this decision will hamper earnings in the upcoming quarters.
Positive or equivalent (38.9%; 7/18 firms): These firms believe that Nabors has become a diversified drilling contractor with significant operations in the international markets. The firms believe that demand for rigs in the international markets is increasing specifically in Latin America, West Africa, and the Middle East. The firms foresee a strong probability of dayrate hike in those markets.They believe that NBR is one of the best-positioned land drillers as it has relatively new drilling fleet (comprising comparatively high-quality land rigs), diversified business segments and a seasoned management team.
May 27, 2013
Overview
Based in Hamilton, Bermuda, Nabors Industries Ltd. (NBR or the company) is a land drilling contractor, which owns and operates approximately 474 land drilling and about 548 land workover and well-servicing rigs in North America. The company’s actively marketed offshore fleet comprises 36 platform rigs, 12 jackup units, and 4 barge rigs in the United States and in multiple international markets. In addition, Nabors manufactures top drives and drilling instrumentation systems and provides comprehensive oilfield hauling, engineering, civil construction, logistics and facilities maintenance, and project management services. Nabors participates in most of the significant oil, gas, and geothermal markets in the world. For more information on the company, visit its website: www.nabors.com. The company operates on a calendar-year basis.
The firms identified the following investment considerations:
Key Positive Arguments / Key Negative ArgumentsFundamentals
· Efficient and experienced management team
· Strong free cash flow
· Financial flexibility
· NBR has secured contracts for more than half of its existing fleet in the Lower-48 states
Growth Opportunities
· International land drilling activity is expected to be driven by high commodity prices and the ongoing effort to increase global oil production capacity.
· Increasing rig utilization rates and day rates in the current capacity-constrained, high-demand environment
· Higher activities in Saudi Arabia and Iraq with the potential for an improvement in Libyan operations
· The Superior Well Services acquisition has expanded Nabors’ shale drilling ability and geographic foothold / Growth Impediments
· Workover rigs, which represent the majority of NBR’s U.S. offshore fleet, does not have the same level of pricing improvement as jackup rigs
· NBR derives a significant portion of its business from the international markets. Such operations are subject to various risks, including war, civil disturbances, and government activities, which could limit or disrupt the company’s markets, impose restrictions on the movement of funds, currency values, and exchange controls
Fundamentals
· Sensitive to fluctuations in magnitude, timing, and pace of margin improvement in the North American land drilling market
· Highly cyclical, depending on the level of oil and gas exploration activity
· High earnings and stock price volatility
Macro Issues
· Volatile oil and gas prices
· Inflationary production costs
· Geopolitical risks associated with international operations
· Severe weather can affect international operations by delaying drilling, workover, and construction projects
May 27, 2013
Long-Term Growth
The drilling industry is highly competitive. The companies compete primarily on a regional basis, and since rigs are mobile and may be moved from one region to another in response to demand, there lies a possibility of an oversupply of rigs, which would adversely affect operational results.
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 has also extended its geographic reach and diversified its operating assets beyond land rigs.
For the next few years, the firms expect the company to remain focused on cost savings, utilization, and higher day rates due to the current oversupply of land rigs in the market.
The company has a long history of mergers and acquisitions, as well as new rigs to modernize its fleet. Management expects this trend to continue over the next few years.
On the acquisition front, the firms continue to expect management to focus on non-rig businesses within the North American market and rig-related opportunities outside North America, particularly in North Africa, the Middle East, and Latin America/Mexico.
May 27, 2013
Target Price/Valuation
Provided below is the summary of valuation and ratings as compiled by Zacks Digest:
Rating DistributionPositive / 38.9%↑
Neutral / 61.1%↑
Negative / 0.0%↓
Average Target Price / $18.22↓
Digest High / $24.00↓
Digest Low / $14.00
No. of firms with target price/Total / 16/18
The primary risks to the price target include economic decline, commodity price volatility, rig utilization and pricing, higher imports of liquefied natural gas, new onshore rig construction, competition and geopolitical risks.
Recent Events
On Apr 23, 2013, Nabors reported a (y-o-y) decline in 1Q13 results, due to the seasonal depression in the Completion Services segment and weaker U.S. operations.
Earnings per share from the continuing operations came in at $0.33, beating the Zacks Consensus Estimate of $0.29. This was aided by better results in the Production Services segment and seasonal peak in Canadian operations. However, the results declined 32.7% from $0.49 earned in 1Q12.
Revenues of $1,661.0 million were below 1Q12 sales of $1,842.0 million due to the decline in activities in most of the business units. The top line also failed to meet the Zacks Consensus Estimate of $1,663.0 million.
On Feb 27, 2013, Nabors announced that it will start paying out a portion of its earnings in the form of shareholder dividends. The company initiated its quarterly dividend at the rate of $0.04 per share, making the annualized dividend payout $0.16 per share. The first installment was paid on Mar 28, to shareholders of record as of Mar 11, 2013.
Revenue
The Zacks Digest average revenues were $1,581.5 million in 1Q13, down 13.2% y-o-y from $1,821.8 million in 1Q12 and 1.0% sequentially from $1,596.8 million in 4Q12.
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Revenue ($ M) / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2012A / 2013E / 2014E / 2015EDigest High / $1,821.8 / $1,596.8 / $1,581.5 / $1,579.7 / $6,688.3 / $6,730.2↓ / $7,897.3↑ / $7,371.9
Digest Low / $1,821.8 / $1,596.8 / $1,581.5 / $1,552.2 / $6,688.3 / $6,521.3↓ / $7,085.9↑ / $7,371.9
Digest Average / $1,821.8 / $1,596.8 / $1,581.5 / $1,566.0 / $6,688.3 / $6,652.5↑ / $7,471.1↑ / $7,371.9
Y-o-Y Growth / 31.1% / -7.8% / -13.2% / -2.3% / 9.3% / -0.5% / 12.3% / -1.3%
Q-o-Q Growth / 5.2% / -4.2% / -1.0% / -1.0%
Note: Blank cells indicate that none of the brokers provided any figures.
Regional Overview as per the Company
Nabors reports its operations in 2 major segments: Drilling and Rig Services – comprising the U.S., Canada, International and Rig Services; and Completion and Production Services – including Production Services and Completion Services.
During 1Q13, Drilling and Rig Service revenues were down 15.7% year over year and 0.3% sequentially to $1,112.5 million, while the segment’s operating income decreased approximately 47.4% year over year and 0.4% sequentially to $137.3 million. The company’s rig years fell to 352.3 from 405.5 in 1Q12.
U.S.: The segment reported revenues of $484.8 million in the quarter versus $627.1 million in 1Q12 and $495.2 million in 4Q12. The year over year decrease was owing to significantly lower rig activity.
Canada: Revenues in 1Q13 were $126.9 million compared with $144.7 million in 1Q12 and $115.7 million in 4Q12. Lower rig activity affected the year over year results.
International: In 1Q13, revenues from the segment were $321.5 million versus $306.5 million in 1Q12 and $324.7 million in 4Q12. The year over year improvement was owing to increased rig activity.
Rig services: The segment reported revenues of $179.3 million in the quarter versus $241.8 million in 1Q12 and $180.5 million in 4Q12.
Outlook
The bullish firms believe that the prospects of pressure pumping business are strong in the coming quarters as the unit recorded nearly 50% of the total income generated in 1Q13.
Moreover, the bullish firms expect more income from international activities, backed by increased rig activity in Algeria and Mexico, increased dayrates in Saudi Arabia and Argentina.
However, the firms with a neutral stance remain cautious, as the company is focusing on repaying debt without making immediate investments and is also taking steps to restructure the compensation of CEO, which might hamper the near-term revenues from its business units.
The Zacks Digest average revenues estimates are $6,652.5 million for 2013 and $7,471.1 million for 2014 and $7,371.9 million for 2015, reflecting a y-o-y decline of 0.5% in 2013 and 1.3% in 2015, but y-o-y growth of 12.3% in 2014. The three-year compound annual growth rate (CAGR) on realized 2012 revenues is 3.3%.
Please refer to the NBR Zacks Research Digest spreadsheet for more details on revenue estimates.
Margins
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2012A / 2013E / 2014E / 2015EEBITDA Margin / 30.1% / 26.7% / 28.3% / 27.6%↓ / 30.0%↑
Operating Margin / 17.0% / 9.4% / 13.2% / 10.2%↓ / 13.5%↑
Pre-tax Margin / 14.3% / 6.2% / 10.0% / 5.5%↓ / 9.8%↑
Net Income Margin / 9.8% / 5.0% / 7.3% / 5.8%↑ / 8.9%↑
Note: Blank cells indicate that none of the brokers provided any figures.
The Zacks Digest average operating income was $149.6 million in 1Q13, down 53.4% y-o-y and 0.6% sequentially.
In 1Q13, interest expense decreased 4.3% y-o-y and 2.9% sequentially to $60.0 million.
Outlook
The bullish firms expect operating margins to improve in the near future, as the company is now constructing a new deepwater platform rig, which is expected to be delivered either by the end of this year or by the beginning of the coming year. The firms added that this rig alone is capable to improve the operating profit by 3%.
In the consensus of broker opinions, direct cost is expected to decrease at a faster rate compared to the decrease of revenues in 2013. However, direct cost is expected to increase at a faster rate compared to revenues in 2014.
The Zacks Digest model forecasts operating income of $638.0 million for 2013 and $847.9 million for 2014 and $973.1 million for 2015, which represents a y-o-y decline of 31.0% in 2013 and y-o-y growth of 32.9% in 2014 and 14.8% in 2015.The three-year CAGR on realized 2012 operating income is 1.7%.
Please refer to the NBR Zacks Research Digest spreadsheet for more details on margin estimates.
Earnings per Share
The Zacks Digest average EPS was $0.24 in 1Q13, down by 62.9% from $0.63 in 1Q12 and 17.1% from $0.28 in 4Q12. The decrease was primarily due to significantly lower contribution from the U.S segment.
The Zacks Digest average pro forma net income decreased 54.7% y-o-y and increased 5.1% sequentially to $83.5 million in 1Q13.
The Zacks Digest average shares outstanding at the end of 1Q13 were 294.2 million, representing an increase of 0.9% y-o-y and 0.6% sequentially.
Provided below is a summary of EPS estimates as compiled by Zacks Research Digest:
EPS / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2012A / 2013E / 2014E / 2015EZacks Consensus / $0.16 / $1.04↓ / $1.38↓
Digest High / $0.65 / $0.30 / $0.24 / $0.14 / $1.75 / $1.08↓ / $1.50↓ / $1.66
Digest Low / $0.60 / $0.25 / $0.23 / $0.14 / $1.70 / $0.90↓ / $1.47↑ / $1.66
Digest Average / $0.63 / $0.28 / $0.24 / $0.14 / $1.73 / $0.99↓ / $1.49↑ / $1.66
Y-o-Y Growth / 120.1% / -45.7% / -62.9% / -63.1% / 16.0% / -42.8% / 50.0% / 11.8%
Q-o-Q Growth / 21.5% / -32.5% / -17.1% / -40.4%
Outlook