Sunday, June 24, 2012

Nabors might make a great investment due to impending divestiture, deleveraging, and management changes

This article is a summary of what I read online on Barron's and my own research. I thought this was interesting to point to readers looking at firms with a restructuring trades.

  • Nabors Industries Ltd – Current price at $13.19
  • Potential Upside by Industry Estimates: $10 per share
  • Market Capitalization: $3.83B
  • Cash: $494M; Total debt: $4.7B
  • Shares Outstanding: 290M
  • Operating Margins:
  • Sector: Basic Materials; Industry: Oil & Gas Drilling & Exploration

 What does NBR do?
Nabors Industries Ltd. (Nabors) is a land drilling contractor. It is also a land well-servicing and workover contractor in the United States and Canada. It markets approximately 499 land drilling rigs for oil and gas land drilling operations in the United States Lower 48 states, Alaska, Canada, South America, Mexico, the Middle East, the Far East, the South Pacific, Russia and Africa. The Company markets approximately 581 rigs for land well-servicing and workover work in the United States and approximately 174 rigs for land well-servicing and workover work in Canada. It is also a provider of offshore platform workover and drilling rigs, and markets 39 platform, 12 jackup and four barge rigs in the United States, including the Gulf of Mexico, and international markets. In April 2012, TransForce Inc. acquired through its subsidiary, I.E. Miller Services, Inc, certain assets of Peak USA Energy Services, Ltd., subsidiary of Nabors.      (Source: Google Finance)

Nabors Industries, the world's largest driller of onshore oil and gas, reported first-quarter results in late April that soundly beat expectations. Yet, to judge from its share price, it would seem all the oil and gas wells were running dry. At $13.07 a share, the stock (NBR) is down more than 50% from its 52-week high of $27.63 reached in August 2011. The shares have been hurt by falling prices for natural gas, and investor anger over executive perks and severance packages. But shareholders look to be getting a stronger say in corporate governance, and there are lots of reasons to be optimistic. The shares, hurt by falling natural gas and a controversy over severance packages, could hit $30 as asset sales and big debt reductions pay off.

Potential Catalysts:

Divestiture to pay down debt: In March 2012, it was reported that progress has been made in jettisoning noncore businesses in which NBR might raise $800  million. These asset sales will help reduce a hefty $4.8 billion in debt. Strong free cash flow will also be used to pay down debt. The company is targeting a net debt-to-capitalization ratio of 25% in two years from the current 45%.

Management Changes: Nabor’s fall from grace is directly related to the company's history of bestowing lavish pay and perks on its executives. An uproar ensued last fall when its former CEO, Eugene Isenberg, was set to receive a $100 million cash payout due to a "change-of-control" clause in his contract triggered by the board removing him from the CEO position. The 81-year-old Isenberg eventually relinquished his right to collect the payment. Isenberg, who remains chairman, is credited with leading Nabors, formerly known as Anglo Energy, out of bankruptcy in 1987 and has been amply rewarded ever since. From 1992 until he stepped down last fall, Nabors paid him $750 million, including exercised stock options. He regularly jetted between headquarters in Houston and his homes in Palm BeachFla.Martha's VineyardMass., and New York. However, a cultural and strategic transformation appears to be taking hold at Nabors under the new CEO, Anthony Petrello, and some new blood on the board—lead director John Yearwood, the former chief executive of Smith International, a respected oil- and gas- equipment maker that was sold to Schlumberger in 2010. The changes are showing up in the customer-satisfaction rankings conducted by independent oilfield tracker Doug Sheridan and his Houston-based EnergyPoint Research. Nabors ratings, though still low or average, are trending higher, reflecting improvements in pricing and contract terms, service, technology, and other factors.

Improving Business:  NBR’s domestic drilling business in the lower 48 states has performed well despite industry challenges. Nabors' Alaska and offshore operations have rebounded, and its overseas operations appear to be recovering. Should natural-gas prices stage a comeback, as is inevitable at some point, Nabors will be a major beneficiary. Nabors also has very limited direct exposure—two rigs—to troubled Chesapeake Energy (CHK), which many expect to cut back on its shale exploration to conserve cash. Margins at Nabors' international operations are set to improve in the second half of this year and into next year as contracts are repriced. Last year, business in Saudi Arabia and North Africa, two areas that account for about half the overseas fleet, were disrupted by the Arab Spring uprisings, resulting in higher labor costs in Saudi Arabia and lower rig utilization in North Africa. Company officials believe the first quarter marked the bottom of the cycle in the international business.

Strong Fundamentals: Nabors' domestic drilling business has performed well still it is trading at a paltry six times estimated earnings of $2.19 a share for this year and about five times projected earnings of $2.51 a share for 2013, despite Wall Street expectations for earnings to increase by 15%. Any way you look at it, the stock appears undervalued. Nabors trades at less than four times EV/Ebitda, despite historically fetching a multiple of more than five. At five times EV/Ebitda, or cash flow, the stock might be worth closer to $23 a share, according to some industry estimates. A price/earnings ratio of 12 would result in a stock price closer to $22, representing gains of 65% to 70%.

Recent Price
52 Week Hi-Lo
Market Value
$3.8 bil
Rev 2012E
$7.5 bil
EPS 2012E
P/E 2012E
Source: Thomson Reuters

Monday, June 18, 2012

Macro Economic Thoughts in 2012

Quick thoughts for the next 12 months:

Both EU and emerging markets have undergone turmoil within the last 12 months and these events might be correlated. The recession within EU might be trickling down to emerging markets leaving US as the next best option for investors around the globe. EU is currently in recession as we know of. Greece underwent a pseudo referendum this weekend on the question of whether or not to stay in the EU. The Greek people voted for the party that supports Greece staying in the EU, however the elections this weekend have resulted in a fragile political dynamic and still lot of uncertainties remain. With Spain and Italian yields at 7%, banks undergoing major restructuring and governments reporting significant deficits, the countries seem to be in trouble. EU turmoil resulting in restricted lending, stagnant corporate growth and high unemployment has resulted in a decline in consumption and corporate spend alike.

Similarly, with two major emerging markets exposed to EU; China with 17% of its exports to EU and Indian with 16% of exports to EU are negatively impacted by European recession. Others in the Asian club are economies such as Malaysia with more than 14% exposure to EU. Furthermore, manufacturing jobs that are returning to the US only exacerbate the problem for the emerging economies. In addition to these problems, China and India have problems of their own; China with its real estate market and India with its high rate of inflation. Both are expected to face volatility over the next year or two. Easing of monetary policy in china might alleviate some short term concerns; however, fundamental problems with bank leverage and real estate still remain.

The cautiousness in bank lending, slowdown in exports and that in Chinese real estate directly impact consumption and corporate spend in the mainland. With slowdown in these economies, which are major consumer of natural resources, economies such as Australia and Brazil will get impacted. The markets are pricing in a slowdown in these countries as well.

That leaves US. Within US, equities are priced at 12x – 13x times’ earnings, corporate balance sheets very strong and corporate are sitting on loads of cash (almost $2T).  A lot of investors are looking for safer havens and have parked their money in treasuries which might be currently overbought – so much so that they are yielding negative yields in real terms. The only reason why investors would do that is because US Govt. assures return of principal if nothing else! With interest rates nowhere to go, treasury market might be overbought and will undergo correction at the first sign of interest rate moves.

That leaves us with US Equity markets. Does that mean the equity markets will rally in short term? Probably not! With almost 20% of S&P 500 companies exposed to EU and almost 35% to 40% firms exposed internationally ( EU & Emerging markets), the markets might undergo short term volatility. Earning comps might not come out that strong YoY, however, US firms are well positioned to take advantage of a turnaround and are one of the best bets for investors, looking both for yields and long term capital appreciation.

2011 and 2012 have seen lot of special situation such as spin-off’s M&A, actual/potential divestitures or potential JV’s in the large and mid cap space. Furthermore, the markets have also seen lot of new regulation & budget cuts post 2008 crisis that will affect the firms going forward. There have also been companies that have emerged from bankruptcies and have started trading post reorganization; these events present ample opportunities for long term investors looking for value plays with significant catalysts attached.

For example - defense sector will see cuts and therefore might lead to consolidation. Healthcare technology providers might benefit from the healthcare regulation. Within homebuilding where I do not see a significant recovery in short term, those who are into home repair & maintenance might come out as winners. Natural gas provides ample opportunities for people to invest in - not in the natural gas producers per se, but in companies that are well placed to take advantage of LNG exports from US to countries in EU & countries like China. There is also need for or demand for natural gas technology which will benefit companies who will export or share it with emerging economies looking to explore natural gas reserves. Furthermore, firms that help build Natural gas infrastructure will benefit too. Water, which has been big on my list, will be a money maker in the next three years, especially firms who are providing water testing systems, analytics, providing water for fracking, transportation and dewatering.  

There are more firms I can talk about within the technology space or shorts for companies that are leveraged with exposure to cyclical industries/consumers. I can talk about Gold given easy monetary policy, but am not expert in gold and it’s an obvious choice! Therefore, I will end it here for now.

These are macro views and should not be construed as my views on specific companies trading internationally. Current markets are clearly for investors who are looking to trade medium to long term.