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

1 comment:

  1. The oil field service area seems like an excellent place to invest long term Great post on nabors industries.