Nabors Industries: Still Overhang In The Market (NYSE:NBR)

Oil Rig at Sunrise in New Mexico

DanielIngelhart/iStock via Getty Images

Nabors’ (NYSE:NBR) stock continues to struggle despite the rapid increase in oil and gas prices over the past 2 years. This is likely the result of a lack of profits, a high debt load and skepticism about the strength of the global economy going forward. The market for drilling rigs will need to tighten and Nabors will likely have to strengthen their balance sheet for the stock to move significantly higher. This appears to be an increasingly unlikely scenario as central banks look to crush inflation.

Nabors Stock Price and Revenue

Figure 1: Nabors Stock Price and Revenue (Created by author using data from Yahoo Finance and company reports)

Nabors

The global rig count is moving up from pandemic lows but remains relatively low compared to historical counts. Nabors is benefitting from this increase in activity, with US drilling activity driving most of their rig count growth. The extent to which rig counts will continue increasing in the face of rapidly tightening monetary policy remains unclear, though. Many E&P companies have emphasized returning capital to shareholders and expressed unwillingness to pay higher prices for oilfield services.

North America and International Rig Count

Figure 2: North America and International Rig Count (Created by author using data from Baker Hughes)

Nabors had 87 rigs operating in the Lower 48 at the end of the first quarter, and increasing rig counts are leading to improved daily margins. According to a Nabors’ survey of customers, an increase in activity of over 15% is expected over the remainder of the year. Nearly every one of the 15 clients surveyed planned to increase activity. This survey was conducted in the first quarter though, and it is possible that deteriorating sentiment will limit the increase in activity going forward.

Average daily revenue exceeded 23,000 USD in the first quarter, up nearly 6% sequentially. Leading-edge day rates are in the high 20s though, and Nabors has stated that if their fleet were to roll into leading-edge day rates it would imply a margin of 15,000 USD per day at some point.

Nabors expects pricing to continue improving as activity picks up and the market tightens. Nabors is forecasting an increase of 6-7 rigs in the second quarter versus the first quarter average and an average daily margin of 8,500 USD per day. This is still significantly below pre-COVID levels, though. Utilization of Nabors rigs in the Lower 48 is far better than Alaska or offshore US, both of which remain severely depressed.

Nabors’ international rig count is 73 and is only increasing slowly, remaining well below pre-COVID levels. Tendering activity is increasing in the Middle East, and Nabors believes that growth there will require higher capability rigs, which should be favorable for pricing. Nabors also expects an increase in rigs in Latin America, with clients there planning on increasing activity. Nabors currently operates three drilling rigs in Russia which are under contracts that require them to continue performing for a period. Disruptions to operations in Russia are having a minor impact on financial results.

Nabors Rig Utilization March 2022

Table 1: Nabors Rig Utilization March 2022 (Created by author using data from Nabors)

Change in Rig Counts

Figure 3: Change in Rig Counts (Nabors)

Nabors Rigs and Profits in North America

Figure 4: Nabors Rigs and Profits in North America (Created by author using data from Nabors)

While labor markets remain tight, they have eased somewhat since the end of 2021. Staffing additional rigs remains challenging, though, and Nabors has increased compensation to remain competitive. Even with an increase in labor costs, profitability continues to improve. Hiring appears to have weakened in recent weeks, though. It is not currently clear whether this is a small fluctuation or a shift that reflects a deterioration in expected activity going forward.

Nabors Hiring Trends

Figure 5: Nabors Hiring Trends (Revealera.com)

Supply chain issues continue to affect Nabors and are causing higher costs and lead time uncertainty. Nabors has been able to offset this somewhat with their own manufacturing infrastructure and increased inventory levels to prevent disruptions. This has been a common strategy across industries over the past 12 months and in aggregate has likely greatly contributed to inflation and supply chain issues. There is also a high probability that most businesses have far too much inventory, which creates a risk of depressed activity and profits economy-wide going forward.

Nabors plans to keep CapEx within prior guidance of 380 million USD, of which 150 million USD is for the SANAD joint venture. It should be noted that Nabors’ depreciation and amortization expenses in the past year were 680 million USD, reflecting a large decline in investment relative to the previous cycle. Nabors does not believe that market pricing currently justifies new builds at this point and with current inflation, adding to capacity is likely a long way off. If most companies have a similar attitude, it should be supportive of margins as the year progresses.

Technology

Similar to many service companies, Nabors has a focus on technology and is trying to expand into higher value-add areas (automation, digitalization and robotization). Nabors has introduced a fully automated rig (R801) that runs a suite of performance automation tools, as well as integrated casing running. The rig is controlled by one person with the crew undertaking other value-add responsibilities. The R801 rig delivers consistent performance that is on par with Nabors’ high-specification fleet and isolates personnel from the red zone. Nabors is currently deploying automation modules on existing rigs at a fraction of newbuild cost and expects that in time automation will be deployed on most of their high-spec fleet. This type of technology is impressive, but it may not be that beneficial to Nabors’ financial performance. Drilling and service companies have driven dramatic productivity gains in recent years but have not captured any of the benefits. Demand for oil and gas is relatively inelastic, meaning that the main impact of productivity gains has been to shrink the services market.

Nabors also offers Nabors Drilling Solutions, which help rigs to deliver best-in-class performance. Drilling Solutions added more than 2,100 USD per day per rig in the first quarter. 82% of Nabors’ Lower 48 rigs were in five or more NDS services, an increase of 8% versus the previous quarter and a record high penetration. Growth has been particularly strong in SmartDRILL, RigCLOUD and related analytics.

Drilling Solutions are being targeted at third-party rigs in addition to Nabors own rigs. This expands Nabors addressable market and helps to provide a stream of high-margin revenue (gross margins ~ 49%). In the first quarter, third-party customers accounted for more than 20% of NDS’ Lower 48 revenue and NDS revenue from third parties grew over 10% sequentially.

Directional Automation (SmartNAV & SmartSLIDE) – Nabors directional automation solutions eliminate variability in the directional drilling process.

Drilling Automation (ROCKit, REVit, SmartROS, SmartDRILL, SmartPLAN, SmartSLIDE) – A range of automation solutions that aim to enhance rig operations.

Digital Operations – Open cloud platform designed to host drilling and analytics software at the rig site, on the web and on mobile devices.

Adoption of NDS Solutions

Figure 6: Adoption of NDS Solutions (Nabors)

Smart Suite Growth Trajectory

Figure 7: Smart Suite Growth Trajectory (Nabors)

SANAD

Saudi Aramco Nabors Drilling is a 50/50 joint venture partnership between Nabors and Saudi Aramco, focused on onshore operations. SANAD plans to deploy 50 rigs over the next 10 years and has awarded Nabors 5 rigs to-date, with the first deployment expected in the second quarter of 2022. Nabors estimates that each of these rigs will generate annual EBITDA of approximately 10 million USD.

Saudi Aramco plans to increase natural gas production by almost 50% by 2030, with this effort being led by the Jafurah unconventional gas development. Saudi Arabia aims to free up 1 million bpd of oil for export by increasing domestic use of gas. The Jafurah basin contains an estimated 200 Tcf of gas in place and is the largest liquids-rich shale gas play in the Middle East.

ESG Initiatives

Nabors has been trying to diversify their business with exposure to geothermal, recently acquiring GA drilling. They have also invested in a company focused on monitoring and measuring GHG and other emissions. Nabors has stated that within 5 years approximately 25% of their business could be from energy transition initiatives. At this stage, this is likely a high-risk strategy and even if successful, the economics aren’t clear.

Conclusion

If the drilling market continues to tighten and Nabors can increase revenue from Drilling Solutions, the stock could appear relatively inexpensive within the next few years. Nabors’ balance sheet is relatively weak and probably needs to strengthen before the stock moves significantly, though. An extended market downturn at this point also represents a significant threat to Nabors. At this point, it appears unlikely that E&P CapEx will increase significantly until sentiment regarding economic prospects improves.

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