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Nabors Industries: No Return of Capital to Shareholders

November 15, 2012 | About:
Nabors Industries Ltd. (NBR) owns and operates approximately 521 land drilling and approximately 607 land workover and well-servicing rigs in North America. Nabors' actively marketed offshore fleet consists of 40 platform rigs, 12 jack-up units and 4 barge rigs in the U.S. and 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.

Valuation

NBR is trading at 0.67x P/B, a 40% discount to its five-year average P/B of 1.13x. Its previous historical lows were 0.62x P/B and 0.56x P/B in 2011 and 2009 respectively. In terms of earnings-based multiples, NBR trades at 5.26x twelve months trailing EV/EBITDA and 19.8x P/E respectively. NBR has achieved a five-year book value per share CAGR of 9.0% and 10-year book value per share CAGR of 11.5%.

Financial And Business Risks

NBR is highly geared with a gross debt-to-equity ratio of 79% and a net gearing of 69%. This is partly mitigated by an interest coverage ratio of 3.0 and current ratio of 2.8.

Off-balance sheet liabilities include agreements and obligations under which we provide financial or performance assurance to third parties amounting to $88 million. Certain of these agreements serve as guarantees, including standby letters of credit issued on behalf of insurance carriers in conjunction with our workers' compensation insurance program and other financial surety instruments such as bonds. In addition, NBR has provided indemnifications, which serve as guarantees, to some third parties.

NBR depends to a large degree on the level of spending by oil and gas companies for exploration, development and production activities. Volatility in oil and natural gas prices is likely to continue in the foreseeable future. Any prolonged suppression of oil and natural gas prices could continue to depress the level of exploration and production activity, which could result in a corresponding decline in demand for NBR's services. Lower oil and natural gas prices have also caused some customers to seek to terminate, renegotiate or fail to honor drilling contracts and affected the fair market value of NBR's rig fleet, which in turn has resulted in impairments of its assets.

The oilfield services industry is very competitive. Many drilling, workover and well-servicing rigs can be moved from one region to another in response to changes in levels of activity and market conditions, which may result in an oversupply of rigs in an area. Most drilling and workover contracts are awarded on the basis of competitive bids, which also results in price competition. The land drilling market generally is more competitive than the offshore drilling market because there are larger numbers of rigs and competitors.

Business Quality and Capital Allocation

NBR is the largest land drilling contractor in the world and one of the largest land well-servicing and workover contractors in the United States and Canada. It is also a leading provider of offshore platform workover and drilling rigs. NBR reviews every business line and asset class to determine if it has a leadership position in the market it serves; the ability to generate attractive returns on investment; or the capability to grow and ultimately achieve these two metrics and be a positive impact on the organization. As NBR identifies specific assets that do not meet these criteria, it will look at various options to monetize these assets. On Dec. 14, 2011, NBR closed a sale of a 25% working interest in the Cat Canyon and West Cat Canyon fields in Santa Barbara County, Calif. The sale price for the properties was $72 million in cash, and the terms of the sale include a commitment for the purchaser to continue utilization of NBR's rigs. The completion of this sale is line with NBR's commitment to monetize its E&P portfolio.

NBR has not paid any cash dividends since 1982 and has no current intention to do so.

On July 17, 2012, NBR announced that its board of directors has adopted a shareholder rights plan under which shareholders will receive rights to purchase shares of a new series of preferred stock; the rights will expire on July 16, 2013. The shareholder rights plan is intended to reduce the likelihood that any person or group would gain control of Nabors by open market accumulation or otherwise without paying a control premium for all common shares. This is a poison pill provision to deter takeover attempts.

Conclusion

NBR is definitely cheap by any standards. However, because of a weak balance sheet coupled with the lack of a meaningful capital allocation policy in the form of dividends or repurchases, I will say no to NBR.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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