In a previous article I mentioned that current political turmoil in the Middle East has affected oil & gas producers’ preferences. In short, technological developments have made other regions more attractive than they were in the past. For example, unconventional reserves have become available with the introduction of fracking. Also, equipment innovation made production at greater depths possible. So, have Ensco (NYSE:ESV) and Nabors Industries (NYSE:NBR) incorporated these new technologies and absorbed new market synergies?
Operating track and standardization
Ensco is a leading offshore drilling service that has absorbed a great amount of current market synergies. As of this moment, the company holds a total 9 deepwater drillships, 19 semisubmersible rigs, and 46 independent leg jackups, with one of the newest jackup and deep-water fleets. Currently, the firm is the world's second-largest offshore oil and gas driller behind Transocean Inc. and its exposure to the fast growing markets of Brazil and West Africa has increased.
Due to the size of its operations and relocation of operations, Ensco is very well positioned to continue absorbing market synergies generated by greater focus on deepwater production. Hence, contract drilling expenses are expected to decline in the coming quarters as new rigs enter production. Additionally, a stable deepwater and strong jackup market, and the construction of 6 new rigs reinforces future prospects. The downside here, pointed by analysts, is an oversupplied market by 2015.
A characteristic that makes Ensco less liable to oversupply is standardization. In other words, is one of the most profitable drillers in the industry, and delivers some of the highest customer satisfaction ratings per Energypoint Research. This has placed the company in a very well position to tap onto new and recently discovered reserves around Asia and Australia. Hence, international expansion is expected to continue to areas where politics and violence is not as great an issue as in the Middle East.
Financially, Ensco is strong amid a higher debt related to the Pride International Inc. acquisition. Currently trading at 10.1 times its trailing earnings, the stock packs a 33% discount to the industry average. However, First Pacific Advisors and Pionner Investments, the two largest gurus holding a position, continue to reduce their stake. I do not share their pessimism and prefer Jim Simmons’ optimism, because the company owes one of the newest and standardized fleet, with a respectable operating track.
Looking for a lifesaver
Nabors Technology is the world´s largest land rig drilling contractor, in addition to numerous offshore rigs that drill for oil and natural gas globally, while it derives about 75% of its revenue from North America. Currently the company owes about 473 actively-marketed land drilling rigs, and the offshore fleet includes 37 platform rigs, 7 jackups, and 4 barge rigs. Thanks to the company’s size and asset diversity, operations have spread from North America to several oil producing areas around the world.
The company´s structural complexity and previous managerial missteps have pushed for CEO replacement. In the road ahead, Nabors Technology is expected to continue with a deep restructuring policy under new CEO Petrello. The strategy entails streamlining the organization into two divisions, selling noncore assets, and reducing financial leverage. Speed will be a key in the transformation because the pressure pumping market suffers from collapsing prices and lower utilization. Additional pressure is placed by recent weakness in the North American onshore rig count.
Future prospects for Nabors Technology are questioned because operational costs continue to raise, great exposure to the volatile gas market, and fears of imbalance between supply and demand. In the meantime, the restructuring strategy is trying to offset these tendencies by focusing on the sale of assets. The challenge ahead is the continue decline on the price of these assets. Another downside to the firm is the expiration of 35 contracts at the end of 2013, at a time when the current market context is unfavorable for contract renegotiation.
The balance sheet for Nabors Technology is weak due to a high debt, low cash, and thin margins. Currently trading at 16.2 times its trailing earnings, the stock carries an 8% discount to the industry average. Richard Snow and Donald Smith, the two largest gurus have increased their stake on the company, and Jim Simmons has followed suit. I am not going to question their optimism, but do not feel safe about taking a strong position in this company as it is in the middle of a deep restructuring process.
Track over size
I prefer Ensco over Nabors Technology because the latter´s new management is yet to prove that it will not follow on previous missteps. Also, the restructuring process can have grave results, especially as the price of disposable assets is declining. Opposite, Ensco made an important acquisition that took the firm to a privileged market positioning, and operational costs continue to decline strengthening margins.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
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