Nabors Industries Ltd. (NBR), registered in Bermuda and headquartered in Barbados is the largest land and platform oil, gas and geothermal drilling contractor in the world, with a 20-24% market share. As of March 2006, Nabors operates in US, Canada, Middle East, Australia, South America and Africa by owning or operating a fleet of 3 barge rigs, 19 jack-ups, 28 marine vessels, 43 platforms, 588 land drilling rigs and 781 land workover rigs. Nabors is the largest rig owner and operator in the US. Nabors has operations in a lot of international markets and is very diversified geographically, thereby diluting the impact of geopolitical events.
A large portion, a little more than 90% of Nabors revenue comes from contract drilling services, while the remainder comes from other services like oil field management, engineering, transportation and logistics services.
For the past five years, Nabors shares have appreciated 150% while Exxon Mobil (XOM) shares have appreciated 50%. Since NBR listed in February 1991, NBR has appreciated 650% while XOM appreciated 400%. Nabors is included in the S&P 500. In August, Nabors announced plans to repurchase $500 Million worth of common shares. Nabors shares, on September 15, closed at 30.06, near a 52-week low, providing a good buying opportunity. With a TTM P/E of 11 and a forward P/E of 7, Nabors shares are very attractive. Taking TTM values and comparing it to its peers, Nabors P/E is lower, P/S is lower, EPS is higher, sales growth is higher and ROI is lower. In 2004, revenue was $2.39 Billion and in 2005 revenue was $3.55 Billion. Analysts average estimates of revenue for 2006 and 2007 are $4.88 Billion and $5.95 Billion respectively. Nabors balance sheet shows strong cash flow, revenue and growth, indicating financial strength. Nabors has a strong management capable of taking the company through ups and downs.
In the first quarter of 2006, day rates for American land drilling rose by $1,475 per day to $18,695 and cash margins rose by almost $1,000 a day to about $9,600. This was a record high. In the second quarter of 2006, day rates rose by $1,491 per day to $20,186 and cash margins rose by $1,257 per day to $10,858. This was again a record high. Most of the existing contracts were negotiated in the year 2005. Some of the contracts expire before the end of 2006. And in 2007 many more are expiring. When the contracts are renegotiated, there is a high probability that Nabors can demand longer contracts and higher day rates which can boost its revenues without a significant increase in costs and also decrease earnings volatility. Over the long term, demand for contract drilling is expected to increase in the US as well as in international regions. With rig supply limited, day rates for drilling are expected to increase, especially in international regions where Nabors will have more pricing power.
Demand for oil and gas is increasing all over the world. Drilling so far has mainly been to create relatively shallow wells. In the case of natural gas, reserves below 15,000 feet of the earth’s surface largely remain untapped. Future exploration will concentrate on drilling wells below 15,000 feet. To maintain the current natural gas production of 18.5 Tcf (Trillion Cubic Feet), more than 15,000 wells must be drilled, which is a conservative estimate. Just in the US, proven conventional gas resources are estimated at 192 Tcf. Of these resources, only 1% of them are deep wells. As of June 2006, US Department of Energy (DoE) estimates that, US onshore and offshore deep reservoirs hold 169-187 Tcf of gas resources. DoE also estimates that for ultra-deep wells, drilling the last 10% of the well alone will cost 50% of total cost of the creating the well. As deeper and more complex wells are drilled, total expenditure on rigs will also increase. All this creates an advantage for Nabors.
Oil and gas exploration is not going to slow down any time soon, especially natural gas. Companies are trying to figure out future energy supplies and are spending a lot of capital towards these goals. As reserves are getting below normal levels, drillers have to drill deeper holes. Nabors, offering contract drilling services, can easily capitalize on this demand. It is not very easy to change drilling contractors and if Nabors has enough pricing power, which it has, Nabors can command higher rates.
Oil and gas prices have come down from their recent peaks. But they still are high. If the prices keep going down, it will pull down the entire oil and gas sector down, resulting in reduction in contract drilling day rates. But if they remain high for the next couple of years, Nabors tends to benefit from it, providing a strong upside.
The bottomline is that exposure to international markets, new contracts and a bullish natural gas sector provide a huge growth opportunity for Nabors. If this trend continues, Nabors stock will not stay in this price range for long. Whereas, high drilling costs may lead producers to reduce capital expenditures on new drilling hurting Nabors’ growth rate which may cause the stock to remain stagnant.
(This article was published as "Nabors Should Capitalize On Strong Natural Gas Demand" in SeekingAlpha on September 19, 2006 and as "Drilling Deeper into Nabors (NBR)" in GuruFocus on September 20, 2006.)
Labels: NBR, XOM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home