Summary
- Nabors Industries reported third quarter 2019 revenues and other income of $756.64 million compared to revenues of $779.43 million in the same quarter of last year.
- Nabors expects drilling activity in the Lower 48 to be slightly lower in the fourth quarter, while the international segment is improving.
- I see NBR as an excellent tool for short-term trading, but the long-term outlook is too uncertain to recommend a more substantial commitment.
Source: NBR
Investment Thesis
Nabors Industries (NBR) is one of my selected onshore driller companies, which also include Helmerich & Payne (HP) that I regularly cover on Seeking Alpha.
The onshore and the offshore drilling industry are comparable in many ways and are suffering the same severe downturn. Oil prices aren't sufficient to support healthy exploration CapEx, leaving demand relatively depressed, which puts pressure on margins and utilization. The situation has not substantially changed from the second to the third quarter, with margins in the US basically stagnant in 2019 and falling severely for the International segment.
In the case of Nabors, this situation is worsened by a concerning debt load that I will present and analyze later. The underlying issue is that oil and Natural gas prices are not healthy enough, and the outlook is not encouraging.
The CEO, Anthony G. Petrello, noted in the conference call:
During the third quarter, the average price of near-month WTI was $56 having traded as low as $51 in mid-August. This represents a nearly 6% decline versus the second quarter average. Natural gas prices also declined averaging just over $2.30 during the second quarter. In the most recent quarterly Dallas Fed Energy Survey E&P respondents cited low commodity prices as the main constraint limiting their growth. The lower customer activity in North America has also resulted from the combination of limited access to capital as well as investor pressure to generate free cash flow.
Worse, in this sector, the technology is rapidly developing, and to stay competitive, Nabors needs to commit significant CapEx, which hurts free cash flow. However, one encouraging sign is that the company managed a positive free cash flow for the last two quarters, which is an achievement.
Thus, I still recommend avoiding the entire drilling sector from a long-term investment perspective until results show a strong correlation between activity and profitability regularly.
However, for the ones who are invested in this segment, I recommend trading about 50% of your position short term to reduce your long-term position without incurring losses. Nabors Industries YTD chart is not very encouraging, and both HP and NBR are down significantly in 2019.
ChartData by YCharts
Nabors Fleet Status Snapshot 3Q'19 And Margin Details
The total fleet counts are unchanged quarter to quarter or 408 rigs and 208 rigs working, with average utilization of 54%.
Source: NBR Presentation 3Q'19 (Montage)
As we can see above, the US Drilling margin has increased steadily from $10,540 in 3Q'18 to $12,400 in 3Q'19. The situation is less remarkable in Canada, with the margin going down from $5,352 to $3,799.
Finally, in International Drilling, which represents 41.9% of the total rigs working, the situation is reversed. Margin fell significantly from $15,003 to $13,739 with good progress sequentially.
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