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Tuesday, January
27, 1998
Nabors Industries
(AMEX: NBR)
Phone: 281-874-0035
Price (1/26/98): $24 5/16
HOW DID IT FIND TROUBLE?
How does a company that has been growing earnings at a greater than 100%
year-over-year clip have its stock price cut in half? Welcome to the world
of cyclical, commodity-based investments. While oil drilling contractor Nabors
Industries continues to put up impressive numbers, the future have been clouded
by declining oil and natural gas prices.
Nabors' business depends on oil exploration and production companies continuing
to pump oil. With the price of oil declining, there is less profit in searching
for more oil. The increasing oil prices that helped moved oil services stocks
up sharply through the first part of 1997 have come backdown, and oil services
stocks have declined as well.
Investors' fears that oil supplies are ahead of demand has meant trouble
for Nabors Industries.
BUSINESS DESCRIPTION
Nabors Industries is the largest land drilling contractor in the world. It
operates 386 land-based rigs and 37 offshore rigs in all major oil producing
areas worldwide. In addition, the company provides ancillary services in
oilfield management, engineering, transportation, and construction. The company
also manufactures, sells, and leases top drivers and oilfield
instrumentation.
Nabors has grown through the acquisition of smaller drilling companies and
a program of fleet upgrades. It leases its rigs on a daywork basis. Dayrates
have stayed at lofty levels up to this point, which accounts for the stellar
earnings performance of Nabors.
FINANCIAL FACTS
Income Statement
12-month sales: $1115 million
12-month income: $136 million
12-month EPS: $1.23
Profit Margin: 12.2%
Market Cap: $2756.8 million
Balance Sheet*
Cash: $3.9 million
Current Assets: $305.8 million
Current Liabilities: $235 million
Long-term Debt: $229.5 million
(*As of Sept. 30, 1997)
Ratios
Price-to-earnings: 19.8
Price-to-sales: 2.5
HOW COULD YOU HAVE SEEN IT COMING?
At the peak, oil services stocks looked solid. It was the #1 ranked industry
sector for relative strength in Investor's Business Daily, "buy"
recommendations were flying out of brokerage houses, and Value Line
rankings were #1 and #2 for the entire industry. Bearish voices were pretty
quiet. However, over on the oil and gas industry
message
board on America Online there were some negative voices. The link between
oil prices and oil service companies is well known, and the drop in the price
of oil would have been expected to move the stocks down.
That said, there are legitimate reasons to believe that some investors have
overreacted to the drop in prices. Whatever the case, the message for investors
is that when stock prices are linked to volatile commodities such as oil,
expect a bumpy ride.
WHERE TO FROM HERE?
In last week's earnings report Nabors fell short of expectations by $0.02
a share. The company also discussed a decline in the number of rigs in use
in the continental U.S. Even so, the company did report that dayrates are
stable and that gross profit margins on rigs in service are expanding. The
management expressed concern over the effects of the drop in oil prices and
natural gas prices. Schlumberger (NYSE: SLB) was equally cautious
in its recent earnings report.
The future for Nabors and other oil service stocks rests on the supply/demand
relationship for oil. While there are government reports showing that oil
supplies are increasing, there are other voices. In last week's
Barron's, oil guru Matt Simmons is quoted as saying that the statistics
on oil supply are wrong and that there is a shortage of oil. He predicts
sharply higher oil prices ahead.
So, it comes down to who you believe. Any investor in this sector should
be ready for a wild ride. There is informed and useful opinion available
on the Oil and Gas Industry
message
board. Before "buying the dip" in Nabors or any other oil services stock,
an evening reading that folder would be well worth an investor's time.
-Mark Weaver, MD
(MWEAV@aol.com)
Check out the Daily Trouble Message Board!
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