For the past several quarters, Nabors Industries (NBR -1.45%) has been trying to dig out of the downturn in oil and gas drilling activity. After starting to see some small signs of a recovery last quarter, the fourth-quarter results seem to be another step backwards. However, they painted a picture that was a little more grim than the actual operations of the company.
Let's dig into the numbers to see what was going on this past quarter, what Nabors has been up to, and what investors should make of this most recent report.
Image source: Getty Images.
By the numbers
| Results | Q4 2016 | Q3 2016 | Q4 2015 |
|---|---|---|---|
| Revenue | $539 million | $520 million | $693 million |
| Operational income | ($392.7 million) | ($128.9 million) | ($223.9 million) |
| Net income | ($335.6 million) | ($111.2 million) | ($163.6 million) |
| Earnings per share | ($1.18) | ($0.39) | ($0.39) |
Data source: Nabors Industries earnings releases.
It would appear that this past quarter was a step backward for the company as losses stacked up. It should be noted, though, that the company took about $245 million in one-time after-tax charges related to asset impairment and the retirement of some of its older rigs. For anyone that has been keeping tabs on the industry, these charges have been pretty common and aren't that big of a deal. If we were to strip out these charges, net loss for the quarter would have been a little closer to $0.31 per share.
From an operations standpoint, Nabors was the tale of two business segments. Its U.S. business made some good strides as average rigs working improved from 57.3 in the third quarter to 72.1. However, margins for rigs continue to slip to $8,464 per day compared to $12,274 per day this time last year. This margin decline is expected, though. Those rigs this time last year were on contracts that were signed when there were less available rigs. Today, though, there is still a large inventory of idle rigs that gives producers some negotiating power. As this inventory of idle rigs gets put to work, then we can expect to see margins increase again.
We're on the exact opposite side of the spectrum for Nabor's international segment as total rigs in the field declined, but margins increased. Basically, the international rig segment is in the same situation as the U.S. market was a year ago as rigs on favorable rates roll off contract and go idle.
Data source: Nabors Industries earnings report. Chart by author.
From a balance sheet and cash flow perspective, this was another quarter of treading water. The company raised about $1.1 billion in debt over the past couple months, but most of that has been for refinancing older debts. Debt reduction should probably still be a priority for Nabors right now given a net debt balance of $3.3 billion, but the company is in the middle of trying to upgrade large portions of its fleet to meet the specifications for drilling today. Hopefully, once these upgrades are complete, management will get back to significantly reducing its debt load.
The highlights
There were two big events worth mentioning. The first was Nabors has signed a joint venture agreement with Saudi Aramco to manage and operate a fleet of drilling rigs in the Kingdom of Saudi Arabia. The venture will involve Nabors and Saudi Aramco contributing its current fleet in the Kingdom to the joint venture. This will allow Saudi Aramco to utilize the advanced drilling technologies developed by Nabors, and it will give Nabors a more permanent foothold in the Kingdom and room for growth with new rigs and rig services. Saudi Arabia wants to double its natural gas well count by 2025 to fuel its domestic power generation, so there is ample opportunity here for Nabors.
The other big move was the signing of a memorandum of understanding with oil services company Weatherford International (NYSE: WFT). This deal, which was signed at the beginning of the month, will look to market Nabors' rigs with Weatherford's well construction, pressure pumping, and its software and engineering products and services. The idea is to streamline well construction and design for producers. This was one of the first big moves made by Weatherford's new CEO, Krishna Shivram.
What management had to say
CEO Anthony Petrello, on the steps that Nabors made in 2016 to improve results:
2016 was a challenging year with the U.S. rig count reaching its lowest point since rig counts were first published. Nabors was proportionally impacted with our working U.S. land rig count declining as much as 81% from our late 2014 high. Our U.S. rig count bottomed in the second quarter while our international count appears to have done so at the end of 2016. We believe the fourth quarter should mark the low point in our financial results both in North America and internationally. Despite the challenges of 2016, we delivered positive free cash flow while funding the continued upgrading of our U.S. fleet. We also were able to implement our new operating system, maintain our critical engineering projects, such as the development of automation initiatives, and keep our dividend commitment. We achieved this through stringent cost control, disciplined capital allocation and efficiencies derived from the streamlining of our operations, engineering and support organizations. We also deployed a significant number of new and upgraded rigs and rolled out our SmartRig systems and introduced our iRig technology. These new technologies represent a game changer in the implementation of a high degree of automation of both surface and downhole drilling systems.
What a Fool believes
From an operational standpoint, Nabors is looking much more healthy than it did a year ago, as it is retiring some of its older rigs or upgrading those that can still be utilized in today's oil and gas industry. As it has been for several years, debt and liquidity still look to be a concern, but management is looking more and more like it is putting itself in a position to start hacking away at that debt load very soon. There are still some hurdles that the company needs to overcome before it really looks like a great investment, but it does look like it is heading in the right direction.
