3 Solid Takeaways From Nabors Industries Ltd's Earnings

Nabors Industries provided solid examples of an improving market, making the stock attractive even after the large post-earnings jump.

Feb 21, 2014 at 8:41AM

The land drilling market is clearly improving according to the latest news from Nabors Industries Ltd (NYSE:NBR). Likewise, the stock surged to 52-week highs based on the improvements in the sector, leaving a dilemma for potential investors.

The land-based driller saw improvements on virtually every front, whether drilling or completion services or domestic versus international areas. The driller didn't even see some of the normal seasonality that typically hits during the last quarter of the year.

Nabors competes against Helmerich & Payne, (NYSE:HP) and Patterson-UTI Energy (NASDAQ:PTEN), which had both previously reported solid numbers, sending those stocks to multi-year highs. Due to Nabors having a business focus beyond building and operating drilling rigs, its stock hadn't performed as well prior to the post-earnings lift. The company provided the following takeaways during the earnings report:

International margins surpass 2008 peak
While the market wasn't paying attention with the stock trading mostly flat for 2013, Nabors generated average margins of $15,884 per rig day in the international segment. The number incredibly surpassed 2008 margins, which was the previous best year for that unit. The company expects weakness during the first quarter due to the dry-docking of a jackup rig, but starting in the second quarter the numbers should improve. The company previously announced new deployments and contractual rate increases impacting more than 30 rigs in the next five quarters.

For Helmerich & Payne, the international operations are only a fraction of the domestic drilling rigs. As an example, the domestic land operations posted operating income of $251 million in comparison to the $12.8 million for the international operations. Regardless, the average rig margin per day declined to only $10,342 during the year-end quarter. The margin level isn't directly comparable, with Helmerich pulling out the offshore rigs into a different segment.

Improving U.S. rig demand  
The domestic drilling market is quietly improving according to the results from Nabors and Helmerich. In both cases, customers are starting to order new premium rigs, including plans to deploy 20 PACE-X rigs from Nabors in 2014. Conversely, Helmerich received orders for 35 premium FlexRigs since the start of October. Patterson-UTI saw strong demand as well, with contracts for seven new APEX rigs since the last earnings release.

In total, Nabors received secured contracts for 40 new and 11 upgraded rigs during 2013 that amounted to an aggregate of over 140 rig years and $2.8 billion in revenues.

Patterson-UTI plans to build 20 of the premium APEX rigs during 2014 after building only 11 in 2013. As of the earnings release back on Feb. 6, the company had half of the new rigs under contract. Demand improved so much for Patterson-UTI that the fleet of old, electric rigs saw increasing interest. The company now operates 124 of the high-specification APEX rigs with over 95% utilization during 2013.

Improved year-over-year results
Maybe the biggest takeaway from the earnings report for Nabors was the bottoming of the market during the fourth quarter. The company reported that both adjusted net income and EBITDA improved over the comparable period last year. Nabors generated net income of $159.6 million in the fourth quarter of 2013, compared to $153.7 million for the corresponding quarter of 2012. While full-year EBITDA declined from 2012 by roughly $310 million, the fourth-quarter numbers grew by $15 million over last year.

Helmerich saw similar increases in operating income with the all-important domestic unit generating income of $251 million for the Dec. quarter of 2013 compared to $235.8 million in the prior year. The company only reported a utilization rate of 84%, providing more upside for operating income in the future.

Bottom line
With a potential bottom in the domestic drilling market and record international margins, Nabors Industries appears primed for a rebounding market. Unfortunately for investors new to the story, the stock has already jumped to yearly highs. The good news is that the stock hasn't soared to the same extent as Helmerich & Payne or Patterson-UTI, leaving it trading around 13 times forward earnings. The number appears very reasonable, especially compared to the 18x forward earnings of Patterson-UTI.

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