When Nabors Industries (NBR -6.71%) introduced its PACE rig to the market a few years ago, it was an immediate hit with the shale drilling industry because it did exactly what they wanted: delivered high horsepower and the ability to easily navigate a drilling pad to quicky move from well to well. When you look at the company's earnings, though, it's hard to find its impact. Let's take a look at the company's most recent results and figure out what's keeping these rigs from leading Nabors to new heights.
Image source: Nabors Industries investor presentation.
By the numbers
| Results (in mil, except per share data) | Q3 2016 | Q2 2016 | Q3 2015 |
| Revenue | $520.0 | $517.1 | $812.4 |
| Operational income | ($128.9) | ($227.7) | ($331.8) |
| Net income | ($111.2) | ($184.6) | ($295.8) |
| Earnings per share | ($0.39) | ($0.65) | ($1.02) |
Data source: Nabors Industries earnings release.
The one promising note that can come from these results is that Nabors was able to significantly pare down its operational losses, while only seeing a rather significant decline in revenue compared to this time last year. The biggest reason for this was a reduction of G&A and other ancillary costs that saved the company $265 million. It also helps that the company is no longer carrying losses from its equity interest in C&J Energy Services, which filed for Chapter 11 bankruptcy in the second quarter.
In just about every business segment, adjusted operating losses widened from both the prior quarter and the same time last year. While the company did note that the total amount of rig activity -- as measured in rig years -- increased compared to the second quarter, lower rig margin took a bite out of earnings. The most notable was in its U.S. operations, which saw rig margin decline from $12,274 per day this time last year to $8,480 per day this past quarter.
Data source: Nabors Industries earnings releases. Chart by author.
From a cash flow and balance sheet perspective, the company didn't really hurt or help its situation much. Nabors reduced its total debt load ever so slightly to $3.47 billion, but it mostly dipped into its cash reserves to do so. With that added to the losses that take a bite out of shareholder equity, its debt metrics did creep up a little. Considering the operating environment for rig owners, though, we can probably call this a win for the company.
What management had to say
If there was one bright spot for the company, it's that new producers are lining up to use its new rigs. According to CEO & executive chairman Anthony Petrello, demand for its PACE rigs is extremely high.
After a challenging downturn, we are experiencing significant utilization increases in our Lower 48 market, although spot market pricing continues to remain competitive. Similarly, our international markets are showing signs of impending activity increases. We are very encouraged by our customers' acceptance of our newest rig, the PACE®-M800. We now have contracts for the first four M800s, with two already deployed, and awards for two more. Likewise, the high demand for our PACE®-X rigs has brought the utilization of that fleet to over 80%. This increased demand is beginning to exert upward pressure on pricing for these top-end rigs, although, in the near-term, our fleet average margins will remain under pressure due to expiring long-term contracts. We are also implementing a cost-effective plan to enhance other classes of our existing AC rig fleet to incorporate most of the features of these rigs. Regardless of how the recovery unfolds, we expect our reduced cost structure, improved performance and our various technology initiatives to significantly increase operating leverage across our global fleet.
All of this sounds great, but it does raise the question of what it will do with the rest of its fleet that can't be upgraded. Today, there are about 47 rigs that aren't even AC power capable, and only two of them are active. With every passing day, demand for these rigs diminishes. It would seem that the best course of action would be to retire them and focus the entire company's efforts on these higher-demand rigs.
What a Fool believes
There are some signs of a very effective, profitable company inside Nabors Industries. The problem is that it's buried under a bunch of legacy equipment, a heavy debt load, and some misplaced investments. If the company were to start ridding itself of some of its legacy equipment that doesn't have much use in today's market and trim its debt load, then Nabors would be worth a look as an investment. Based on the results it's putting out today, though, it's probably best to take a wait-and-see approach because there are still some things the company needs to figure out.
