When Nabors Industries (NYSE:NBR) didn't meet expectations in the first quarter, management let everyone know it wasn't satisfied with the results and pledged to do better. This past quarter, though, the company didn't quite meet expectations again. While part of that performance has to do with the market, some of the blame has to be on the things that Nabors management is (or is not) doing.
Here's a look at Nabors' most recent earnings results and what needs to happen in the upcoming quarters if the company wants to get back in Wall Street's good graces.
By the numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$630.5 million||$563.5 million||$517.1 million|
|Operating income||($134.9 million)||($173.2 million)||($227.7 million)|
|Net income||($132.9 million)||
Overall, Nabors' results were frustrating for investors betting on the rebound in shale drilling across the United States. One would assume that Nabors, with its highly desirable fleet of PACE rigs, would benefit immensely from the more than doubling of the active rig count since the bottom of the market in May 2016.
It has, in fact, benefited from this rebound in shale drilling. Over the past year, the utilization rate for Nabors' AC drive rigs has increased from 25% to 50%. Even more impressive is that its AC drive rigs with more than 1,500 horsepower have a utilization rate of 72%. The reason the uptick in high spec usage hasn't translated to the bottom line is that the company still has a lot of undesirable rigs in its fleet that eat up operating cash. Management has been shedding some of these less capable rigs, but not quickly enough.
This quarter is also a particularly challenging one for Nabors because it has a large fleet of rigs in Canada. The second quarter is a seasonal low because of muddy conditions and restrictions of heavy equipment on roads. We should see this number tick back up in the coming quarter as Canada's oil and gas business shifts from spending on oil-sands projects to conventional and shale drilling.
Perhaps the most positive news in this earnings report is the sequential uptick in international drilling activity. This is the first time in two years we have seen an increase in this part of the business. Much of that gain came from an uptick in gas drilling in Saudi Arabia. Late last year, Nabors signed a joint-venture deal with Saudi Aramco that should lead to higher rig utilization and further growth in the kingdom. The venture has yet to close, but growth in the international segment shows that drilling activity in places like Saudi Arabia are on the upswing and should bode well for this joint venture.
The most frustrating thing of all, though, is that Nabors' balance sheet continues to deteriorate. Even though it did generate operating cash flow in the quarter, it has upped its capital spending lately to construct new high-specification rigs instead of paying down debt. The company's debt metrics continue to decline such that its debt-to-capital stands at 55% and its net-debt-to-adjusted EBITDA ratio was 6.6. These levels aren't conducive to a profitable business in a cyclical industry. Perhaps as the market for rigs tightens and margin improves, Nabors can start whittling away at this debt load. However, it doesn't appear to be as much of a management priority as it probably should.
What management had to say
CEO Anthony Petrello gave an optimistic outlook for the rest of the year for both its U.S. and international business:
The positive momentum in the U.S. combined with our strong performance allowed us to deploy several rigs during the quarter. In the U.S. drilling segment, we reversed the negative trend in margins. Additionally, we expect sequential margin increases going forward as a result of improved pricing and cost reductions, coupled with the deployment of incremental new builds and SmartRig upgrades. Internationally, our margins recovered from the material cost and lost revenue impact during the first quarter in one of our major markets. Finally, I am excited with the opportunities presented by our joint venture with Saudi Aramco, officially named Sanad. We expect to commence operations within the next few months.
What a Fool believes
Nabors' business looks to be in the very early innings of a turnaround. It has a fleet of quality rigs in high demand around which management can build a profitable business. However, it still has a lot of fat to trim, both regarding outdated equipment and debt, before it will look like an investment-worthy business again.
In the coming quarters, management expects to see an increase in margin as some rig contracts come up for renewal and several rigs under construction get put into service. Let's hope management will then finally pivot to repairing the balance sheet.