2017 has been a brutal year for Nabors Industries (NYSE:NBR) stock. Sure, drilling activity hasn't been particularly robust, but the company hasn't done much to make the best of the situation as it continues to add debt and post worse-than-expected losses. This past quarter was no different as the company failed to meet expectations.
Here's a look at Nabors' most recent results and what the company could do to pull itself out of this funk.
By the numbers
|Metric||Q3 2017||Q2 2017||Q3 2016|
|Revenue||$662.5 million||$630.5 million||$520.0 million|
|Operating income||($140.0 million)||($134.9 million)||($128.9 million|
|Net income||($148.5 million)||($132.9 million)||($111.2 million)|
Investors that look at Nabors are probably routinely pulling their hair out based on the quarterly numbers. Buried within these results is a small business segment that is incredibly profitable: Its fleet of high horsepower AC drive rigs that work in the U.S. This past quarter, these rigs posted a fantastic utilization rate of 78%. Considering that the current rig count in the U.S. is about half of what it was in 2014, this means that these rigs are an in-demand product that should have some pricing power.
Here's the rub, though. This set of rigs is buried under a bunch of dead weight assets sitting on the books that add to operating costs and other expenses. Its SCR drive and offshore rig businesses in the U.S. have utilization rates of 13% and 16%, respectively, and have been like that for the past few years. With all of these undesirable assets just sitting there, it's going to be extremely difficult for the company to post positive net income results.
If you wanted to put a positive spin on it, Nabors' adjusted EBITDA for the quarter was $142.9 million. The most significant contributing factor for the operating income loss is depreciation expenses, which totaled $217 million for the quarter. A large part of that high rate of depreciation has to do with those legacy fleets that aren't adding value today.
Even though management has said that debt reduction is a core corporate strategy, total debt and its leverage metrics continue to get worse. Net debt to capital is now 56%, and its interest coverage -- adjusted EBITDA divided by interest expense -- is just 2.5 times.
Making a splash in the acquisition market
This past quarter, Nabors made two acquisitions. The first was an all-stock deal for Tesco Corporation (NASDAQ:TESO) -- not the British supermarket company, the drilling equipment manufacturer -- and the other was for Norwegian robotics company Robotic Drilling Systems for an undisclosed amount. The idea here is that the company will be able to add these segments to its Rig Services business and should increase the productivity and value for its high specification rigs.
What management had to say
Despite the uninspiring numbers the company put out this past quarter, CEO Anthony Petrello gave the most positive message he could. He believes that even though the company's results don't show it, the foundation is there for improvement down the road.
I believe the steady progression in our operational results, in light of this year's oil price-induced weakness across all of our markets, illustrates the validity of our strategy. Declining global oil and product inventories and better than expected demand should move the oil market close to balance in the near future. Over the next several quarters, we expect to achieve commercialization of several automation and services integration initiatives. As all of these components of our strategy commence, the utilization and margins of our existing fleet continue to improve, and NDS continues to grow, our results should improve meaningfully. This puts us in a good position to resume profitability, reduce debt and restore acceptable returns on capital in the coming years.
What a Fool believes
With its high specification rigs performing relatively well and its upcoming joint venture with Saudi Aramco about to start, there are some positive aspects of Nabors Industries business. For those parts of the company to shine, though, management needs to do some serious house cleaning. Keeping older and legacy rigs that aren't working on the books is an unnecessary cost that continues to bleed the company of profitability.
Nabors would be well suited to do something similar to offshore rig company Transocean (NYSE:RIG). The company has scrapped almost all of its older, less capable rigs such that it can focus on keeping its newer rigs employed and efficiently running. It may result in a massive writedown in a quarter, but it would be beneficial in the long run.