For the first time in years, Nabors Industries (NBR 0.75%) reported earnings results that showed improvements where it counts: its debt load. While the reported earnings results for the second quarter weren't exactly encouraging, there were a few things buried in its income statement and operational update that show the company may be headed in the right direction.
Let's take a look at what happened in Nabors' most recent quarter and what an improving business means for investors over the long haul.
Image source: Nabors Industries.
By the numbers
| Metric | Q2 2018 | Q1 2018 | Q2 2017 |
|---|---|---|---|
| Revenue | $758.6 million | $734.7 million | $630.9 million |
| Operating income | ($171.9 million) | ($120.0 million) | ($134.9 million) |
| Net income | ($202.4 million) | ($144.2 million) | ($132.9 million) |
| Diluted EPS | ($0.61) | ($0.46) | ($0.46) |
DATA SOURCE: NABORS INDUSTRIES EARNINGS RELEASE. EPS = EARNINGS PER SHARE.
It's a bit strange to see Nabor's top and bottom lines move in opposite directions. While Nabor's competitors haven't exactly been recovering quickly, at least their earnings numbers are showing signs of improvement. It looks as though the two things that keep holding Nabors' results back are increased depreciation expenses and $69 million in losses and transaction costs associated with the sale of an offshore rig in the Middle East. If we strip out these costs and look at Nabors' results on an adjusted EBITDA basis, there are clear signs of improvement in critical business segments such as U.S. drilling.
Data source: Nabors Industries earnings release. Chart by author.
From an operations' standpoint, Nabors continues to rise the same trends that have dominated its earnings results in recent quarters. Utilization rates for its higher-specification rigs continue to rise, but its older legacy equipment remains idle. Of its 96 legacy rigs in its onshore U.S. business, only 12 of them are currently contracted. This has been the case for years now, and it's a wonder why management insists on keeping these rigs around instead of taking them off the books.
The most promising news this quarter was that management was able to (finally) take a bite out of its debt load. Between the sale of a couple international rigs and issuing equity, it was able to raise about $640 million that was used to pay down some term loans coming due in 2019 and increase its cash position. At the end of the quarter, its net debt-to-capital ratio was down to 51% and its debt-to-EBITDA ratio was down to 7.4 times. By no means are those good financial metrics, but they are an improvement.
What management had to say
A large portion of management's press release statement was centered around the financial moves to clean up the balance sheet. Beyond that, though, CEO Anthony Petrello highlighted some of the increase in drilling activity and contract wins in recent months that should lead to further improvements.
During the second quarter, we secured awards for 13 incremental rigs globally. We signed three-year contracts for six upgraded rigs with one operator to be deployed progressively through January 2019, and received awards for three more, all for operations in the Permian. We are in discussions for additional upgraded rigs with operators in multiple basins in the Lower 48. In the international markets, we were awarded four incremental rigs and are negotiating with customers for additional rigs. Across our global markets, demand for high-specification rigs is increasing. With our inventory of readily available rigs internationally and upgradable rigs in the Lower 48, this should translate into a high success rate.
Baby steps on a long journey
To see management take tangible steps to reduce its debt load is a breath of fresh air. It's been saying for a half-decade that debt reduction has been its No. 1 priority, but this was the first time we have actually seen a lower debt level and improving leverage metrics.
As encouraging as this is, it is still one small step among many that the company needs to take to become a stock that is truly investment worthy. This debt load is still too high for comfort in a cyclical industry like oil and gas services, and it remains a surprise that the company continues to let these legacy rigs stay on the books and drag on profitability. These persistent issues make it hard to justify an investment in this stock.
