Nabors Industries (IL/A): Opportunity to accumulate shares in the making -Goldman Sachs - February 08, 2006
We are raising our 06/07 EPS estimates for Nabors to $6.23/$8.35 from $6.05/$7.20 given our higher E&P spending growth outlook of +25%/+15% vs + 20%/ +10% previously. We are also raising our fair value to $96 (6.5x 2006E EV/ EBITDA) from $91. We acknowledge potential for additional OSX weakness near-term on concerns over US natural gas and lack of catalysts, but see another opportunity to accumulate shares - not the end of the cycle - in the making. Strong oil prices, fuel switching dynamics (i.e. resid floor), potential for hotter than normal summer and hurricane disruptions - not to mention continued strong economic demand - still render a sustained sub-$7 US gas price scenario a low probability outcome, in our view. We believe producers need to believe a sub-$7 scenario could be sustained through winter 2006-07 to meaningfully cut back US drilling activity. We maintain our IL/A rating on NBR.
VALUATION
We estimate fair value of $96 based on 6.5x 2006 EV/EBITDA vs. a historical average multiple of 10x. On 2007E EV/EBITDA, NBR is trading at 4.9x, a 15% discount to both the offshore drillers and to well servicing company BAS and a 50% discount to the historical upcycle multiple of 10x.
RAISING 2006-2007 ESTIMATES
We are raising our 2006EPS estimates by 3% to $6.23 due primarily to higher day rates and fleet size in Canada (+$0.20), Alaska (+$0.05), US well servicing (+0.16), Other (+$0.15) and International divisions (+0.09), offset by higher expenses in US Land (-$0.21) and higher tax rate (-$0.26).
The details of our US land estimates are as follows:
(1) average fleet size of 279 rigs vs. 278 prior offset by
(2) average day rate of $18,710 vs. $18,740 prior and
(3) daily rig opex costs of $9,040 vs. $8,809 prior.
We are raising our 2007 estimates by 16% to $8.35 due to higher day rates and fleet size in US land (+$0.76), Canada (+$0.21), US well services (+$0.22) and US offshore (+$0.29) and offset by higher tax rate ($-0.36).
The details of our US land estimates are as follows:
(1) average fleet size of 380 rigs vs. 312 prior offset by
(2) average day rate of $20,028 vs. $19,563 prior and
(3) daily rig opex costs of $9,763 vs. $9,622 prior
4Q05 RESULTS AHEAD OF EXPECTATIONS.
Nabors 4Q5 recurring EPS of $1.35 was above our $1.31 and consensus $1.29 driven by:
(1) strong Canadian land drilling (+$0.09 positive EPS variance) and US well servicing margins (+$0.02);
(2) better than expected results in Other Operating Segments (boats, top drives, MWD; +$0.03); and
(3) higher net interest and other (+$0.06) offset by:
(4) US land drilling margins of $8.6k vs. our expectation of $8.9k (-$0.06 negative EPS variance);
(5) lower than expected International Drilling (-$0.03) and US offshore operating income (-$0.01); and
(6) tax rate of 27.5% vs. our 25% (-$0.04).
NBR consolidated EBITDA was 3% above our expectations.
WHAT TO WATCH FOR.
(1) Management guidance for 2006E EPS of >$6 based on 275 rig years for Lower 48 Land in 2006 at an average margin of $9,700/day vs. $8,900 in 12/05.
(2) NBR expects to have 310 drilling rigs operating in lower 48 by year end 07 following approximately 60 newbuilds and refurbishments.
(3) Management suggested possibility for sale/separation of Canrig, Ryan and Epoch, which collectively generate EBIT of ~$100mm after adjusting for intercompany eliminations. Assuming 10-15x EV/EBIT, which is in line with other service/ equipment companies (NBR is at 8-9x), implied value is around $1bn-$1.5bn.
(4) NBR currently has 82 firm contracts for newbuild PACE rigs.
(5) Offshore boat business is non-core and a likely candidate for divestiture.
(6) Tax rate seen at 29% for 2006.
IMPLICATIONS FOR THE INDUSTRY.
(1) Management believes current upcycle conditions will continue until at least 2009.
(2) Despite weakness in gas prices, market appetite for term contracts continues to increase. management intends to continue to add capacity - beyond those rigs already announced - by newbuilding and refurbishing.
(3) NBR recently signed a 3000hp land rig at a dayrate of $31k = cash margin of $17k-$18k.
(4) Land rig pricing in California weaker than in some other areas.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Jason Gilbert, Terry Darling. |
