Dain on Nabors:
NBR:SB-Avg;NEW RIG FIXTURES IN $16.5K TO $18K RANGE, CYCLE STILL HAS LEGS
There has been a worry lately among investors that for oilfield services, the
party is over. We do not think this is true. We are seeing the same mid-cycle
situations that would be expected and have been seen in other cycles. But we
do not believe it is the peak of the cycle in terms of time or stock price
appreciation.
What is being seen is the transition of margin expansion go from the oil
company to the service company. Last cycle, commodity prices peaked ten
months before the stocks did and a year and a half before activity did. When
the margins started to move from the producer to the service company, the
margin expansion was dramatic and so was the stock move. Birth can be seen as
the beginning of the end too, but the goal here is to pick stocks rather than
predict events out farther than the market can reasonably discount.
Don not misunderstand--when Nabors Industries puts out a rig, with no top
drive, to an E&P company in South Texas at $16,500 per day, we are farther
down the track than we were a year ago when that same rigs got closer to
$8,000 per day. But 30% of the land rig fleet is still idle and sitting in
yards, waiting to be upgraded or refurbished. When you look at the number of
yards currently staffed and in operation by the larger contractors, it will
take approximately two years just to get all of those rigs out and working,
and at these dayrates, it is economic.
At $16,500 per day without a top drive puts this in the realm of $19,000
per day with a top drive. Assuming approximately a $6,500 per day operating
cost for most lower-48 rigs, that margin is significantly higher than the
$3,500-$3,750 per day we are estimating for Nabors in the current quarter. We
understand that it will take time for the overall fleet to move its average
rate up, but this is the point in the cycle when such pricing accelerates.
Last cycle many investors where upset and concerned when the offshore
development and construction cycle was cut short. Every cycle cuts activity
short. That is the definition. But so far, there has not been a development
and construction run this cycle. We have not starting hooking a lot of things
up. Natural gas production is still declining, even in the face of a rig
count up almost 50% in the last twelve months. If the slowing economy drops
demand, how long will that slowdown last.
Does anyone believe that the long-term demand curve for natural gas has
turned negative? We have all seen in the past three years what happens to
natural gas production when drilling slows. None of this even touches on the
international sector, which has been moribund for almost three years and is
not even close to a peak. It barely has its training wheels on.
We understand the need for objective analysis and dispassionate investment
opinion as well as anyone. We do understand that this is a cyclical business.
It may be that in hindsight, the cycle rolled over in the fourth quarter of
2000. But if that is the case, then the recovery should be in sight.
While the shakeout of the economic slowdown occurs, farsighted investors
should be looking for recovery plays with strong fundamentals and market
drivers. Energy seems to represent the best of those conditions. Nabor
Industries continues to offer some of the best, most operationally leveraged
opportunity in the sector, driven by rig contracts such as the one mentioned
above.
Stock Opinion
Our Strong Buy-Average rating on NBR shares is based on the strength and
diversity of the company's asset base and operations, which should allow for
longer cycle benefits and greater upside to earnings and cash flow as the
recovery cycle continues.
Our new $80 price target is based on a 25 multiple of our 2002 EPS
estimate. We view this valuation as conservative given the historical trading
ranges during recovery cycles.
Company Description
Nabors Industries, Inc. actively markets more than 500 land drilling and 680
land work-over and well-servicing rigs worldwide. Offshore, Nabors Industries
operates 37 platform, 11 jackup, and four barge rigs in the Gulf of Mexico
and international markets. The company also operates 30 active marine vessels
in the Gulf of Mexico. In addition, it manufactures top drives and drilling
instrumentation systems and provides comprehensive oilfield hauling,
engineering, civil construction, logistics and facilities maintenance, and
project management services. |
