Nabors (IL/A): Risk-reward attractive into earnings January 27, 2005
Goldman-Sachs
We are raising our 2004-06 EPS estimates to $1.88/ $2.90/ $3.50 from $1.86/ $2.75/ $3.25 + see above consensus 4Q EPS as a catalyst for improved relative performance near-term. NBR was -7%/-8% vs. land drillers/ OSX in 2004 and is -6%/-6% in 2005. Missed estimates, potential insider selling, disappointing Int'l execution, concerns that US land drilling economics are approaching replacement economics + commodity price anxieties have all contributed.áHowever, NBR now has potential for several qtrs of upward revisions, in our view, Int'l will become a catalyst + there is 34% upside to our $67 fair value estimate. Insider selling is inevitable + not fatal, in our view. We share concerns about US land rig newbuilding, but not at a meaningful level until 2006+. We maintain our IL/A rating, but see favorable relative risk/ rewardáheading into Jan 31st earnings report.
VALUATION: STEEP DISCOUNT TO HISTORICAL AVERAGE Our fair value estimate of $67 is based on 10x 2006 EV-EBITDA, in-line w/ NBR's historical average valuation despite a 15-20% lower tax rate today, with margins in its core US land drilling business still $500-2,500 below levels needed to justify replacement (Exhibits 1 + 2), arguing that we may be too conservative. NBR is trading at 9x/ 8x our 2005-06 EV-EBITDA estimates = discounts of 10%/ 21% to the historical average and a 26%/ 22% discount to the offshore drillers vs. in-line historically. On P-CF, NBR is trading at 9x/ 7.5x our 2005-06 estimates vs. a historical average of 14.5x. On P-E, NBR is at 17.5x/ 14.5 our vs. a historical average of 25.5x.
US LAND DRILLING: 4Q DAY RATES ABOVE CONSENSUS INDUSTRY-WIDE We have raised our day rate assumptions for 4Q2004/2005/2006 by $200 (2%) due to higher sequential day rate acceleration in 4Q2004, as industry sources are pointing to increases of $500 - $1,000 vs. our current assumption of +$600. These include recent earnings reports by RDC + HP as well as industry trade publications. Our day rate estimates assume quarterly 2005 margin increases of +$500/ +$350/ +$250/ +$250, but HP indicated that it sees day rates +$1,000 sequentially in 1Q2005 implies potential upside. For NBR, every $500 = +$0.20 to annual EPS. Our 2006 day rate estimates assume sequential price increases of $100 - $200. NBR derives 42% of operating income from this segment. The EPS impact of our higher assumptions is +$0.10/ +$0.07 in 2005/ 2006 vs. our prior estimates.
US WELL SERVICING: PRICING ALSO IMPROVING RELATIVE TO EXPECTATIONS Our 2005-06 estimates assume hourly rates in NBR's US workover business are +9%/ 6% vs. prior assumptions of +6%/ +0% with rising operating costs, fungibility of scarce labor resources between well services + land drilling segments adding to the upward pressure of late. NBR is adding 60 well service rigs to its fleet starting in June 2005. NBR derives 14% of operating income from this segment. The EPS impact of our higher assumptions is +$0.05/ +$0.07 in 2005/ 2006 vs. our prior estimates.
O CANADA! STRONG C$ + PRICING DRIVING UPSIDE NBR'S aggressive expansion into Canada at the bottom of the last cycle continues to pay off handsomely as margins are benefiting from tight supply/ demand and the softer US dollar, which GS economists are expecting 8-13% below 2004 in 2005. Our current estimates assume that Canadian land margins are +11%/ +0% in 2005/ 2006 vs. our prior estimates of +2%/+0%. NBR derives 19% of operating income from this segment. The EPS impact of our higher assumptions is +$0.06/ +$0.08 in 2005/ 2006 vs. our prior estimates.
INT'L POTENTIAL IS BEING DISCOUNTED Nabors has 10 additional land rigs going to work in Saudi in 2005 at attractive rates of return that suggest a 33% annualized boost in segment operating earnings, according to our estimates. We believe other companies' foreign operations are receiving a higher valuation by the market given better historical execution. While this is not inappropriate, in our view, we think there is multiple upside for NBR if improving foreign earnings become a bigger part of the story, which our estimates imply will be the case heading into 2006. NBR derives 24% of operating income from this segment.
Conference call information: Release on Monday, January 31, 2005 after market close. Conference call on Tuesday, February 1, 2005 at 11 AM EST, domestic dial in 888 694 4676 or internationally 973 9358512. Replay available for one week, beginning at 12:00 p.m. CT on February 1, 2005, dial in 877 519 4471 domestically or 973 341 3080 internationally, access code 5599832.
I, Terry Darling, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. |
