Nabors (IL/A): Raising estimates + fair value to $91 - Goldman Sachs - October 25, 2005
We are raising our 2005-2007 EPS estimates for NBR to $4.04/ $6.05/ $7.20 from $3.80/ $5.00/ $5.80 mainly based on stronger pricing in US land drilling, workover + offshore and accretion from NBR's ~$1 bln newbuild program, partly offset by higher corporate + DD&A expense. NBR's 3Q2005 results showed stronger than expected pricing trends across most businesses. We are also raising our fair value to $91 (9x 2006E EV-EBITDA) from $80 = 36% upside potential, and maintain our IL/A rating, seeing solid upside in NBR shares, but better risk-reward in RIG, DO, BHI, SLB, + SII. We maintain an IL/A rating.
VALUATION: FAIR VALUE SUGGESTS 36% UPSIDE POTENTIAL
We estimate fair value of $91 based on 9x 2006 EV-EBITDA estimate vs. a historical average multiple of 10x. We are lowering our fair value multiple to 9x 2006 EV-EBITDA from 9.5x prior as NBR's 15% ROCE estimated in 2006 is 700 bps above its 5-year average, and we continue to expect multiples to be inversely correlated with returns. On EV-EBITDA, NBR is trading at 6.8x our 2006 EBITDA estimates (5% discount to the offshore drillers) vs, a historical average of 10x (3% discount). On EV-DACF, NBR is trading at 8.5x 2006E DACF estimates (4% discount to the offshore drillers) vs. a historical average of 13.4x (3% premium).
RAISING 2005 - 2007 EPS ESTIMATES ON HIGHER FLEET SIZE AND PRICING
We are raising our 4Q2005 EPS estimate by $0.25 to $1.32 due to higher pricing in US land (+$0.11), Int'l (+$0.03), and US Offshore (+$0.02), partly offset by higher SG&A (-$0.01).
We are raising our 2006 EPS estimates by $1.05 to $6.05 due to higher day rates and fleet size in US land (+$0.70), US well services (+$0.15), US Offshore (+$0.15), and Int'l divisions (+$0.04). The details of our US land estimates are as follows:
(1) average fleet of 278 rigs vs. 261 prior (~$0.20),
(2) average day rate of $18,700 vs. $16,600 prior (+0.90),
(3) partly offset by daily rig opex costs of $8,800 vs. $7,850 prior (-$0.40).
We believe there is more upside than downside to our estimates, as our Int'l pricing assumptions assume modest price + utilization increases.
We are raising our 2007 EPS estimates by $1.40 to $7.20 due to higher day rates and fleet size in US land (+$0.79), US well services (+$0.20), and US Offshore (+$0.21).
UPSIDE TO 3Q2005 RESULTS DRIVEN BY STRONGER PRICING
NBR 3Q2005 recurring EPS of $1.11 was ahead of our/ consensus estimates of $1.00/ $1.01 highlighted by:
(1) stronger Canadian rig count (+$0.05 positive impact);
(2) stronger US land pricing (+$0.03);
(3) stronger Int'l pricing (+$0.03); and
(4) higher US offshore operating income (+$0.03), partially offset by higher operating costs in US well services (-$0.02 negative impact). US LAND DRILLING (45% of revenues)
DAY RATES ACCELERATION CONTINUES:
US land drilling division revenues + operating income were 5% ahead of our estimates. 3Q05 margins per day were up +15% seq +152% yoy, and were $215 (3%) ahead of our estimates. NBR's active rig count was up 6% seq, +17% yoy, and was 2 rigs (1%) above our estimate. Our new estimates assume margins improve to $9,900 in 2006 + in 2007 versus $7,600 in 3Q2005 and a prior peak of $6,200 in 3Q2001.
INTERNATIONAL DRILLING (15%) UTILIZATION + PRICING IMPROVING:
International drilling revenues were 5% above our estimate, with margins 200 bps higher. 3Q05 revenues were up 6% seq, with margins up 290 bps off. Our 2006 and 2007 estimates assume that revenue/ margins increase to $670 mln/ 27.5% in 2006 and to $770 mln/ 29.5% in 2007 from $560 mln/ 25.5% in 2005.
CANADA DRILLING + WORKOVER (15%) RIG COUNT WELL ABOVE EXPECTATIONS:
3Q2005 revenue/ margins were up 71%/ 580 bps yoy, and were +8%/ +700 bps vs. our estimates. Our 2006 and 2007 estimates assume that revenues/ margins increase to $690 mln/ 22% in 2006 and $730/ 22.5% in 2007 vs. $570/ 20.5% in 2005.
US WELL SERVICING (14%) PRICES + COSTS ABOVE EXPECTATIONS:
3Q2005 revenues were 5% ahead of our estimate and +10% sequentially/ +37% yoy. Margins were 400 bps below our estimates, +30 bps seq and +300 bps yoy. Our estimates assume that revenues/ margins are up 28%/ 300 bps yoy in 2006 and +16%/ +150 bp in 2007.
US OFFSHORE DRILLING (5%) OPERATING MARGINS STRONG:
3Q05 revenues were 4% above our estimate, -7% seq/ +24% yoy. Margins were 1700 bps above our ests, +800 bps seq, +1700 bps yoy. Our estimates assume that revenues/ margins are up 26%/ 400 bps yoy in 2006 and +20%/ +100 bp in 2007.
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: Terry Darling and Jerry Revich. |
