Nabors Industries, Ltd. (NBR): Solid 4Q results but 1Q2008 bottom in US land is not a guarantee - Goldman Sachs - February 07, 2008
What's changed
Adjusted 4Q2007 EPS of $0.70 was above our estimate of $0.69 and below consensus of $0.73. We adjusted our 2008 EPS to $3.24 from $3.26, driven primarily by lower operating income for certain segments. Our 2009E EPS is unchanged. We raised 2010E EPS to $3.81 from $3.76, mainly after adjusting for tax rate, share count, and contract drilling operating income.
Implications
(1) We remain Neutral rated on NBR shares. While we believe the risk/reward is tempting, we continue to think it is too early.
(2) There is still risk to NBR’s US land drilling results, in our view, and we are reluctant to assume that Lower 48 margins will trough in 1Q2008, as management has indicated. We are concerned with the number of Nabors rigs rolling off high priced contracts in the first half of 2008, which is likely to lead to margin compression through the first three quarters. We also believe there could be additional downside to leading edge dayrates due to the following factors: current utilization is in the low to mid-70% range, a level that has historically been characterized by declining rates; front-end loaded newbuild additions of roughly 50 for 2008; and margins are still healthy enough to incent contractors to lower rates to maintain utilization, in our view.
(3) Nabors’ international business continues to be plagued by delays. We believe the international segment is the future of Nabors and will begin to show potential in 2Q2008 results, following the start-up of several new contracts. Meeting expectations will be especially important given past disappointments and management’s continued optimism, which we share.
Valuation
NBR trades at 7.6X/6.4X 2008E and 6.5X/5.5X 2009E EV-DACF/EV-EBITDA vs. the offshore driller averages of 7.2X/5.8X and 6.3X/4.9X. We see 11% upside potential to our $32 12-month price target (8.2X 2008E EV/DACF).
Key risks
Risks include capacity additions or a decline in commodity prices. |
