Nabors Industries Ltd.
May 25, 2012
Spring
Equity Research
Nabors Industries Ltd.
As the world’s largest land drilling contractor, Nabors
Industries Ltd. (Nabors or the Company) owns a fleet of
approximately 500 land drilling rigs and 750 land workover
and servicing wells. Their land operations are
supplemented by their offshore rigs, which include 39
platform rigs, 12 jack ups and 4 barge drilling rigs in the
United States and multiple international markets. In
addition, Nabors also provides hydraulic fracturing,
cementing, nitrogen and acid pressure pumping services.
Nabors also manufactures top drives and drilling
instrumentation systems and provides comprehensive
transportation, engineering and facilities maintenance
services around the world.
Investment Thesis
Despite facing a challenging natural gas market in North
America, Nabors Industries continues to demonstrate
incredibly strong revenue growth, which came in at 31%
higher year over year for the first quarter 2012. Mr.
Petrello, the Company’s new CEO, is also a potential
catalyst for growth. His commitment to restructure the
organization around their core strengths, drilling and
production, confirms management’s renewed focus. In
addition to strong fundamentals, trading nearly fifty percent
below its 52-week average makes Nabors Industries a strong
buy with a price target of $26.82.
12
Nabors Industries Ltd. [NYSE: NBR]
Rating: BUY
Price (as of May 25): $13.82
Price Target: $26.82
% Upside: 94%
Sector: Energy
Industry: Energy Equipment & Services
Sub Industry: Oil & Gas Drilling
Market Data
52-Week Range: 11.05 – 28.50
Market Cap. (B): 4.06
D. Shares Out. (M): 290.3
Avg. Daily Volume: 7,349,440
Beta: 2.32
Dividend Yield: 0%
Financial Snapshot
USD (mm) 2010 2011 2012E 2013E
Revenue
4.29
6.35
6.88
7.82
EPS
.30
.77
2.28
2.49
Consensus
2.20 2.55
Analyst: Julie M. Heigel
Heigel.193@osu.edu
(330) 388-7902
1
Nabors Industries Ltd.
May 25, 2012
Table of Contents
Company overview ............................................................................................................................. 3
BUSINESS SEGMENTS.........................................................................................................................3
BUSINESS STRATEGY AND VALUE DRIVERS.................................................................................5
Investment thesis ................................................................................................................................. 7
MACRO ENVIRONMENT ....................................................................................................................7
SECTOR ANALYSIS .............................................................................................................................9
FINANCIAL ANALYSIS ..................................................................................................................... 12
VALUATION ANALYSIS ................................................................................................................... 13
RISKS AND CONSIDERATIONS........................................................................................................... 14
conclusions .............................................................................................................................................15
APPENDIX A .................................................................................................................................................16
List of Figures:
Figure 1: Actively Marketed Rigs by Region.................................................................................................3
Figure 2: 2011 Revenue by Segment.............................................................................................................4
Figure 3: 2011 Contract Drilling Composition..............................................................................................4
Figure 4: 2012 Q1 Revenue by Business Line ...............................................................................................5
Figure 5: 2012 Q1 Revenue by Segment .......................................................................................................5
Figure 6: Q1 Rig Years 2012 vs. 2011...........................................................................................................6
Figure 7: Growth Scenarios for Global Energy Demand ...............................................................................7
Figure 8: U.S. Crude Oil Inventory ..............................................................................................................8
Figure 9: World Oil Supply Capacity Growth ..............................................................................................8
Figure 10: Historical Crude Oil Front Month Future Prices ..........................................................................9
Figure 11: Natural Gas Spot Price (Henry Hub) ..........................................................................................9
Figure 12: Crude Oil Spot Price (Brent) .......................................................................................................9
Figure 13: Energy 1-year Performance Relative to S&P 500 ........................................................................ 10
Figure 14: Baker Hughes Rig Count vs. Oil & Gas Drilling......................................................................... 11
Figure 15: Key Financial Ratios for Nabors Industries Ltd. ........................................................................ 12
List of Tables:
Table 1: Operating Segment Restructuring ...................................................................................................4
Table 2: Energy Sub-Industry Relative Performance ................................................................................... 11
Table 3: Nabors Industries Valuation – Relative to S&P 500 ....................................................................... 13
Table 4: Nabors Industries Valuation – Relative to Industry........................................................................ 13
Table 5: Nabors Industries Valuation – Absolute ....................................................................................... 14
APPENDIX A
Exhibit A-1: DCF...................................................................................................................................... 17
Exhibit A-2: Implied Equity Sensitivity Analysis .......................................................................... 17
Exhibit A-3: Income Statement Forecasts ..................................................................................... 18
Exhibit A-4: Nabors Industries Balance Sheet............................................................................... 19
2
Nabors Industries Ltd.
May 25, 2012
Company overview
Nabors Industries began operations in 1987 under the current management team as a contract land drilling
service provider on the North Slope of Alaska, Western Canada and in the Rocky Mountain region of the
United States. The Company has since then expanded both their service offerings and also their
geographical presence. Nabors actively markets a fleet of 500 land drilling rigs in the U.S. Lower 48
States, Alaska, Latin America, the Far East, Middle East, Commonwealth of Independent States and
Africa. All 750 workover and well-servicing rigs are located in the US Lower 48 States and Canada. The
Company’s offshore drilling operations is comprised of 39 platform rigs, 12 jack ups and 4 barge drilling
rigs. Approximately 50% of these rigs are actively marketed in the US Gulf of Mexico, with the
remainder primarily positioned in the Middle East.1
Figure 1: Actively Marketed
Rigs by Region
900
Workover
750
Offshore
600
Onshore
450
300
150
0
United States
Canada
Middle East/Africa
Latin America
Far East
Source: Nabors Industries Online – Investor Relations
BUSINESS SEGMENTS
Under the leadership of new CEO Anthony Petrello, Nabors is streamlining operations in the formation of
two business division: Drilling and Rig Services, which will include all of the Company’s drilling and rigrelated operations; and Completion and Production Services, which will consist of well servicing and coil
tubing rigs, and fluids management and pressure pumping services. The Company began reporting results
based on these two divisions as of the first quarter of 2012. Prior to this restructuring, Nabors reported
operating revenue by Contract Drilling, Pressure Pumping, Oil and Gas, and Other Operating Segments.
Contract Drilling included all drilling, workover and well-serving operations, on land and offshore. The
Pressure Pumping operations previously encompassed hydraulic fracturing and downhole surveying
services, and Oil and Gas comprised the Company’s oil and gas exploration and production operations.
Lastly, segments engaged in drilling technology and top drive manufacturing, directional drilling and rig
instrumentation software were included under Other Operating Segments.
1
Nabors Industries Online – About Nabors http://www.nabors.com/Public/index.asp
3
Nabors Industries Ltd.
May 25, 2012
The Company reported total revenue of $6.12 billion in 2011, an increase of an impressive 47% over
2010. As depicted below in Figure 2, Contract Drilling contributed almost 70% of total revenue or
approximately $4.4 billion. Of this $4.4 billion, the Company’s US Lower 48 Land Drilling operations
added $1.7 billion, with the second largest component of revenue derived from US Land Well-servicing
operations2. Moving forward it is important for investors to note the drastic shift in how revenue by
operating segment will be reported. Under the restructuring, these lines of business will be reported under
either Drilling and Rig Services of Completion and Production Services as detailed below in Table 1.
Figure 2: 2011 Revenue by Segment
1%
Figure 3: 2011 Contract Drilling
Composition
Contract
Drilling
11%
Pressure
Pumping
19%
Oil and Gas
69%
U.S. Land
U.S. Well-servicing
25%
39%
Alaska
13%
Other
3%
16%
4%
U.S. Offshore
Canada
International
Source: Nabors 2011 10-K
Table 1: Operating Segment Restructuring
Drilling and Rig Services
Completion and Production
Services
Land Drilling
Fluids and Manufacturing and
Disposal
Understanding this restructuring is
critical to understanding reported
revenue moving forward.
Workover and well-services which
formerly comprised nearly 30% of
Contract Drilling will now be
Offshore Drilling
Coiled Tubing
reported under Completion and
Rig Equipment
Workover and well-services
Production Services. Likewise,
Specialty Rigs
Fluid Storage
drilling software technology will
Directional Drilling
Fluids and Materials
now be reported under Drilling and
Transportation
Rig Services instead of Other
Drilling Software
Operating Segments. Investors
Technology
need to be cognizant of these
changes when comparing trends moving forward. Nabors reported revenue for the first three months
ended March 31, 2012 as compared to first three months ended March 31, 2011 under the newly
structured segments as depicted in Figure 4 and Figure 5 below.3
2
3
Nabors Industries Ltd. 2011 Annual Report
Nabors Industries Ltd. 2012 Q1 Report
4
Nabors Industries Ltd.
May 25, 2012
Figure 4: 2012 Q1 Revenue by Business Line
600,000
500,000
400,000
300,000
200,000
100,000
0
(100,000)
2012
2011
Source: Nabors 2012 Q1 10-Q
BUSINESS STRATEGY AND Value drivers
Commitment to Technology
Moving forward, Nabors Industries plans to rejuvenate
their focus on technology-intensive services through their
wholly-owned subsidiary, Carnig Drilling Technology,
Ltd.. Carnig Drilling Technology has contributed several
groundbreaking technologies, which includes ROCKIT
and REVIT drilling systems. This state-of-the-art
engineering allows Nabors’ customers to utilize a stateof-the-art directional steering control system which
effectively orients the tool face when slide drilling.4
According to the Director of Corporate Development,
Denny Smith, at the UBS Global Oil and Gas Conference
on May 22, over 35% of services and rentals revenue in
2011 came from new products, technologies and services
introduced the past three years such as ROCKIT and
REVIT. In a competitive industry driven by cutthroat
bidding for contracts, available innovative technology can
provide a significant advantage.
4
Figure 5: 2012 Q1 Revenue
by Segment
Drilling
and Rig
Services
Completion
and
Production
Services
Source: Nabors 2012 Q1 10-Q
Nabors Industries Online – Carnig Drilling Technology, Ltd.
5
Nabors Industries Ltd.
May 25, 2012
Young and Productive Rig Fleet
By year-end 2012, Nabors will have built 152 new rigs and performed 28 major upgrades on existing rigs
since 2005.5 These upgrades and new builds indicate that nearly one-third of Nabors fleet is either new or
improved and therefore in a position to command higher day rates than their competitors. This is
reflected in their rig year count as depicted in Figure 6 below.
A rig year is a measure of the number of
equivalent rigs operating during a given
Figure 6: Q1 Rig Years
period. It is calculated as the number of
2012 vs. 2011
days rigs that are operating divided by the
500.00
number of days in the period.6 If a rig is
International
400.00
down for maintenance, it is not operating.
However because Nabors has such a new
300.00
Canada
fleet, this maintenance is not necessary. An
200.00
increase in the number of rig years of a fleet
Alaska
leads to the ability to command higher day
100.00
rates and also improve utilization of the rigs.
U.S. Offshore
0.00
This youthful fleet will be a key asset for
2012
2011
Nabors in the North American market.
Large oil and gas conglomerates have their
choice of contractors in the over saturated North American markets and therefore having an effective and
efficient rig fleet differentiates them from their competition.
Extensive Existing Contracts
A surplus in supply of natural gas has led to depressed gas prices and therefore a challenging environment
for many oil firms operating in the United States. Nabors Industries however has weathered this storm
better than its competitors thanks to its extensive backlog of pressure pumping contracts extending well
into 2013.7 In addition to this backlog, Nabors also signed nine new long-term contracts for new-builds
in the first quarter of 2012.8
Strategic Realignment
After experiencing several quarters of declining revenue in the oil and gas exploration and production
operations, Anthony Petrello has decided to liquidate their oil and gas positions and strategically realign
with their core business segments, Contract Drilling and Completion and Production Services.
Management is committed to selling as much as $800 million of oil and natural gas assets and business
units this year. Several oil and gas sales have already been completed totaling approximately $150
million. Other assets totaling approximately $500 million are in the pipeline for execution later this year.9
In addition to streamlining operations, Petrello has committed to using these funds to restore financial
flexibility by paying down existing debt balances. Highlighted at the UBS Global Oil and Gas
Conference earlier this week, Nabors announced a targeted net debt to capitalization reduction from 42%
5
Denny Smith, UBS Global Oil and Gas Conference (Nabors Industries Publication)
Nabors Industries Online – Glossary of Drilling Terms
7
Anthony Petrello, Q1 2012 Conference Call
8
Bret Jenson, Nabors Becomes Latest Oil Services Firm to Blow Through Estimates, (Seeking Alpha)
9
Denny Smith, UBS Global Oil and Gas Conference (Nabors Industries Publication)
6
6
Nabors Industries Ltd.
May 25, 2012
to 25% by 2013. Improved financial flexibility will allow the Company to capitalize on better technologyintensive investment opportunities moving forward.
International Opportunities
Nabors has established a sizeable presence in the Middle East, which I believe to be a primary driver for
future growth in their international portfolio. The international unit posted income of $21.1 million for
the first quarter of 2012, which was higher than management’s expectations. This was due primary to the
early startup of high-spec platform rig offshore India. Management anticipates several other similar
projects to commence in the region within the coming months. Growing revenue and improved margins
in the international markets, especially the Middle East, will have a positive effect in the near future for
Nabors.
Investment thesis
Macroeconomic analysis
The energy sector as a whole is heavily influenced by the
supply and demand of oil and natural gas in the market.
Figure 7: Growth Scenarios for Global
Energy Demand
Demand
It is the general consensus that long-term energy
consumption and demand is estimated to grow at a steady
rate. Figure 7 depicts a 12% increase in global energy
demand between 2015 and 2020. This growth in demand
assumes pre-crisis GDP conditions, no new energy regulation
and the assumption that electric vehicles make up 14% of all
vehicles sold by 2020. Modifying the assumptions to
account for a severe downturn, new EU regulations and the
assumption that electric vehicles make up 50% of sales,
demand is still strong at 11.7% growth between 2015 and
202010. Given the magnitude of the Euro crisis, a “doubledip” global economic crisis is still possible which would
impact global demand. Regardless of economic conditions
however, long-term demand will remain strong. It is worthy
to note however that approximately 90% of this demand will
come from non-OECD11, which are primarily undeveloped
countries. This trend is also depicted in Figure 7.
Above: Pre-Crisis
Below: Severe Downturn
Source: McKinsey Quarterly
10
McKinsey Quarterly, Exploring Global Energy Demand, June 2009
http://www.mckinseyquarterly.com/Exploring_global_energy_demand_2369
11
OECD – Organisation of Economic Co-operation and Development
7
Nabors Industries Ltd.
Supply
May 25, 2012
Figure 8: U.S. Crude Oil Inventory
Global supply of oil and gas is determined by a variety of
factors including market prices, upstream activity, rates of
proven oilfield decline and an unlimited amount of
geopolitical reasons. However a simple snapshot of world
oil inventories and capacity lend a solid foundation for
analyzing current and future oil supplies.
Although inventory levels are not a good indicator of future
supplies of oil, it does provide a good idea of how well
current supply is meeting current demand. As you can see in
Figure 8, inventory levels have dropped slightly which
indicates that demand has been growing faster than supply
so far in 2012.
In addition to current inventory levels, it is also useful to
analyze future capacity to determine whether or not there is
opportunity for growth to meet the growing demands.
The International Energy Agency has predicted global
oil supply capacity to increase to 100.6 mb/d by 2016, a
net increase averaging +1.1 mb/d annually12. The
majority of non-OPEC supply growth is derived from
Brazil, Canada, Kazakhstan and Columbia.
Source: Thomson Reuters Baseline
Figure 9: World Oil Supply Capacity
Growth
Oil and Gas Prices
Natural gas and oil prices as discussed are primarily
determined by supply and demand in the market.
Until early 2000, the price of oil was relatively stable
around $20 per barrel. Beginning around 2003, the
market began to see a stable increase in oil prices
followed by a drastic run up in 2008 just before the
Source: International Energy Agency
great recession. As seen in Figure 12 below, oil prices
fell from $140 per barrel to about $40 per barrel in less
than 6 months. Brent Crude is currently trading at $105 per barrel; however the U.S. benchmark crude –
West Texas Intermediate is trading as low as $90 per barrel. Brent was a $26 premium over WTI 6
months ago and is now only a $15 premium. Following this trend, I believe this spread will narrow as
both spot prices trade between $95-100 per barrel for the remainder of the year.
That being said, although price of oil has begun to fall largely in response to decreased worries over
tension in the Middle East, I expect it to remain volatile and increase in the long run. As with most
contango markets, consumers drive the price of futures higher than the spot price in an attempt to hedge
12
International Energy Agency. (2011). Medium-Term Oil & Gas Markets
8
Nabors Industries Ltd.
May 25, 2012
against the risk of higher spot prices13. This is the current case for WTI, however Brent has exhibited a
state known as backwardation. As the spread between the two spots narrow, Brent will become less
backwardated and WTI will flatten out. This relationship is show in Figure 10.
As depicted in Figure 11, natural gas is trading at an all-time low, around $2.50 million British thermal
units (Btu). This is a result of an unseasonably warm winter and the increased number of oil and gas
companies partaking in fracking. In my opinion the natural gas spot price has seen its bottom and I expect
an increase by December.
Figure 10: Historical Crude Oil Front Month
Future Prices
Figure 11: Natural Gas Spot Price
(Henry Hub)
Source: International Energy Agency
Figure 12: Crude Oil Spot Price
(Brent)
Source: Thomson Reuters Baseline
13
Layard-Liesching, Ronald. (2012). Investing in Commodities, Derivative and Alternative Investments. CFA Curriculum
Level I
9
Nabors Industries Ltd.
May 25, 2012
Sector analysis
The Energy sector is the 6th largest sector of the S&P 500 with a market capitalization of approximately
$1.3 trillion14 in market capitalization. Year–to-date it is the S&P 500’s worst performing sector with a
return of -5.82%. Quarter-to-date it is the S&P 500’s second worst performing sector with a return of 8.04%. Financials is the Index’s worst performer. Energy is the second worst performing and second
best performing sector for 3-year and 5-year performance respectively. A chart depicting the sector’s 1year price performance relative to the overall S&P can be seen in Figure 13 below.
Figure 13: Energy 1-year Performance
Relative to S&P 500
Source: Thomson Reuters Baseline
Source: Thomson Reuters Baseline
The Energy sector is divided into two industries, Energy Equipment & Services, and Oil, Gas &
Consumable fuels. Energy Equipment & Services is further divided into two sub-industries; Oil & Gas
Equipment Services which is composed mostly of large oilfield services firms, and Oil & Gas Drilling.
Oil, Gas & Consumable Fuels is organized by five sub-industries; Coal and Consumable Fuels, Oil & Gas
Exploration and Production, Oil & Gas Integrated, Oil & Gas Refining and Marketing, and Oil & Gas
Storage.
Over the past 10 years, the Energy sector has dominated every other sector in the S&P 500 by a
significant amount. The Energy sector has demonstrated an absolute return of 124% for the past 10years where as the second best performing sector in the S&P 500, Information Technology, has
returned less than half of that at 57%15. Much of this outperformance can be explained by the run-up
in oil prices just before the great recession. It is therefore beneficial to look at an industry and subindustry breakdown of the sector.
As you can see in Table 2 below, only one sub-industry has recorded positive gains year-to-date. Oil
& Gas Drilling, in which Nabors participates, has recorded year-to-date losses of -8%. This makes it
the third best performing sub-industry within the sector. However it is also the second worst
performing sub-industry for 10-year performance with a return of 12%. This is because unlike Oil &
14
Standards and Poor Performance Data – Online http://www.standardandpoors.com/indices/sp500/en/us/?indexId=spusa-500-usduf--p-us-l-15
Thomson Reuters Basline
10
Nabors Industries Ltd.
May 25, 2012
Gas Exploration and Production and Oil & Gas Equipment/Services, Oil & Gas Drilling was
affected less by the run-up in oil prices in 2008. This is depicted in their standard deviation of .195,
the second lowest behind Oil & Gas Storage.
Table 2: Energy Sub-Industry Relative Performance
Industry
Sub-Industry
Energy
Equipment
& Services
Oil, Gas &
Consumable
Fuels
Oil & Gas
Equipment/Services
Oil & Gas Drilling
Coal & Consumable
Fuels
Oil & Gas Exploration
& Production
Oil & Gas Integrated
Oil & Gas Refining &
Marketing
Oil & Gas Storage
Baseline
Symbol
OGEQP
YTD
1-Year
10-Year
-11%
-24%
117%
Std.
Dev.
.779
OGDRL
COCOF
-8%
-33%
-27%
-60%
12%
60%
.195
.629
OGEXP
-12%
-21%
186%
1.17
OGINT
OGREF
-11%
7%
-6%
-6%
99%
56%
.621
.327
OGSTO
0%
22%
-4%
.140
Source: Thomson Reuters Baseline
Baker Hughes Rig Count
Figure 14: Baker Hughes Rig Count
vs. Oil & Gas Drilling
Baker Hughes has issued rotary rig counts
for North America since 1944 and global
rig counts since 1975. The North
American rig count is released every
Friday at noon central time, and the global
rig count is released on the fifth working
day of each month. The rig count is an
extremely important leading indicator of
demand for products used in the oil and
gas industry. For this reason, the Baker
Hughes rig count exhibits a high
correlation with the energy sector and
more specific to Nabors, to the Oil & Gas
Rig counts generally rise following
increased spending on exploration and
Source: Thomson Reuters Baseline
development by large integrated oil firms.
Integrated oil firms typically only increase their spending on exploration when prices of oil and natural
gas are expected to rise. Therefore by extension, the rig count reflects stability in energy prices. As of
May, the U.S. rig count was down 3 from April and up 136 rigs from last year. As of April, the
international rig count was down 14 from March and up 49 rigs from April of 2011.
11
Nabors Industries Ltd.
Financial analysis
May 25, 2012
Figure 15: Key Financial Ratios for Nabors
Industries Ltd.
Discounted Cash Flow Model
As seen in Exhibit A-1 of Appendix A,
assuming a terminal discount rate of 11.50%
and a terminal future cash flow growth rate of
2.00% for Nabors Industries forecasts a target
price of $23.36. This offers a 69% upside
from the trading price of $13.82 at the close
of trading May 25th, 2012. This valuation is
backed by strong revenue growth through
2014, recovering operating margins and
management’s commitment to improve the
Company’s solvency.
Revenue growth
Nabors Industries surpassed consensus
revenue estimates by nearly $40 million for
the first quarter 2012. This is an increase of
31% year over year. Gains in revenue
represent solid performance in all segments of
the North American market and although
Source: Thomson Reuters Baseline
lower, better than expected performance from
international operations. Nabors has seen
double-digit year-over-year growth in revenue for the past five quarters16. As seen in Figure 15, sales per
share are at a 10-year high. The DCF included in this analysis assumes conservative revenue growth of
8.4%, 13.67% and 14.94% for the years 2012, 2013 and 2014 respectively. Equipped with an extensive
backlog of contracts, Nabors is positioned well to weather the poor natural gas environment in 2012.
Operating Margins
Operating margin was 14.8% for the first quarter 2012, a 2.1% improvement from the first quarter 201117.
As seen in Figure 15, this is close to the 10-year median of 15.5%. It is my belief that this operating
margin will continue to improve as international margins expand. For this reason, I have included
operating margins of roughly 21% for the next three years in my discounted cash flow analysis.
Solvency
In addition to strong revenue and improved operating margin, Nabors under the new leadership of
Anthony Petrello is committed to deleveraging the balance sheet and improving the Company’s financial
flexibility. Low levels of leverage allowed Nabors to capitalize on several valuable investment
opportunities between 2000 and 2008. These opportunities became increasingly limited as the Company
added more debt to their balance sheet. This increased leverage can be seen in the bottom panel of Figure
16
17
Wall Street Cheat Sheet, Nabors Industries Ltd. Earnings, April 24, 2012
The Motley Fool, Nabors Industries Crushes Earnings Estimates
12
Nabors Industries Ltd.
May 25, 2012
15 above. Nabors target total debt by year-end 2012 was $4,900 million. This goal was already achieved
after the first quarter with reported total debt of $4,773 million. Management has targeted long term total
debt of $3,500 million by year-end 2013, a net debt reduction from 42% to 25%18
Valuation analysis
Nabors Industries is
undervalued and currently
trading near its ten-year lows
relative to the S&P 500,
Industry, and
historical absolute values.
Although a portion of the
discounted multiples can be
attributed to increased
uncertainty in geopolitical risk,
the majority of the discount can
be explained by the
overreaction the market has
had in response to the declining
natural gas market in North
America and European debt
crisis.
As discussed in the financial
analysis segment, with the help
of new CEO Anthony Petrello
Nabors Industries has
outperformed nearly all of
analyst’s expectations. Even
after confirming impressive
revenue growth and even more
impressive profits at the end of
third quarter 2012, Nabors
remains at a significant
discount relative to several
measures. For this reason, the
discount to Nabors appears to
be unwarranted.
18
Table 3: Nabors Industries Valuation – Relative to S&P 500
Relative to S&P500
High
Low
Median
Current
P/Trailing E
3.7
.28
1.1
0.59
P/Forward E
2.2
0.36
0.99
0.52
P/B
1.3
0.3
0.8
0.4
P/S
3.3
0.5
1.6
0.5
P/CF
2.1
0.2
0.8
0.3
Source: Thomson Reuters Baseline
Table 4: Nabors Industries Valuation – Relative to Industry
Relative to Industry
High
Low
Median
Current
P/Trailing E
3.1
0.47
0.89
0.61
P/Forward E
2.3
0.58
0.89
0.66
P/B
2.2
0.4
0.8
0.7
P/S
1.2
0.3
0.7
0.4
P/CF
1.6
0.5
0.9
0.5
Source: Thomson Reuters Baseline
Denny Smith, UBS Global Oil and Gas Conference (Nabors Industries Publication)
13
Nabors Industries Ltd.
May 25, 2012
Table 5: Nabors Industries Valuation – Absolute
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
Target E,
S, B
/Share
Target
Price
P/Forward E
37.6
4.8
14.9
6.3
12.4
2.28
28.18
P/S
4.9
0.5
2.1
0.6
1.7
23.6
40.11
P/B
3.7
0.6
2.4
0.8
1.95
17.72
34.55
P/EBITDA
15.98
1.81
7.41
2.11
6.0
4.35
26.15
P/CF
21.6
1.8
8.1
2.8
6.5
5.7
37.15
Source: Thomson Reuters Baseline
Risks and considerations
Sustained Decline in Oil and Natural Gas Prices
The amount of spending on exploration and production is the largest driver of revenue for Nabors
Industries. If there is a sustained decrease in oil and natural gas prices, there will also be a sustained
decrease in spending by oil exploration and production companies, which would cut revenue drastically.
Geopolitical Risk
The challenge of managing geopolitical risk in the energy sector is always prevalent. As mentioned in the
macroeconomic analysis, the bulk of growth in both demand and supply will come from non-OECD
countries. The majority of these countries are considered developing markets and therefore cultural,
infrastructure, security and new technology challenges must be confronted19. In addition to these
challenges, some of these countries face a highly uncertain political environment. Nabors derives a
significant portion of their business from global markets and needs to continue to be cognizant of these
risks.
Environmental Regulation
Nabors Industries is subject to various federal, state and local laws regarding environmental regulations.
The breadth of environmental regulation within the United States and globally has expanded recently and
this trend is expected to continue. Most relevant, the United States has been reviewing at the request of
the Occupational Safety and Health Administration and the Mine Safety and Health Administration the
safety concerns related to hydraulic fracturing, or fracking. A push to bolster oversight on fracking could
potentially be detrimentally to the Company’s pressure pumping operations.
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Conclusion
Nabors Industries is a Buy with a price target of $27. This price was derived as a function of implied
equity from the discounted cash flow and also price targets indicated from the absolute valuation analysis.
Specifically, the final price target is calculated as 65% of the implied equity value from the discounted
cash flow model, and 7% of the implied equity value from each of the absolute valuation price targets
calculated in Table 4. This significant upside is due primary to the noteworthy growth in both revenues
and operating margins. This upside coupled with an overall undervalued position, makes Nabors
Industries a strong buy.
Implied Value
DCF Implied Value*
Valuation Implied Value*
Current Price: $13.82
Expected Upside: 94%
Discount Rate: 11.50%
Terminal Growth: 2.5%
$26.82
$23.36
$32.03
*DCF Implied value weighted 65%
*P/Forward E, P/S, P/B, P/EBITDA, P/CF weighted 7% each
Analyst Certification
I, Julie Heigel, hereby certify that the views expressed in this research report accurately reflect my
personal views about the subject companies and their underlying securities.
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Appendix a
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EXHIBIT A-1: DCF
EXHIBIT a-2: Implied Equity sensitivity analysis
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EXHIBIT a-3: Income statement forecasts
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EXHIBIT a-4: Nabors Industries Balance sheet
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