Morningstar | Maintaining Nabors' Fair Value Estimate; Looks Attractively Priced Relative to Other Land Drillers
We are maintaining our Nabors fair value estimate of $6 per share (and our no-moat rating as well) upon deeper review of the company's second-quarter results. The unchanged fair value comes via two offsetting revisions in our outlook for the company on a segment level. We have increased our near-term forecasts for Nabors' U.S. Drilling segment performance, but on the other hand we have slightly decreased our expectations for the company's International, Drilling Solutions, and Rig Technologies segments.Nabors' Lower 48 U.S. Drilling performance has been impressive in recent quarters. Nabors was severely lagging U.S. land drilling peers in profitability (in terms of gross margin per rig day) a year ago, but now has essentially converged to its peer average. Although we had anticipated this convergence, we were surprised by the speed, and therefore we are increasing our near-term margin expectations for the business.
On the other hand, we are slightly decreasing our near and long-term expectations for Nabors' international drilling business. Nabors' international rig count is down about 5% vs. two years ago despite a 10% increase in the overall international land rig count. While management is guiding for about a solid rebound in its rig count (up to 10%) by the end of this year, much of this will merely serve to keep the company's pace in line with increases in overall industry activity levels. For now, we are tempering our expectations for the segment.
Nabors is currently trading just a sliver (less than 3%) above our fair value estimate, making it the most attractively priced land driller by far--its peers are trading around 50% above our fair value estimates on average. Overall, we think the market is missing the fact that the U.S. land drilling market is likely to deteriorate instead of improve over the next several years. However, in our view, Nabors will stand out from its peers in coming years by benefiting from a strong recovery in the international land rig count.
Nabors Industries, through its subsidiaries, owns and operates land-based drilling rig fleet and is a provider of offshore platform drilling rigs in the U.S. and several international markets. The company also provides directional drilling services, tubular services, performance tools, and technologies for its own rig fleet and those of third parties. The company's business is comprised of its land-based and offshore drilling rig operations and other rig related services and technologies, consisting of equipment manufacturing, rig instrumentation and optimization software. The company has five reportable segments: U.S. Drilling, Canada Drilling, International Drilling, Drilling Solutions and Rig Technologies.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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