EUR 850.00 For Business Accounts Only

Morningstar | U.S. Drilling Pricing Improvement Drives Stronger 3Q for Nabors

Land driller Nabors posted a solid third quarter, with a 3% sequential increase in revenue and adjusted operating margins improving to negative 1% from negative 4% previously. The top-line improvement was driven by pricing increases in the U.S. drilling segment as well as the typical seasonal improvement in activity affecting the Canadian drilling segment. The bottom-line improvement was driven chiefly by U.S. drilling, despite being offset by decreased international segment profitability stemming from the divestiture of three higher-margin jackup rigs. Our fair value estimate and no-moat rating are unchanged.

The U.S. drilling pricing improvement came in the form of Lower 48 gross margin per rig day increasing to about $8,700 from $7,400 in the second quarter. Nabors' gross margin per rig day improvement has outpaced peers' in the last several quarters, allowing the company to close the gap with peers after trailing them on this metric throughout 2016 and 2017. We think this narrowed gap will hold in the future.

However, our outlook for U.S. land drillers overall remains generally bearish. We expect the U.S. horizontal rig count to fall from about 930 currently to around 700 by midcycle, driven by a need for U.S. shale oil production growth to moderate to more sustainable levels as well as increased drilling efficiencies, which reduce the number of rigs required to fulfill U.S. shale activity needs.

Despite this, we think Nabors overall is very slightly undervalued, as the market seems overly pessimistic about the company's international segment, whereas we see potential for solid international growth in the coming years. Additionally, the market seems to be ascribing almost negligible value to the drilling solutions and rig technologies segments, while we think there is some likelihood of improvement in these segments in the coming years from currently low profitability levels.