Morningstar | Nabors Sees Solid First Quarter Underpinned by U.S. Drilling Margin Improvement
Nabors experienced a solid first quarter, with revenue up 2% sequentially and adjusted operating margin improving to negative 1.7% from negative 3.2% previously. The bulk of the top-line and especially the bottom-line improvement was driven by the U.S. drilling segment. Our fair value estimate and no-moat rating are unchanged for now.Nabors' U.S. drilling segment saw revenue increase 5% sequentially and segment adjusted operating margin improve to 8% from 3% previously. This is the segment's best margin since the second quarter of 2015. The Lower 48 rig count was essentially flat, but Lower 48 gross margins per rig day increased to $10,200 from $9,400 previously. Also, there was improvement in the Alaska and Gulf of Mexico units due to higher utilization and pricing.
Nabors' solid U.S. drilling results were largely matched by peers. U.S. land drillers had a great first quarter overall. Although the U.S. horizontal rig count fell by 2% sequentially, Tier 1 rig utilization remained fairly strong (at about 80%-85%), with "super spec" rig utilization well above 90%. Tight utilization allowed for land drillers to continue to push pricing increases, and as a result gross margins per day for the driller increased 11% on average (to $10,400 per day from $9,400 across Nabors' chief peers).
Unfortunately for U.S. land drillers, we forecast that the U.S. horizontal rig count will fall from almost 900 today to about 700 by 2023 as U.S. shale drilling moderates and drilling efficiencies continue to improve. This means that utilization and hence pricing will fall in coming years (even for super spec rigs), pushing down drillers' financial results. However, we do think Nabors will be able to more than offset this weakness in the U.S., thanks to its peer-leading international operations, which are still at cyclical trough levels of activity.
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.
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