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Morningstar | Nabors Still Set to Benefit From Increasing International Rig Activity in Coming Years

Nabors is among the top-tier U.S. and international onshore drillers. However, the company's profitability has been curbed since 2014 by a downturn in drilling activity, resulting in lower utilization and day rates than in past years.Despite the recovery in U.S. shale activity, the U.S. land rig market today is still marked by overcapacity and low day rates and margins. We expect utilization for even Tier 1 rigs (high-quality AC rigs with 1.5k-plus horsepower and multiwell pad drilling capabilities) to remain below 80% at midcycle. While our view is that incremental global oil supply needs will largely be met by U.S. tight oil, fewer rigs will be needed to meet this requirement than in the past, owing to increased efficiencies. This limits the scope for improved pricing and utilization for all U.S. land drillers, even as overall industry fundamentals recover. Not only is Nabors beset by a collapsed U.S. horizontal rig market, it's also lost market share over the years. This is a result of factors that appear likely to persist into the near future. Effectively, Nabors has invested to build a rig fleet that, while expensive and high-spec, is only partly composed of rigs tailored to the drilling trends of the past several years. The company's investment in lower-horsepower, lighter-footprint AC rigs is emblematic of this; while these rigs played well early in the shale boom, they are less well equipped to handle the longer laterals and deeper wells prevalent more recently. These bleak prospects on the U.S. side are counterbalanced somewhat by improving international prospects. In particular, we expect Nabors to maintain its nearly one third of Saudi drilling market share, even while Saudi drilling activity grows by about 40% from 2016 to 2022. Additionally, we project a modest recovery in Latin American drilling activity, where Nabors is prominent.