2023-04-25 18:01:38 ET
Summary
- For Q1 2023, Nabors Industries Ltd. showed an earnings beat for the first time since Q2 2021, surprising the consensus by >250%.
- The target of $400 million in adjusted free cash flow for 2023 remained unchanged - the forwarding free cash flow yield stands at over 35%.
- I expect the company's financial strength to force analysts to revise their estimates upward again - this should play into the hands of Nabors Industries Ltd.'s buyers in the short term.
- Technicals support my bullish view. So despite the existing risks, I see Nabors Industries stock as having short-to medium-term growth prospects of at least 20-30% from current prices.
Thesis
I think Nabors Industries Ltd. ( NBR ) offers a good risk/reward ratio after its [Q1 2023] earnings release on April 23, 2023, when the company reiterated its free cash flow ("FCF") guidance. The stock is too cheap to ignore in terms of FY2023 forwarding FCF yield. Also, the technical setup that one can see on the daily chart suggests that the odds of NBR growing in the medium term are now much higher.
Why Do I Think So?
According to Seeking Alpha data, Nabors Industries Ltd. was founded in 1952 and is based in Hamilton, Bermuda, and provides drilling services for onshore and offshore oil and gas wells worldwide, offering various services, equipment manufacturing, and drilling optimization software. The company also produces advanced directional steering control systems and aftermarket sales and services. It has around 300 rigs for land-based and 29 rigs for offshore drilling operations.
Here's what NBR's business segments look like [ as per Q4 2022 IR materials ]:
On April 24, 2023, Nabors Industries reported Q1 2023 operating revenues of $779 million, up 2.5% from $760 million in Q4 2022. The net income attributable to Nabors shareholders for the quarter was $49 million, or $4.11 per diluted share [compared to a loss of $69 million in Q4]. The Q1 results included a gain related to Nabors warrants of $34 million and a $25 million gain on the redemption of debt. Excluding these gains, net loss improved sequentially by $28 million. Q1 adjusted EBITDA was $240 million, compared to $230 million in the previous quarter.
In terms of the company's segments, the U.S. Drilling segment obviously had a successful Q1 2023 with an adjusted EBITDA of $156.5 million, a 9% increase from the previous quarter. The International Drilling segment also saw improvements, with adjusted EBITDA totaling $88.6 million due to higher day rates on renewal contracts in Saudi Arabia. Drilling Solutions had a 5% sequential increase in adjusted EBITDA to $31.9 million, while Rig Technologies experienced a decline in adjusted EBITDA due to delays in equipment deliveries.
NBR's press release, author's notes
Nabors Chairman, CEO, and President, Anthony G. Petrello, stated that results were essentially in line with expectations, and U.S. Drilling and Drilling Solutions segments drove growth. The company continued to reprice its rigs upward, and the daily gross margin increased by more than $2,000.
NBR generated $37 million in free cash flow for Q1, primarily due to stronger financial results, strong collections, and disciplined capital spending. Capital expenditures for the quarter totaled $119 million, with $37 million supporting newbuilds in Saudi Arabia. Net debt at the end of Q1 was $2.087 billion. Nabors CFO, William Restrepo, stated that the company's cash flow generation was strong in Q1 and that the target of $400 million in adjusted free cash flow for 2023 remains unchanged. He also emphasized the company's commitment to improving its capital structure and reducing leverage this year, highlighted by the recent issuance of $250 million in convertible notes to redeem senior notes due in 2025. The company intends to redeem the remaining $52 million of the September 2023 notes using Q2 cash flow generation, according to Seeking Alpha.
Although the results were in line with management's forecasts [according to the same CEO], the market definitely did not expect NBR to deliver such strong financials - the company showed an earnings beat for the first time since Q2 2021 (surprised by >250%):
Seeking Alpha News, author's notes Seeking Alpha, NBR's Earnings Surprises
As a result, NBR stock rose nearly 7.3% in a single trading day amid relatively choppy broader market dynamics. And this is not surprising. I bolded the information on prospective adjusted FCF for a reason - if NBR does indeed generate $400 million in FY2023, the FCF yield on an adjusted basis will rise to over 35.1% - in theory, the stock should follow as far as I can see:
Although, of course, this relationship will strongly manifest itself with reasonable capital spending. From the information above, we already know that the NBR prioritizes deleveraging - this is clearly evident from the scale of recent years. This is in particularly marked contrast to the number of shares outstanding - all along it has either been growing or stagnating as it is now:
On the other hand, declining debt has an advantage in the medium term - higher EPS in future periods (with relative stability in operating costs and taxes). Analysts already estimate FY2024 EPS growth at 95.37% y/y - this should lower the implied price/earnings ratio to below 5x:
Seeking Alpha, NBR's Earnings Estimates, author's notes
Over the past 3 months, NBR stock has fallen >31%; over the same period, its quarterly EPS estimates have been revised downward by an average of 20%:
Seeking Alpha and YCharts data, author's work
Logically, these 2 events can be linked - the forward-looking estimates constantly drive the stock up or down, and the direction of the revision is always of great importance to investors.
Analysts last revised their EPS forecasts for NBR on April 18, 2023 - just prior to the company's Q1 report which beat the nearest consensus estimate by >250%. Those revisions have put the forwarding EPS numbers far lower than previously expected. What will follow next? I'd not be surprised if the company's unexpected financial strength forces analysts to revise their estimates upward again - this should play into the hands of NBR's buyers in the short term.
This new potential tailwind fits perfectly into the technical picture of the NBR stock:
TrendSpider Software, author's notes
Recently, the stock was at a crossroads right before the quarterly report - after approaching its multi-month support trendline, traders were waiting for the company's next earnings surprise [good or bad] to continue or break the trend. The report turned out to be surprisingly good - compare the most recent EPS in the chart with the dynamics of the last few quarters. The share price has bounced sharply off the trend line - as has happened 4 times before. At the same time, NBR stock still looks oversold - of course, because the -31% in the last 3 months has not been recovered yet. The RSI is below 50, although it shows signs of a bullish comeback.
The weekly chart agrees with the daily one as far as I understand:
TrendSpider Software, author's notes
Depressed forward-looking valuation multiples, the FCF yield growth potential even on an adjusted basis of over 35% [relative to the current market cap], may return NBR to its usual $150-170 per share price range in the coming weeks. I expect analysts to revise their previous estimates upward, taking into account management's confirmed guidance and Q1 financial results that far exceeded expectations. This should support my bullish view on NBR at current share price levels.
The Bottom Line
In many ways, the future development of Nabors Industries Ltd. depends on the state of the oil and gas industry. We have heard a lot in recent years about the lack of CAPEX in this industry and how the return on new investments should drive high-quality O&G stocks to new price levels. In fact, given the cyclicality, these companies have simply absorbed the expectation that the current bullish cycle will end quickly enough - hence their low multiples today. NBR is no exception. The FY2024 P/E ratio of <5x appears very low, while the projected EPS growth of more than 90% year-over-year is already priced in - the company really needs to surprise the market, again and again, to keep going up.
We have not seen any share buybacks in the recent past - without them, it would be difficult for Nabors Industries Ltd. to justify a high FCF yield as a strong buying argument. However, the ongoing deleveraging looks good - so far I see every indication that EPS will likely just grow from the current points. But then again - if demand for petroleum products proves to be strong for a shorter [than I expect] period, the underlying fundamentals I'm relying on here will not make much sense.
But despite the existing risks, I see Nabors Industries Ltd. stock as having short-to medium-term growth prospects of at least 20-30% from current prices. I rate Nabors Industries Ltd. a "Buy" and recommend you consider the stock for your own due diligence process.
Thanks for reading!
For further details see:
Nabors Industries Stock: When Technicals And Fundamentals Align