High Price for Oil Driller Nabors

We are maintaining our Hold recommendation on Nabors Industries Ltd. (NBR - Analyst Report) shares on valuation grounds. The stock has performed strongly recently on the back of an improving outlook for onshore drilling. This followed favorable winter/spring weather that meaningfully brought down the storage overhang plaguing the natural gas market over the last two years.

We expect a significant uptick in onshore actively levels later this year, which should help improve utilization and spot dayrates. Our preferred land drilling names are Patterson-UTI Energy Inc. (PTEN - Analyst Report) and Grey Wolf Inc. (GW) that offer comparable leverage to the cycle at much reasonable valuation levels.

We expect significant improvements in the rig count as well as dayrates from the second-half 2008 onwards. Having actively invested in its fleet in recent years, Nabors remains well-positioned to capitalize on this upturn. The majority of these newbuilds are secured by term contracts that provide visible cash flows going forward. Nabors is a major beneficiary of the favorable U.S. drilling scene.

Internationally, the company’s revenue grew more than 46% last year, a trend that is expected to remain in place this year as well. We project that Nabors will be able to fund its 2008 capital budget of about $1 billion through internal cash flows and divestment of non-core assets. The company hopes to generate roughly $700 million in free cash flows for the current year. In the last two years, Nabors has repurchased approximately $1.5 billion worth of its own shares.

Nabors shares are up approximately 48% in the last 12 weeks and are currently trading near their 52-week high. We believe that Nabors premium valuation relative to the peer group adequately discounts its cyclical leverage, leaving little room for upside.

Read the full analyst report on NBR

Read the full analyst report on PTEN

Read the full analyst report on GW