Nabors Industries Ltd. (NBR - Free Report) recently announced that it is looking to significantly reduce its debt burden by various means. Per Bloomberg, the CEO of Nabors, Anthony Petrello is also taking a 10% pay cut to support the motion. The stock rallied 12.6% following the news.
Let’s have a look at the company’s balance sheet to have a better understanding of the situation.
Balance Sheet Analysis
As of Sep 30, 2018, the company had $688.6 million in cash and short-term investments, and $3,737.3 million in long-term debt. It has a debt-to-capitalization ratio of approximately 55.8%, much higher than the industry average of 33.8%.
Nabors’ relatively stretched balance sheet in this severe credit-constrained environment has been a cause of concern for a long time. The increasing debt and elevated capital expenditure associated with fleet recapitalization programs including rig upgrades and newbuilds have put pressure on its balance sheet, restricting the financial flexibility of the company. The upgrade of rigs is also an important objective of the company as its older legacy rigs are not effective enough to drill shale wells, which can put a dent on its income. Although the sign of improvement in its balance sheet was not impressive so far, it has been in management’s priority list for quite a while.
Nabors’ Moves to Reduce Debt
The company claims to have lowered net debt by around $230 million in the fourth quarter of 2018 and aims to reduce it by another $200-$250 million in 2019. Nabors is taking several measures that are targeted to improve its financial health, as given below:
Capital Spending: The company is planning to restrict its 2019 capital spending at $400 million versus expected capital expenditure of $500 million in 2018. This move is significant in the sense that Nabors’ free cash flow (FCF) in the trailing 12 months was negative at $289 million, reflecting weakness in cash-generating abilities. The restriction of capital spending can improve its FCF situation. However, it can also have a negative impact on its rig upgradation and modernization works.
Cost Cuts: The company intends to reduce its General & administrative (G&A) as well as Research & Engineering (R&E) costs by 10% in 2019 from 2018 levels. Arresting expenses from these two fronts are important as G&A and R&E costs rose 8.9% and 18.4%, respectively, in the first nine months of 2018. The cost optimization method is appreciable as the company’s total costs rose 15.2% year over year to $2.7 billion during this period.
Dividend Cut: Starting from the second quarter of 2019, Nabors is planning to reduce its quarterly cash dividend payment by 83% to a penny per share (leading to four cents per share on an annualized basis). The company intends to focus on regaining financial strength instead of giving capital back into the hands of its shareholders, keeping the long run in mind.
The stock has declined 60.9% in the past year compared with 39.8% collective fall of the industry it belongs to. Before the 12.6% jump in its stock price witnessed recently, the company’s shares were trading at their lowest levels since the 90’s.
Zacks Rank and Stocks to Consider
Hamilton, Bermuda-based drilling service provider, Nabors currently carries a Zacks Rank #3 (Hold). Investors interested in the energy sector can opt for some better ranked stocks as given below:
Houston, TX-based Shell Midstream Partners, L.P. (SHLX - Free Report) is a midstream energy company. For 2019, its bottom line, which has witnessed three upside revisions over the past 60 days, is expected to grow 27.7% year over year. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Calgary, Canada-based Gran Tierra Energy Inc. (GTE - Free Report) is an international oil and gas exploration and production company. Its bottom line for 2018 is expected to surge more than 300% year over year. The company delivered average positive earnings surprise of 24% in the trailing four quarters. The stock currently has a Zacks Rank #2 (Buy).
Bellatrix Exploration Ltd. is a Calgary, Canada-based exploration and production company. Its bottom line for 2019 is expected to surge more than 30% year over year. The company currently has a Zacks Rank #2.
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