Nabors Industries Limited’s (NBR - Free Report) share price movement has been weak, both in absolute and relative terms. Shares of the drilling contractor have plummeted around 65.5% over a year, underperforming its industry's decline of around 41%.
The company failed to impress investors in 2018 as it delivered weaker-than-expected earnings in each of the trailing four quarters, with average miss of 38.87%. Let’s take a look at the factors responsible for the dismal price performance and results of the company.
What’s Plaguing the Stock?
As we know, 2018 had been a tumultuous year for the Energy sector, with most of the oil and gas companies taking a beating amid commodity price volatility, supply glut, U.S.-China trade tussle, weakening demand outlook and economic headwinds. West Texas Intermediate (WTI) started the year just above $60 per barrel of oil and touched multi-year highs of more than $76 in early October. However, the rally was pretty short-lived, with the commodity plunging more than 30% since then.
Despite crude being on an upward trajectory for most part of 2018, the picture for the drilling contractors has not been quite rosy. Drilling companies including Helmerich & Payne (HP - Free Report) , Patterson-UTI Energy (PTEN - Free Report) and Diamond Offshore Drilling (DO - Free Report) , among others, struggled during the year due to reduced day rates and diminishing backlogs, which affected their earnings and revenues. Needleless to say, the oil price decline severely impacted the shares of Nabors.
However, it’s not just the dismal movement of the crude price that is to be blamed for the poor performance of the company. Weakness in the international markets, operational inefficiencies and stretched balance sheet of the company are other major headwinds for the stock.
Nabors has quite a large presence in the foreign market. However, its international operations have been adversely impacted by the sale of jack-ups, along with higher operational and reactivation costs. The segment has been struggling to recover since 2015 and is bearing the brunt of low margins. Further, the international concerns are likely to persist in the near term as well.
The company continues to maintain its fleet of older legacy equipment and rigs in the United States instead of taking them off the books. While the utilization rates for high specification rigs are high, most of these old legacy rigs remain idle and are not effective to drill wells, in turn denting the profits of the firm.
Further, Nabors’ elevated leverage of around 56%, along with rising costs (related to operations, stacking and reactivation) pressurize its financials.
Management’s Initiatives Provide a Ray of Hope
Amid the above-mentioned headwinds, management recently came up with some encouraging news regarding the company’s debt position in fourth-quarter 2018 along with plans to clean up the balance sheet, moving ahead.
The company announced that it has managed to reduce its net debt by $230 million in the fourth quarter, thanks to robust cash flow generation. Not only that, the company intends to further deleverage itself in 2019 by slashing its quarterly dividend by 83% (a penny per share), effective second-quarter 2019. Moreover, it plans to lower its 2019 capex by around 20% from the 2018 level.
While the Zacks Rank #3 (Hold) company aims to reduce its leverage to a considerable extent over the next two-three years, it also intends to modernize its fleet and introduce new automated technologies to boost its drilling operations, and that too despite cutting its 2019 capex. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While it is refreshing to see management making a concrete plan of action to reduce its leverage, Nabors still has a long way to go. In fact, the company has always emphasized upon debt reduction as one of its top priorities, without much tangible results. Whether management will be successful in delivering upon its promise this time around is a wait and watch story. Nonetheless, Nabors’ joint venture with Saudi Aramco, steady U.S. onshore outlook, rising margins in Lower 48 along with management’s deep focus to shore up its financials raise some optimism. Hence, we advise investors to retain the stock for the time being.
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