Based upon the number of near-term challenges, we have lowered our recommendation on onshore contract driller Nabors Industries Ltd. (NBR - Free Report) to Underperform from Neutral.
Barbados-based Nabors conducts oil, gas and geothermal land drilling operations and is the largest land-drilling contractor in the world. It is also one of the largest land well servicing companies and workover contractors in the U.S. The company offers a number of ancillary wellsite services, including oilfield management, engineering, transportation, construction, maintenance, well logging, and other support services in select domestic and international markets.
We are concerned about the weakness in Nabors’ pressure pumping business. Deterioration in pricing and utilization, coupled with the spike in costs, is likely to adversely impact the company’s second half results. The depressed North American onshore rig count has also been a negative.
As usual, we remain worried about weak natural gas fundamentals, which are likely to limit the company’s ability to generate positive earnings surprises. The glut in domestic gas supplies still exists, with storage levels remaining well above their benchmark levels.
This will continue to weigh on natural gas prices in the near-to-medium term. Nabors – the largest North American land drilling contractor ahead of Patterson-UTI Energy Inc. (PTEN - Free Report) – remains particularly exposed to this situation since its business in the region is heavily biased to gas drilling.
Nabors’ relatively weak balance sheet in this severe credit-constrained environment (debt-to-capitalization ratio of approximately 45%) is also a cause for concern. Over the last few years, the company kept adding debt to its balance sheet for a fleet recapitalization program.
Considering these factors, we see Nabors as a risky bet from which ordinary investors should exit. Our new long-term Underperform recommendation is supported by a Zacks #5 Rank (short-term Strong Sell rating).