Based upon the number of near-term challenges, we have lowered
our recommendation on onshore contract driller
Nabors Industries Ltd.
) 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
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
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.
) - 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
NABORS IND (NBR): Free Stock Analysis Report
PATTERSON-UTI (PTEN): Free Stock Analysis
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