On Nov 1, 2013, we downgraded onshore contract driller
Nabors Industries Ltd.
) to Underperform from Neutral.
Why the Downgrade?
Based upon the number of near-term challenges, we see Nabors as a
risky bet that ordinary investors should exit.
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
near-term 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 above their five-year
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 41%) 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.
Stocks That Warrant a Look
While we expect Nabors to perform below its peers and industry
levels in the coming months and see little reason for investors
to own the stock, one can look at
Matador Resources Co.
Northern Oil & Gas Inc.
) as good buying opportunities. These domestic upstream energy
operators - sporting a Zacks Rank #1 (Strong Buy) - have solid
secular growth stories with potential to rise significantly from
MATADOR RESOURC (MTDR): Free Stock Analysis
NABORS IND (NBR): Free Stock Analysis Report
NORTHRN OIL&GAS (NOG): Free Stock Analysis
PATTERSON-UTI (PTEN): Free Stock Analysis
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