Nabors Is Richly Undervalued - Barron's

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A Gusher of Opportunity by Andrew Bary

Summary: Nabors Industries (NBR) is the global energy onshore drill leader, with 15% of the 48-state US market, +50% of Alaska's and 33% of Saudi Arabia's. But its $28.59 shares reflect a largely missed bull run on energy stocks because of fears that lower US natural gas prices could lead to rig oversupply and leasing price pressures. Offshore drilling rivals Diamond Offshore (DO) and Transocean (RIG) enjoy a stronger, steadier market. US onshore drilling weakness is expected to persist until 2008, but long term US natural gas prospects are strong. Nabors spent $2b upgrading rigs in 2006, and $1.8b this year. Newer, powerful rigs get higher leasing prices, usually recouping their $14m cost within the first three years of a 30-year rig life. With expenditures downtrending next year, $1b in expected new cash could buy back more shares or yield dividends. Despite credit market turmoil, 1) a low P/E of 8x 2007 estimated profits of $3.45/share and 7x projected 2007 profits of $4.01, 2) $4 billion in debt and $1b cash for an $8b enterprise, and 3) tripled profits since 2004, could invite LBOs. Bulls say a $4 EPS (analysts' consensus) would double the stock price, but even just a $3 EPS would put it in the $40-$45 range.

Related Links: Energy Stock Trader: Wednesday Outlook • Land-Based Drillers Extremely Mispriced • Caveat Emptor: Nabors Industries Warns Downward

NBR 1-yr. chart:

Comments

[wax:]

I did a back of the napkin thing for Nabors Industries, Ltd. (NYSE: NBR) based on the company's 2006 10-K numbers and came up with a reasonable value estimate of $54-$62.

Curious, I found that the stock closed yesterday (08.21.07) $28.98 and had first resistance at $31.55 (200 day), second resistance at $31.89 (50 day), and support at $27.05 (52 week low). That's not much wiggle room for a company in the oil field services business.

Based on my reasonable value estimate I would set a buy target at $27. Normally I would set a first sell target at $52, but because there is so much market volatility at present and because I think this volatility is going to be with us for the next 18-24 months, I would set a first sell target, the point at which I would sell off half of my shares, at $41, and be completely out of the stock at $56.

I have to admit that I like the company, and current management, in place since 1987, has done an adequate job. Were I to be a buyer of the stock, it would probably be 1.5% position for me. But alas at the moment, a buyer I am not, and the reason is because I can't work out an answer to what I consider to be a basic question.

How do you increase shareholder value in an industry that is as mature as the oil industry? If Nabors' management can figure that out, I may have to rethink my valuation of the company. With almost $6.25 of free cash flowing directly to equity, and a trailing twelve PE of 8.5, the company seems poised to dominate it's industry, and yet it doesn't. Why?

For those that have the time to dig into this company, the folks willing to put forth the effort to contact the investor relations folks at Nabors, it may indeed prove to be extremely profitable. [sigh]


In the mean time I'll be here, watching the price go up, and telling all my friends at the pub, how this one got away.

Wax

2007 Aug 21 07:05 AM