Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Nabors Industries (NBR)
1. Nabors Industries
$35.60 - BUY
CREDIT AGRICOLE GROUP
Mark S. Urness
Riding the Rebound
mark.urness@us.calyon.com
212 408-5683 • Nabors Industries currently reigns as the industry's largest provider of
land-based contract drilling services, with a fleet of approximately 550
land drilling rigs operating around the globe.
Shreyans Jain
• We believe NBR is well positioned to benefit from the current North
shreyans.jain@us.calyon.com
212 408-5707 American land drilling recovery, as well as growing demand for its rigs
internationally.
• We reiterate our BUY rating on the shares of NBR and 12-month price
Zachary F. Sadow target of $50.
zachary.sadow@us.calyon.com
212 261-3485
U.S. Land Drilling Rebounding. The U.S. land drilling market is in the
middle of a turnaround. The market has experienced significant firming
over the past few months and we believe that the prospects for an
ever-improving 2H08 continue. We believe that continued strength in oil
and gas prices coupled with a developing interest in shale plays will
sustain the U.S. land drilling rebound.
• Strong in Canada and Alaska. We believe the scenario in Canada
and Alaska is improving as well. NBR is ready to capitalize on this
trend led by its sizable fleet in Canada. We believe that the current
increasing Canadian rig count coupled with improving activity and day
rates bodes well for NBR.
• International Drilling Offers Substantial Growth. NBR continues
to deploy its strategy of extending its presence in the booming
international market. It has built its international fleet to
approximately 140 units, continues to be the largest land driller in
September 2, 2008 Company Update Saudi Arabia, and has been steadily achieving attractive day rates and
margins. We expect NBR to increase operating income in this segment
USA by 39% in 2008.
Oil Services & Equipment • Quality Driving Strong Visibility. Strong demand for NBR's rigs,
Reuters NBR highlighted by its Pace Rigs, has stemmed from a need for high
Bloomberg NBR quality rigs to drill in the various complex shale plays. The emergence
of these shale plays has allowed NBR to achieve earnings visibility and
Priced on 09/01/2008 continue to win term contracts. In 2Q08 NBR signed more than 20
S&P 1,283 term contracts and has 15 to 20 prospective term contracts in sight.
12M hi/lo $50.58/$23.61
• 40% Upside Potential. The shares are trading at 8.6x our 2009 EPS
12M price target $50.00
estimate, a discount to the peer group average of 9.6x. We believe
±% potential +40%
that the shares of NBR should trade at a 25% premium versus the
land drilling group. In our opinion, a 12x P/E applied to the 2009 EPS
Target set on 08/20/2008
estimate of $4.15 is a fair valuation for the stock. We are reiterating
Shares in issue (m) 280 our BUY rating on the shares of Nabors Industries with a $50 price
Free float (est)(m) 274 target.
Market Cap (m) $9,968
Financials
3M avg. daily vol.(000) 7,960,470 Dec Yr 06A 07A 08E 09E
EPS $3.58 $3.17 $3.25 $4.15 --
P/E 9.9x 11.2x 11.0x 8.6x NM
The group of companies that comprise CLSA are affiliates of Calyon Securities (USA) Inc.
See important disclosures on page 25.
2. Oilfield Services & Equipment
in association with Nabors Industries Rating: BUY PT: $50
Riding the Rebound
Nabors Industries currently reigns as the industry’s largest provider of
Mark S. Urness
mark.urness@us.calyon.com
land-based contract drilling services, with a fleet of approximately 550
(212) 408-5683 land drilling rigs operating around the globe, and a large position in the
workover and well-servicing market, with a fleet of approximately 750
Shreyans Jain well-servicing rigs primarily located in the U.S. and Canada. We believe
shreyans.jain@us.calyon.com
NBR is well positioned to benefit from the current North American land
(212) 408-5707
drilling recovery. We reiterate our BUY rating on the shares of NBR and
Zachary F. Sadow 12-month price target of $50.
zachary.sadow@us.calyon.com
(212) 261-3485
U.S. Land Drilling Rebounding. The U.S. land drilling market is in the middle of a
robust recovery. The market has experienced significant firming over the past few
months and we believe that the prospects for an ever-improving 2H08 continue.
Reflecting the rebound is a steady increase in the U.S. land rig count and an increase in
NBR’s working rig count in the U.S. Lower 48. We believe that continued strength in oil
and gas prices coupled with a developing interest in shale plays will sustain the U.S.
2 September 2008 land drilling recovery.
Strong in Canada and Alaska. We believe the scenario in Canada and Alaska is
USA improving as well. NBR is ready to capitalize on this trend led by its sizable fleet in
Canada. While Canada and Alaska had a sequentially weak quarter in 2Q08, we see the
Oil Services & Equipment trend as already improving. We believe that the currently increasing Canadian rig count
Ticker NBR
coupled with improving activity and day rates bodes well for NBR.
Price (07/27/08) $37.16
International Drilling Offers Substantial Growth. NBR continues to execute its
12M hi/lo $23.61 / $50.58
strategy of extending its presence in the booming international markets. It has built its
12M price target $50 international fleet to approximately 140 units, continues to be the largest land driller in
±% potential +34% Saudi Arabia and has been steadily achieving attractive day rates and margins.
Target set on 27 August 2008
Contributions from new land rigs should support substantial international revenue
Shares Out. 285.7m growth during the next 18 months. We expect NBR to increase operating income in this
Market cap US $10,618m segment by 39% in 2008.
3M Avg. volume 8,042,730
Quality Driving Strong Visibility. Strong demand for NBR’s rigs, highlighted by its
Pace Rigs, stems from a need for high quality rigs to drill in the various complex shale
plays. The emergence of these shale plays has allowed NBR to achieve earnings
visibility and continue to win term contracts. In 2Q08 NBR signed more than 20 term
contracts and has 15 to 20 prospective term contracts in sight.
Over 30% Upside Potential. The shares are trading at 8.9x our 2009 EPS estimate,
a discount to the peer group average of 9.6x. In addition, at 5.8x estimated 2009 cash
flow/share, the stock is trading at par with comparable land drillers. With its
technologically superior fleet of rigs and a diversified business mix, NBR has greater
earnings visibility than the average land driller. As a result, we believe that NBR should
trade at a 25% premium versus the land drilling group. In our opinion, a 12x P/E
applied to the 2009 EPS estimate of $4.15 is a fair valuation for the company. We are
reiterating our BUY rating on the shares of Nabors Industries with a $50 price target.
Stock performance (%)
1M 3M 12M Financials
Absolute -4.7% -13.4% 21.6% Year to 31 Dec 05A 06A 07A 08E 09E
Relative -3.6% -4.8% 34.7%
Total Revenues ($ Mill) 3,460.9 4,840.7 5,009.3 5,340.8 6,176.9
6.0
Revenue Growth 45% 40% 3% 7% 16%
5.0
NBR Operating Income ($ Mill) 879.8 1491.9 1237.3 1259.2 1714.9
SPX
4.0
Net Income ($ Mill) 659.7 1059.0 930.7 943.2 1225.4
3.0
EPS Operating ($) $2.03 $3.58 $3.17 $3.25 $4.15
2.0 P/E 18.2x 10.3x 11.7x 11.4x 8.9x
1.0 Cash Flow Per Share ($) 3.08 4.92 4.70 5.32 6.39
0.0 P/CF 12.1x 7.5x 7.9x 6.9x 5.8x
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
EBIT Margin 25% 31% 25% 24% 28%
Source: Calyon Securities (USA) Inc., Bloomberg
Source: FactSet
2 mark.urness@us.calyon.com 02 September 2008
3. Riding the Rebound Nabors Industries - BUY
Contents
Executive Summary ............................................................................... 4
Company Snapshot ................................................................................ 5
Riding the Rebound ............................................................................... 6
Attractive Industry Fundamentals.......................................................... 9
Natural Gas Market to Remain Tight in ‘08 ........................................... 11
Strong Financials & Appealing Valuation .............................................. 13
Risks ................................................................................................... 15
Charts & Tables ................................................................................... 16
All prices quoted herein are as at close of business 27th August 2008, unless otherwise stated
Other Recent Reports
02 September 2008 mark.urness@us.calyon.com 3
4. Riding the Rebound Nabors Industries - BUY
Executive Summary
We are reiterating our BUY rating on the shares of Nabors Industries
with a $50 price target.
The U.S. land drilling U.S. Land Drilling Rebounding. The U.S. land drilling market is in the middle
market is in the middle of a robust recovery. The market has experienced significant firming over the
of a recovery.
past few months and we believe that the prospects for an ever-improving 2H08
continue. Reflecting the rebound is a steady increase in the U.S. land rig count
and an increase in NBR’s working rig count in the U.S. Lower 48. We believe that
continued strength in oil and gas prices coupled with a developing interest in the
shale plays will sustain the U.S. land drilling recovery.
Strong in Canada and Alaska. We believe the scenario in Canada and Alaska is
improving as well. NBR is ready to capitalize on this trend led by its sizable fleet
in Canada. While Canada and Alaska had a sequentially weak quarter in 2Q08,
we see the trend as already improving. We believe that the current increasing
Canadian rig count coupled with improving activity and day rates bodes well for
NBR.
NBR continues to execute International Drilling Offers Substantial Growth. NBR continues to execute
its strategy of extending its strategy of extending its presence in the booming international markets. It
its presence in the
has built its international fleet to approximately 140 units, continues to be the
booming international
markets. largest land driller in Saudi Arabia and has been steadily achieving attractive day
rates and margins. Contributions from new land rigs should support substantial
international revenue growth during the next 18 months. We expect NBR to
increase operating income in this segment by 39% in 2008.
Quality Driving Strong Visibility. Strong demand for NBR’s rigs, highlighted by
its Pace Rigs, has stemmed from a need for high quality rigs to drill in the various
complex shale plays. The emergence of these shale plays has allowed NBR to
achieve earnings visibility and continue to win term contracts. In 2Q08 NBR
signed more than 20 term contracts and has 15 to 20 prospective term contracts
in sight.
We are reiterating our Over 30% Upside Potential. The shares are trading at 8.9x our 2009 EPS
BUY rating on the shares estimate, a discount to the peer group average of 9.6x. In addition, at 5.8x
of Nabors Industries with
estimated 2009 cash flow/share, the stock is trading at par with comparable land
a $50 price target.
drillers. With its technologically superior fleet of rigs and a diversified business
mix, NBR has greater earnings visibility than the average land driller. As a result,
we believe that NBR should trade at a 25% premium versus the land drilling
group. In our opinion, a 12x P/E applied to the 2009 EPS estimate of $4.15 is a
fair valuation for the company. We are reiterating our BUY rating on the shares of
Nabors Industries with a $50 price target.
4 mark.urness@us.calyon.com 02 September 2008
5. Riding the Rebound Nabors Industries - BUY
Company Snapshot
Current Operations
Nabors Industries operates the largest land drilling fleet in North America with
approximately 550 land rigs and 750 land workover rigs. The company operates
a fleet of approximately 140 land rigs in a variety of international markets,
highlighted by its incumbent position as the largest land driller in Saudi Arabia.
NBR also operates an offshore fleet consisting of 36 platform rigs, 13 jackups and
four barge rigs in the Gulf of Mexico and various international locations. NBR’s
well servicing segment is comprised of comprehensive oilfield hauling,
engineering, construction and project management services as well as
manufacturing of top drives and instrumentation systems. In 2007, revenues
derived internationally from drilling and related services encompassed 21% of
total revenues.
Figure 1
2007 North America Revenue and Operating Income
Revenues Operating Income
Manufac, Manufac,
Logistics & Logistics & Oil and Gas
other Oil and Gas other 4%
12% 3% 4%
International
24%
International
21%
North America North America
64% 68%
*Exceludes $219.4 M M deduction for Other *Exceludes $136.5 M M deduction for Other
Source: Company reports
Background
Since 1987, NBR has grown into the world’s largest provider of land drilling
contract services. NBR has stretched its reach to include operations in most of
the major oil and gas producing regions in the world. The company has also
increased its scope since 1987 to incorporate offshore drilling, U.S. land well-
servicing and workover activities.
Figure 2
2007 Revenue and Operating Income
Revenues
Operating Income
C anada
Alaska C anada
Alaska 16%
4% 9%
5%
U.S. Offshore U.S. Offshore
6% 6%
U.S. Land Well-
Servicing U.S. Land
U.S. Land Well- U.S. Land 17% Drilling
Servicing Drilling 64%
21% 52%
Source: Company reports
02 September 2008 mark.urness@us.calyon.com 5
6. Riding the Rebound Nabors Industries - BUY
Riding the Rebound
We believe that NBR is well positioned to capitalize on the firming North
American land drilling market.
Land Drilling
Nabors has over 550 land Nabors has over 550 land drilling rigs, with about 435 units (79%) located in
drilling rigs. North America, the largest land drilling market in the world. The remaining rigs
are spread across South America, Mexico, the Caribbean, the Middle East, Far
East, Russia and Africa. Out of the 336 rigs located in the U.S. Lower 48, 242 are
actively marketed and 94 are stacked in inventory.
Figure 3
NBR: North American Land Drilling Fleet
C anada
19%
Alaska
4%
Lower 48
77%
Source: Company reports and Calyon Securities (USA) estimates
We believe that land- We believe that land-drilling activity in North America is in the middle of a
drilling activity in North recovery. The current elevated prices of oil and gas coupled with developing
America is in the middle
interest in shale plays have stimulated North American drilling activity. The
of a recovery.
firming U.S. land drilling market is evidenced by the steady increase in the U.S.
land rig count and an increase in NBR’s working rig count.
Figure 4
NBR Working Rig Count and Utilization
245 Lower 48 Drilling 82%
80%
240 Rigs Working Utilization
78%
235 76%
74%
230
72%
225
70%
68%
220
66%
215
64%
210 62%
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Source: Company reports
6 mark.urness@us.calyon.com 02 September 2008
7. Riding the Rebound Nabors Industries - BUY
We expect that land-drilling activity in North America will remain robust over the
Volatility in natural gas
next year as E&P customers continue to drill more in an effort to capitalize on
prices is a cause for high oil and gas prices. Volatility in natural gas prices is a cause for some
some concern. concern, as it relates to customers’ propensity to spend as well as equity
valuations in the drilling sector. However, we are seeing evidence that the E&Ps
will drill through any near-term price weakness with confidence in the long-term
fundamentals.
Our model assumes Nabors will average 248 active rigs in the Lower-48 states
this year, another 31 in Canada, and 11 in Alaska. We expect the average size of
the fleet in the Lower-48 to move up to 338 while remaining at 81 in Canada and
20 in Alaska.
Figure 5
Total and Active North American Land Drilling Fleet – 2008E
350.0 338
300.0
Active Rigs # of Rigs
248
250.0
200.0
150.0
100.0 81
50.0 31
19
11
0.0
Alaska Canada Lower 48
Source: Company reports and Calyon Securities (USA) estimates
Workover and Well Servicing
We see continued NBR has more than 735 workover rigs in North America, primarily located in
strength in the well Texas, California, and Western Canada. Though not as profitable as the land
service and workover
drilling business, the workover and well-servicing business does have high
activity.
operating margins, which came in at 17.3% in 2Q08 versus U.S. land drilling
which came in at 30.6%. Going forward, we see continued strength in well
service and workover activity, as sustained high oil prices lead to increased repair
and maintenance of mechanically pumped wells. In addition, NBR Well Services
continues to expand in the rapidly growing Rocky Mountains region.
Operating in a Fragmented Industry
Although the land-drilling industry is more consolidated today than in the past,
we continue to characterize it as fragmented. We estimate that the top eight
players accounted for roughly half of overall land-drilling revenues in 2007.
Nabors, with about 12% of the market by our estimates, is the only company on
this list, apart from PTEN, with more than a 10% share. According to Spears &
Associates, the total land-based drilling revenues reached $20.4 billion in 2007.
02 September 2008 mark.urness@us.calyon.com 7
8. Riding the Rebound Nabors Industries - BUY
Figure 6
Top Five U.S. Land Drilling Marketed Rigs
Grey Wolf, 108
Nabors, 286
Unit, 110
Helmerich& Payne, 176
Patterson, 262
Source: Land Rig Newsletter
The sector continues to have a significant number of small regional drillers that
have historically benefited from operational and geological expertise in their
particular regions. However, vast improvements in drilling processes and rig
technology and the intensifying focus on safety and the environment have eroded
away any advantage the smaller players have had. In our view, they now operate
at a meaningful disadvantage to the larger land drillers.
International Drilling Offers Substantial Growth
The international markets The international markets continue to offer attractive opportunities. NBR has built
continue to offer an its international fleet to approximately 140 units and maintains the largest land
attractive opportunity.
drilling presence in Saudi Arabia. We expect NBR to grow its international
operating income by 39% in 2008 over last year due to contributions from
international jackups and additional land rigs. Strong growth in day rates and
margins should support this trend.
Figure 7 Figure 8
International Revenue & Operating Income International Day Rate & Cash Margins
1,800 $35,000 $16,000
Average Dayrate
1,600 $14,000
Revenue Operating Income $30,000
Average Daily CFOA
1,400 $12,000
$25,000
1,200
$10,000
$20,000
1,000
$8,000
800 $15,000
$6,000
600 $10,000
$4,000
400
$5,000 $2,000
200
$0 $0
0
05
05
05
05
06
06
06
06
07
07
07
07
08
08
E
E
2001 2002 2003 2004 2005 2006 2007 2008E 2009E
08
08
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
Source: Company reports and Calyon Securities (USA) estimates
8 mark.urness@us.calyon.com 02 September 2008
9. Riding the Rebound Nabors Industries - BUY
Attractive Industry Fundamentals
We believe the current upcycle represents the strongest and longest growth
period for the oil service industry since the 1970’s. Our positive investment thesis
is formulated based on a number of important fundamental trends in the industry
that we believe will remain intact for the foreseeable future.
Robust Upstream Capital Spending
After years of strong spending growth in 2006 and 2007, further expansion of
After strong spending upstream capital expenditures is expected to continue into 2008, albeit at a
growth in 2006 and 2007, slower rate. Capital spending grew by an estimated 26% in 2006, the largest
further expansion of increase since 2001, driven both by high oil prices and rising costs. Capital
upstream capital spending grew by an estimated 19% in 2007. In 2008, we expect capital
expenditures is expected
to continue into 2008. spending to increase by close to 20% due to resilient global oil demand and
strong oil prices; increased capital requirements for remote deepwater projects;
higher oil services costs and the increased difficulty in replacing reserves.
Although drilling for unconventional gas in North America remains one of the
drivers of increased spending, in our view, oil leveraged companies see more
attractive opportunities in lower-cost regions outside North America.
Figure 9
Worldwide Upstream Capital Spending (2008E)
Canada
National
7%
Oil Cos
24% Major Oils
United 32%
States
24%
Foreign
Cos
Outside 22%
NA Canadians U.S.
69% 8% Indep's
14%
Source: Calyon Securities USA estimates
Oil Demand Growth Remains a Key Driver
Oil demand is expected to In our view, strong oil demand growth precipitated by the synchronized global
grow at approximately economic expansion has been the primary driver of accelerating upstream capital
2%/year.
spending growth. In 2006, oil demand growth slowed to 1.0%, due primarily to
price-related demand destruction. Importantly, oil demand growth rebounded to
1.8% in 2007 and is expected to average nearly 2.0% per year for the next
several years, according to the International Energy Agency (IEA). The global
economy is expected to grow at a rate of approximately 4.0% in 2008, which
should support oil demand. In particular, the Chinese economy, a key driver of oil
demand growth, is expected to grow at a rate of 9-10% over the next two years.
The single biggest risk to our positive investment thesis is the potential for global
economic weakness and slowing oil demand growth brought on by high prices.
Finding & development We believe that there is a close correlation between global oil demand and
costs have been rising upstream capital spending trends. The finding and development (F&D) costs
rapidly.
which have been increasing at 10% per year since the mid-1990s. The escalation
in capital requirements puts the oil services industry under pressure to find ways
to help customers reduce costs.
02 September 2008 mark.urness@us.calyon.com 9
10. Riding the Rebound Nabors Industries - BUY
Challenges Replacing Reserves and Growing Production
Global oil demand may We believe that the oil industry faces serious problems replacing reserves each
increase by as much as year and growing production to meet rising global demand. According to the IEA,
50% over the next
25 years. global oil demand may increase by as much as 50% over the next 25 years.
Obviously, if this huge increase in consumption is to be met, the industry faces
tremendous challenges. The major oils have begun to adopt more realistic oil
price forecasts and raise their upstream spending budgets accordingly. Even after
beginning to increase spending, the major oils have yet to achieve the reserve
replacement levels desired, and year/year production continues to decline for the
major oils as a group. Technologies such as horizontal drilling and advanced well
stimulation techniques have resulted in more rapid depletion of oil reserves.
Worldwide Rig Count Continues to Grow
We believe worldwide We believe worldwide drilling activity will remain solid, with anticipated growth
drilling activity will through 2008. Given the strong crude oil and natural gas prices, we expect to
remain solid, with
see a continued increase in the land drilling activity in the coming quarters. The
anticipated growth
through 2008. operators were able to lock in high natural gas prices as the strip near $13/Mcf in
June 2008. We forecast a 7% increase in the U.S. land rig count to 1,816 units
in 2008 from 1,695 units last year. With the U.S. land rig count averaging at
1,712 units in 1Q08, we believe that this increase to 1,816 for 2008 is easily
achievable, given the recent strength in activity. While the newbuilds continue to
replace legacy rigs, some older rigs, which were previously stacked, are also
being reactivated. This should further help the rig count. Weatherford recently
indicated that the Canadian rig count might be 15% higher year/year in 3Q08.
We estimate the Canadian rig count will average 300 units in 2008.
We expect international rig count to average 1,094 units in 2008, 9% higher than
2007. The 89-unit increase in international rig count in 2008 is expected to be
driven by increased demand from national oil companies such as Pemex, Saudi
Aramco and ONGC. We believe that the rig count will continue to grow worldwide
in 2009, driven by strong demand from international markets. We expect the
North American rig count to grow 7% year/year to 2,340 in 2009. The
international rig count is expected to increase more rapidly as new offshore rigs
start drilling in the international markets. We expect the international rig count to
average 1,190 units in 2009, an increase of 9% year/year.
Figure 10
Worldwide Rig Count (1975-2008E)
6,000
5,000
Rig Count
4,000 30 Year Average
3,000
2,000
1,000
-
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009E
U.S. C anada International Average
Source: Baker Hughes and Calyon Securities (USA) estimates
10 mark.urness@us.calyon.com 02 September 2008
11. Riding the Rebound Nabors Industries - BUY
Natural Gas Market to Remain Tight in ‘08
Natural Gas Price Forecast
Our 2008 natural gas Our 2008 natural gas price forecast is $10.17/MMBtu and our 2009 forecast is
price forecast is $10.25/MMBtu. A key factor in our thesis is that the oil-to-natural gas price ratio
$10.17/MMBtu and our
will narrow to the 10-11x level by year-end, driven primarily by limited liquefied
2009 forecast is
$10.25/MMBtu. natural gas (LNG) imports and greater capital/resource allocation to oil versus
natural gas projects.
Despite actual and pending increases to US regasification capacity, we are
projecting that US LNG imports will remain essentially flat year-over-year in
2008. This is being driven by higher LNG prices in Asia and Europe, where LNG
prices are more closely tied to crude oil. Interestingly, while we believe the oil-to-
natural gas fuel switching in the US power-generation sector has been essentially
tapped out, there appears to be incremental switching capacity in Asia
(particularly Japan and Korea), with high crude oil prices making natural gas the
more attractive fuel.
Compounding the problem, there have been start-up delays at a number of key
global liquefaction projects, which have significantly reduced the amount of LNG
supply expected to reach the market this year. Out of a total 56 MM tons (~7.4
Bcf/d) previously scheduled to be on-line in 2008, less than one-third is expected
to make it to market before year-end.
Figure 11
Global Natural Gas Price Comparison
20
18
16
14
12
/ M tu
$M B
10
8
6
4
2
-
/5 0 1
/5 0 1
/5 0 1
/5 0 2
/5 0 2
/5 0 2
/5 0 3
/5 0 3
/5 0 3
/5 0 4
/5 0 4
/5 0 4
/5 0 5
/5 0 5
/5 0 5
/5 0 6
/5 0 6
/5 0 6
/5 0 7
/5 0 7
/5 0 7
/5 0 8
1 /2 0
5 /2 0
9 /2 0
1 /2 0
5 /2 0
9 /2 0
1 /2 0
5 /2 0
9 /2 0
1 /2 0
5 /2 0
9 /2 0
1 /2 0
5 /2 0
9 /2 0
1 /2 0
5 /2 0
9 /2 0
1 /2 0
5 /2 0
9 /2 0
1 /2 0
Europe: UK Balanc ing Point Japan: Japan Crude Coc kt ail Unit ed St at es: Henry Hub
Source: FactSet
Another important impact Another important impact of the higher crude oil price (relative to natural gas) is
of the higher crude oil the capital and resource allocations of producing companies. With oil prices
price (relative to natural
running significantly higher on an energy-equivalent basis to natural gas, returns
gas) is the capital and
resource allocations of on oil projects look much greater than for natural gas. As a result, companies
producing companies. with limited capital resources and labor have to choose. Several independent
producers have already indicated shifts in their capital budgets towards oil
projects, and we expect to begin to see a modest natural gas production impact
over the next 12 months.
02 September 2008 mark.urness@us.calyon.com 11
12. Riding the Rebound Nabors Industries - BUY
Figure 12
US LNG Imports
3.5
3.0
2.5
2.0
Bcf/d
1.5
1.0
0.5
0.0
ar-04
Jul-04
Nov-04
ar-05
Jul-05
Nov-05
ar-06
Jul-06
Nov-06
ar-07
Jul-07
Nov-07
Jan-04
ay-04
Sep-04
Jan-05
ay-05
Sep-05
Jan-06
ay-06
Sep-06
Jan-07
ay-07
Sep-07
Jan-08
M
M
M
M
M
M
M
M
Source: US Department of Energy
We expect offshore production to increase 10% next year driven by the start-up
of Independence Hub (and other projects). Onshore production is expected to
increase roughly 3.5% driven by the continued ramp up in drilling (the average
nat gas rig count increased 7% in 2007 and we are projecting a 4% increase this
year). Overall though, we are still projecting a 3-4% year-over-year increase in
total US natural gas production.
Demand to Grow Nearly 2% in 2008
We project natural gas Utilizing a bottoms-up approach to analyze the natural gas supply/demand
demand will slightly fundamentals, we estimate that the natural gas market will remain tight in 2008,
outstrip supply in 2008.
as demand is projected to slightly outstrip supply. We estimate that natural gas
storage on November 1, 2008 will be 3.3-3.4 Tcf, or 5% below the level on
November 1, 2007.
Demand growth is being We are projecting year-over-year natural gas demand growth of roughly 1.8% in
driven largely by the 2008, driven largely by a 3% year-over-year uptick in power generation demand.
power generation sector.
In addition to an overall 1.5% increase in electricity demand (essentially
matching Calyon’s US GDP growth forecast of 1.8%), we expect natural gas will
continue to capture market share from fuel oil and coal.
12 mark.urness@us.calyon.com 02 September 2008
13. Riding the Rebound Nabors Industries - BUY
Strong Financials & Appealing Valuation
With strong fundamental trends driving demand for land-based drilling, we
believe NBR will post strong revenue and earnings growth in 2008 and 2009. In
our view, NBR is well positioned to benefit from the U.S. land drilling rebound
and should generate strong and sustained earnings growth in the years ahead.
The company has an impressive financial profile. NBR has also shown an ability
to bring advances in rig design to market, which should help it grow in the
future.
In 2008, we expect revenue to come in at $5.34 billion, advancing to $6.18
billion next year. We estimate that NBR will earn $943.2 million, or $3.25/share,
this year, and $1.23 billion, or $4.15/share, in 2009.
We have seen Volatile swings in activity in the land-drilling market make earnings stability
fundamental difficult to achieve. That said, we have seen fundamental improvements in
improvements in pricing
pricing patterns in the sector over the past decade, thanks to industry
patterns in the sector
over the past decade. consolidation and increasing activity from the majors and large independents. In
addition, the trend toward long-term commitments should add a meaningful
amount of stability to revenue and earnings at Nabors.
We believe the trend toward long-term contracts demonstrates the confidence
that E&P customers have in the sustainability of the current upcycle. NBR
currently has a significant proportion of its rigs in the Lower-48 on term
contracts, and this will continue to trend higher as the newbuilds are added to
the fleet.
Strong Balance Sheet
Nabors’ balance sheet is Nabors’ balance sheet is strong, with a net-debt-to-total-capital of 37% at the
strong, with a net-debt- end of 2Q08, and the cash-flow outlook is very positive, thanks in part to the
to-total-capital of 37%.
visibility provided by the healthy percentage of term commitments that the
company has entered into and the robust outlook towards North American land
drilling.
Good Operating Leverage
Soft demand and excess supply for land rigs have pushed day rates lower over
the past year. The company’s Lower-48 fleet of land rigs saw average day rates
decline by 3% in 2Q08, to $19,903, over the year ago period. We expect day
rates to continue to trend higher this year and next as the supply for rigs
tightens in North America due to the active drilling environment. We expect
average day rates to increase by 7% in 2Q09 to $21,300 over 2Q08.
The shares of NBR have The shares of NBR have advanced more than four-fold over the past 10 years, far
advanced over four-fold outpacing the S&P 500 Index. However, the stock exhibits a fair amount of
over the past 10 years.
volatility, with movements to the downside occurring over relatively short periods
of time. Since investors are very mindful of this fact, short-term stock price
movements are heavily influenced by a number of leading indicators, including
natural gas and crude oil prices (the latter to a somewhat lesser degree), the
Baker Hughes North American rig count, and reports on E&P spending,
particularly from the operators focused on the North American markets.
The shares of NBR have more or less moved in tandem with the Philadelphia Oil
Services Index (OSX) over the past several years. The same generally holds true
over longer periods of time, although NBR’s upward and downward moves have
historically been more pronounced than those of the OSX.
02 September 2008 mark.urness@us.calyon.com 13
14. Riding the Rebound Nabors Industries - BUY
Figure 13
NBR Relative Performance
6.0
5.0 NBR
OSX
4.0 SPX
3.0
2.0
1.0
0.0
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Source: FactSet
Over 30% Upside Potential
We reiterate our BUY The shares are trading at 8.9x our 2009 EPS estimate, a discount to the peer
rating on the shares of group average of 9.6x. In addition, at 5.8x estimated 2009 cash flow/share, the
Nabors Industries with a
stock is trading at par with comparable land drillers. With its technologically
$50 price target.
superior fleet of rigs and a diversified business mix, NBR has greater earnings
visibility than the average land driller. As a result, we believe that NBR should
trade at a 25% premium versus the land drilling group. In our opinion, a 12x P/E
applied to the 2009 EPS estimate of $4.15 is a fair valuation for the company. We
are reiterating our BUY rating on the shares of Nabors Industries with a $50 price
target.
14 mark.urness@us.calyon.com 02 September 2008
15. Riding the Rebound Nabors Industries - BUY
Risks
A Volatile Group with Considerable Risks
While we believe that industry fundamentals are strong and that revenue and
earnings visibility has reached unprecedented levels, we also acknowledge that
oil service stocks are volatile and substantial risks to our investment thesis
continue to exist.
The greatest risk to our By far the greatest risk to our positive investment thesis and the continuation of
positive investment thesis the current upcycle is the potential for slowing global economic growth. If oil and
is the potential for
natural gas prices decline precipitously, the oil service stocks would also fall
slowing global economic
growth. sharply.
One of the risks to our investment thesis is the scenario in which the E&P
companies continue to exercise capital discipline and do not meaningfully
increase upstream capital spending.
Another risk is that of external factors such as warm winter weather impacting oil
and natural gas demand. We estimate an average natural gas price of
$10.17/Mcf and crude oil price of $120.43/Bbl will prevail in 2008, which should
support the estimated level of drilling and exploration and production. However,
adverse weather conditions and decreased demand for crude oil and natural gas
may impact the company’s operations adversely.
Another substantial risk to our positive investment thesis is the threat of
oversupply in the land drilling markets. Newbuild construction may create an
oversupply and lead to declining pricing and utilization.
NBR has operations in parts of the world that have had unsettled political
conditions, wars, strikes, terrorism, etc. Continued uncertainty in such countries
could adversely impact oil service activity.
02 September 2008 mark.urness@us.calyon.com 15
16. Charts & Tables
Figure 14
Land Drilling Companies: Comparative Valuation Table
Mark S. Urness
(212) 408-5683
mark.urness@us.calyon.com
Price Price Earnings per Share Price/Earnings Cash Flow per Share Price/Cash Flow
Company Symbol Rating Target 08/27/08 2007A 2008E 2009E 2007A 2008E 2009E 2007A 2008E 2009E 2007A 2008E 2009E
Land Drillers (7)
Bronco Drilling BRNC Neutral $17 $15.82 $1.44 $1.30 $1.85 11.0 12.2 8.5 $3.14 $3.13 $3.86 5.0 5.1 4.1
Grey Wolf GW NR NR $8.84 0.76 0.66 0.80 11.6 13.4 11.1 1.19 1.20 1.23 7.4 7.4 7.2
Helmerich & Payne HP Add $67 $58.27 3.97 4.30 5.15 14.7 13.6 11.3 5.66 6.24 7.27 10.3 9.3 8.0
Nabors Industries NBR Buy $50 $37.16 3.17 3.25 4.15 11.7 11.4 8.9 4.70 5.32 6.39 7.9 7.0 5.8
Patterson-UTI PTEN NR NR $29.55 2.52 2.27 2.85 11.7 13.0 10.4 4.24 4.00 4.95 7.0 7.4 6.0
Riding the Rebound
Pioneer Drilling PDC NR NR $17.79 1.04 1.44 2.00 17.1 12.4 8.9 2.74 3.17 3.89 6.5 5.6 4.6
Unit Corporation UNT Buy $90 $70.77 5.71 7.75 8.85 12.4 9.1 8.0 11.63 15.96 17.94 6.1 4.4 3.9
Average 12.9 12.2 9.6 7.2 6.6 5.7
Mkt Firm
% Ch. 52-Week Book Price/ Debt/ Shares Cap Value EBITDA EV/ EBITDA
Company Symbol YTD Low High Value Book Cap Out ($MM) ($MM) 2007A 2008E 2009E 2007A 2008E 2009E
Land Drillers (7)
Bronco Drilling BRNC 6.5% $11.21 $18.69 14.05 1.13 15.5% 26.1 413 479 108 96 119 4.4 5.0 4.0
Grey Wolf GW 65.9% 4.85 9.65 3.70 2.39 29.4% 178.3 1576 1,603 351 290 323 4.6 5.5 5.0
Helmerich & Payne HP 45.4% 29.49 77.24 18.98 3.07 19.2% 106.1 6182 6,571 746 895 1,046 8.8 7.3 6.3
Nabors Industries NBR 35.7% 23.61 50.58 15.80 2.35 47.0% 285.7 10618 14,093 1,675 1,859 2,375 8.4 7.6 5.9
Patterson-UTI PTEN 51.4% 17.40 37.45 12.32 2.40 2.6% 153.9 4548 4,580 860 745 795 5.3 6.1 5.8
Pioneer Drilling PDC 49.7% 8.95 20.75 9.17 1.94 0.0% 49.7 883 817 184 196 237 4.4 4.2 3.4
Unit Corporation UNT 53.0% 43.30 88.24 30.94 2.29 8.3% 46.4 3282 3,411 1,675 1,859 2,375 2.0 1.8 1.4
Average 43.9% 2.22 17.4% 5.4 5.4 4.5
NR: Not Rated; First Call & Calyon Securities estimates used.
Source: Company reports and Calyon Securities (USA) estimates
Nabors Industries– BUY
16 mark.urness@us.calyon.com 02 September 2008