Nabors Industries Part 2: Estimates And Relative Valuation

Our regression model suggests that NBR’s revenue would increase sharply in NTM 2023 but may decelerate later.
EBITDA estimates are steady over the next two years
The stock is reasonably valued versus its peers at the current level

Part 1 of this article discussed Nabors Industries (NBR) outlook, performance, and financial condition. In this part, we will discuss more.

Linear Regression Based Forecast

Observing a regression model based on the historical relationship among the crude oil price, rig count, and NBR’s reported revenues for the past seven years and the previous four quarters suggests that NBR’s revenues will increase by 14% in the next 12 months (or NTM 2023). It can increase further, but at a decelerated rate (7% up), in NTM 2024.

Based on the regression models and the average forecast revenues, the company’s EBITDA will increase by 16% in the next 12 months (or NTM) in 2023. In NTM 2024 also, the model suggests the company’s EBITDA will increase by 11%.

Target Price And Relative Valuation

The stock’s returns potential using the forward EV/EBITDA multiple (6.7x) is higher (61% upside) than the returns potential (13% downside) using the past five-year average multiple (7.3x). In comparison, Wall Street’s sell-side analysts expect 9% returns from the stock.

NBR’s forward EV-to-EBITDA multiple contraction versus the current EV/EBITDA is less steep than peers, typically resulting in a lower EV/EBITDA multiple than peers. The company’s EV/EBITDA multiple (7.6x) is lower than its peers’ (HP, PTEN, and PDS) average of 13.6x. So, the stock is reasonably valued versus its peers at this level.

Analyst Rating And Target Price

According to data provided by Seeking Alpha, only one sell-side analyst rated NBR a “buy” in the past 90 days (including “Strong Buy”), while six of the analysts rated it a “hold.” Two of the analysts rated it a “sell.” The consensus target price is $171.2, suggesting a 9% upside at the current price.

What’s The Take On NBR?

As the leading-edge day rates become healthier with the recovery of the oilfield services industry, NBR’s strategy is to go short on contract duration to capture the pricing upside. The combination of price hikes and cost optimization should increase NBR’s drilling rig margin. In the US onshore, it focuses on the top-tier rigs. It also plans to add a few rigs in Q4. Outside of the US, it may add more new builds in Saudi Arabia in the SANAD joint venture. It will also forge ahead in upgrading the M550 fleets.

NBR invests in new technologies like digitization and automation services and ESG initiatives, which can drive its topline in the medium term. However, investors have been concerned about declining cash flows due to huge working capital requirements. As a result, the stock underperformed the VanEck Vectors Oil Services ETF (OIH) in the past year. In FY2023, the management expects a strong turnaround in EBITDA and free cash flow generation. This can also deleverage the balance sheet, which has been hanging over its financial health due to high leverage. The stock is reasonably valued versus its peers. With a steady outlook, investors might want to hold it for gains in the medium term.

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