Nabors Industries’ Perspective in Q1: KEY Takeaways

Nabors plans to strengthen its international drilling activity in 2025 and 2026. The SANAD JV continued to add newbuilds with a few more projected to come online in 2026. However, the drilling activity, particularly in the US onshore, looks uncertain. Free cash flow deteriorated and turned further into negative territory in Q1.

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Drilling Outlook

We have already discussed Nabors Industries' (NBR) Q1 2025 financial performance in our recent article . Here is an outline of its strategies and outlook. The current factors at play in the industry, including higher OPEC production, higher tariffs, and increased US shale production, will all play a role in putting pressure on the outlook for oilfield services. NBR will look to mitigate these effects on the crude oil operations by adding to natural gas-focused drilling activity.

As customer mix shifted and markets experienced elevated levels of volatility, Nabors’ operating efficiencies and margins came under pressure in the recent quarters. The drilling industry also saw a “slight downward trend” in leading-edge pricing. Also, utilization for high-spec rigs in the industry has hovered around 66% in the US onshore, estimates NBR’s management. Day rates, too, have been under pressure.

SANAD Update

SANAD, NBR's joint venture with Saudi Aramco, deployed its tenth newbuild during Q1, while another four are scheduled for 2025. By 2026, it expects to have 15 working newbuilds. On top of that, it plans to add five more newbuilds when additional rigs are constructed in Saudi Arabia.

Investors may note that Saudi Arabia suffered from onshore rig suspensions over the past year, particularly in conventional oil development. Unconventional rigs, on the other hand, saw additions in natural gas. Approximately 75% of the company’s rigs are capable of operating in the natural gas space. The company also estimates that SANAD will earn adjusted EBITDA of $300 million. The figure will grow subsequently, assuming it continues to add newbuilds in the following years.

Industry & Rig Count Outlook

In Russia and Colombia, Nabors' drilling operations took a hit after it received notices to release two rigs in Colombia in Q2. Outside of Saudi Arabia, it has deployed a newbuild in Kuwait. Still, an environment of volatility exists in the Middle East and in Latin America. Estimates suggest that upstream operators may cut down rigs by 4% in 2025. Nabors, however, compensated for the drop in activity by increasing the number of contracts. In the international markets, the company expects to end Q2 with 87 rigs working compared to 85 by Q4. In 2H 2024, it has four more new build rigs scheduled to deploy - two in Saudi Arabia, one in Argentina, and one in India.

Parker Acquisition

In March, NBR acquired Parker Wellbore. It expects Parker to generate ~$150 million of EBITDA in 2025. Parker’s solutions portfolio includes Quail Tools, a rental provider of high-performance downhole tubulars in the US onshore, offshore, and internationally. Parker’s contract drilling services include land and barge rigs, as well as Operations & Maintenance services. It also expects to capture approximately $40 million of synergy gains, which can inflate up to $60 million in 2026.

Financial Performance

Quarter-over-quarter, revenues in the company's International Drilling operating segment witnessed a 3% rise in Q1, while the topline in the U.S. Drilling segment declined by 5%. Rig Technologies witnessed a sequential revenue rise of 23%.

NBR's cash flow from operations declined (41% down) in Q1 2025 compared to the previous quarter. Free cash flow was negative in Q1. In FY2025, its capital expenditures are expected to range between $710 million and $720 million, representing a 26% increase from FY2024. The SANAD newbuild would account for nearly 50% of the FY2025 capex. Its debt-to-equity (4.1x) is high, primarily due to low shareholders' equity and high long-term debt.

Relative Valuation

NBR is currently trading at an EV/EBITDA multiple of 4.5x. Based on sell-side analysts' EBITDA estimates, the forward EV/EBITDA multiple is lower. The current multiple is also lower than its five-year average EV/EBITDA multiple of 5.9x.

NBR's forward EV/EBITDA multiple is expected to contract compared to the current EV/EBITDA, contrasting with the rise in multiple for its peers. This is because the company's EBITDA is expected to increase over the next four quarters, whereas its peers are expected to see a decline in EBITDA. This typically results in a much higher EV/EBITDA multiple compared to its peers. The stock's EV/EBITDA multiple is slightly higher than its peers' (NINE, PUMP, and ACDC) average of 3.9x. So, the stock is reasonably valued, with a positive bias, compared to its peers.

Final Commentary

Pressured by negative developments in the energy industry, Nabors’ operating efficiencies and margins contracted in Q1. At the same time, leading-edge pricing and day rate declined. Undeterred by these developments, the company continues to add newbuild rigs in Saudi Arabia (SANAD JV) and Kuwait. Overall, it plans to deploy 15 newbuilds in Saudi Arabia by 2026.

The Parker acquisition will complement NBR’s downhole operations and contract drilling services. The acquisition will add to its EBITDA through synergies. The company's FCF turned negative in Q1. Its planned FY2025 is higher on account of higher spend on SANAD newbuilds. The stock is reasonably valued, with a positive bias, compared to its peers.

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