Why Is Nabors (NBR) Down 39.3% Since Last Earnings Report?

It has been about a month since the last earnings report for Nabors Industries (NBR). Shares have lost about 39.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Nabors due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Nabors’ Q2 Loss Widens Y/Y, Sales Up

Nabors Industries' second-quarter 2019 loss from continuing operations (excluding special items) came in at 41 cents per share, wider than the Zacks Consensus Estimate of 21 cents as well as the year-ago adjusted loss of 39 cents, primarily due to weak performance of the international drilling segment.

Quarterly revenues of $771.9 million also fall short of the Zacks Consensus Estimate of $798 million. However, the top line was higher than the year-ago level of $758.8 million, attributable to Nabors’ resilient North American operations. In fact, the stock surged 40.9 % in two days after the company bucked the industry trend of declining rig counts by reporting a quarterly increase in average tally by around 3 rigs.

Notably, year over year, Nabors’ adjusted EBITDA has grown from $187.7 million to $198.4 million, reflecting a 5.7% rise.

Segmental Performance

Nabors’ U.S. Drilling segment generated quarterly operating revenues of $323.4 million, up 22.3% from the year-ago level of $264.4 million.The segment recorded an operating income of $20.4 million, significantly reversing the year-ago loss of $13.1 million on the back of improved rig activity and wider margins.

Canadian Drilling segment revenues came in at $11.4 million in the quarter under review, down from the year-ago figure of $17.4 million. Moreover, the segment’s operating loss widened to $5.5 million from $4.6 million in the corresponding quarter of 2018 amid weak market environment and seasonal downturn.

International Drilling segment operations’ revenues of $326.9 million decreased from the year-ago quarter’s $378 million. The segment incurred an operating loss of $6.9 million in the quarter under review versus income of $24.5 million in the prior-year period. The primary reason for this decline is increase in unplanned downtime in Saudi Arabia and the reduction of one rig in Argentina.

Revenues from the Drilling Solutions segment increased to $64.6 million in second-quarter 2019 from $59.9 million a year ago. The unit’s operating income of $13.8 million improved from $7.5 million. This can be attributed to improvement in performance benefits from the recently acquired PetroMar business and higher software sales.

Revenues from the Rig Technologies segment decreased to $72.8 million from the prior-year level of $81.3 million. However, the segment’s income increased to $496,000 against the prior-year loss of $3.4 million. This upside is driven by improved contribution from the core Canrig aftermarket business and tubular projects.

Financials

Total costs and expenses increased to $953.3 million from $930.7 million in the year-ago quarter, reflecting a large impairment charge of $102.6 million. While the company’s capital expenditure was $131 million in the quarter under review, Nabors reported a post dividend free cash flow of $82 million.

As of Jun 30, the company had $395.7 million in cash and short-term investments plus $3.6 billion in long-term debt with a debt-to-capitalization ratio of approximately 59.1%.

Guidance & Outlook

Nabors expects drilling activity in Lower 48 to be persistently subdued in the third quarter due to continued E&P capex discipline.

The company expects rig count in the international segment to be sequentially stable in the third quarter. However, improved operational performance in Argentina, Colombia and Saudi Arabia and cost control are likely to improve the segment’s results in third-quarter 2019. Nabors expects adjusted EBITDA from the International unit to increase between $5 million and $7 million from the range reported in the second quarter.

The Canadian segment should experience an uptick in the third quarter, aided by a recovering seasonal activity and higher rig count.

The adjusted EBITDA from the Drilling Solutions segment is expected to better sequentially in the third quarter, mainly across the major service lines, especially in tubular services.

While adjusted EBITDA from the Rig Technologies unit is likely to fall slightly from the second-quarter level, the segment is likely to see an uptick in revenues from rig automation projects in robotics operation during the last three months of the year.

For the third quarter, Nabors expects its EBITDA to vary between $210 million and $240 million.

Capital spending in the second half of 2019 is expected to reduce significantly with full-year capex projected at around $400 million. Nabors expects to generate positive free cash flow after paying out dividends in the third quarter. It remains focused to lower net debt by more than $200 million this year and by $600-$700 million through 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -15.15% due to these changes.

VGM Scores

At this time, Nabors has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Nabors has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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