Nabors Industries (NBR – Free Report) has seen its stock price fall 21.2% in the past three months, significantly underperforming the broader oil and gas sector and the drilling oil and gas sub-industry’s decrease of 5% and 15.2%, respectively. In comparison, competitors like Transocean (RIG – Free Report) and Helmerich & Payne (HP – Free Report) dropped only 16.4% and 0.6% respectively, while Patterson-UTI (PTEN – Free Report) saw a rise of 2.5%.
YTD Price Performance
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With such a sharp fall, investors are left asking, is this an opportunity to buy at a discount or a signal to avoid the stock altogether?
What Does Nabors Bring to the Table?
NBR is a global leader in drilling services, operating in about 20 countries. The company provides advanced land and offshore drilling rigs to the oil and gas industry. Additionally, it has a 100% ownership stake in Nabors Arabia, actively marketing rigs in the Middle East, one of the world’s most lucrative drilling markets.
Hamilton-based company primarily generates revenues by drilling wells for oil and gas companies, offering the expertise and equipment necessary to extract these vital resources. However, recent financial results and market conditions raise questions about its growth potential.
Disappointing Performance in Q3
In its latest earnings report, Nabors posted a wider-than-expected loss of $3.35 per share, missing the Zacks Consensus Estimate of a loss of $1.79. The underperformance was caused by higher expenses across general administration, research and engineering, and interest costs.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
On the other hand, NBR’s adjusted free cash flow also dropped to $18 million in the third quarter from $57 million in the previous quarter, largely due to a hefty $82 million in interest payments and increased capital expenditures.
What is Dragging Down NBR Stock?
High Debt and Limited Flexibility: Nabors faces financial challenges with a debt-to-capitalization ratio of nearly 93%. While no major debt maturities are due until 2027, most free cash flow is directed toward debt repayment rather than growth initiatives or shareholder returns. This restricts the company’s ability to capitalize on market opportunities.
Declining U.S. Drilling Revenues: Reduced activity and lower daily margins in the Lower 48 U.S. market have put pressure on revenues from the domestic drilling segment. Margins dropped to $15,051 per day and this trend may continue as older contracts adjust to current rates.
Heavy Capital Expenditures: Nabors has raised its 2024 CapEx target to $600 million, driven by accelerated new-build projects in Saudi Arabia. While this indicates strong demand, it strains the company’s liquidity, limiting NBR’s ability to pursue other strategic opportunities.
Exposure to Market Volatility: As an oil and gas service provider, Nabors is highly vulnerable to fluctuations in oil prices and geopolitical risks. The recent suspension of three rigs in Saudi Arabia highlights how quickly market conditions can change, adding uncertainty to its growth outlook.
Should Investors Buy the Dip?
Despite its challenges, Nabors operates in a critical sector with long-term demand for drilling services. Its global presence, especially in high-potential regions like the Middle East, remains a key strength. However, the company’s heavy debt load, declining cash flow and reliance on volatile oil prices create significant risks. For investors with a high-risk tolerance and a long-term horizon, the current dip might seem tempting. But without clear signs of financial improvement or market stabilization, we believe the safer approach may be to stay on the sidelines.
Final Words: Avoid NBR Stock
This Zacks Rank #4 (Sell) company has been facing significant headwinds from heavy debt and declining U.S. revenues to high capital demands and market volatility. Until the company demonstrates stronger financial performance and operational stability, it is advisable to look elsewhere for opportunities in the oil and gas sector.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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