NBR has $460M in cash and $4.7B in debt on its balance sheet. Despite the debt, NBR is leveraged 2.4x while its interest coverage ratio is 8.0x. Of the total $4.7B in debt, only $275M are due until 2018 while NBR's $1.4B credit facility of which $490M is still available is due in September, 2014. Firm has $1B available in total liquidity, which should help alleviate any liquidity concerns - a major issue with capital intensive business. For the first time in 2H of 2012, the firm generated more operation cash flow than it spent on Capex demonstrating management's commitment to rein in costs and increase its cash flow.
Looking at approximately 25 quarters of data, the year-over-year operating margins, both for the Drilling as well as Completion & Production Services have started to move up again toward the 2007 highs. This is a result of management's effort to slowly restructure the company whose share price is weighed down by Oil & Gas pricing pressure as well as from 2011 controversy surrounding NBR's CEO. After performing valuation on the company, the shares can be valued at $22.50 to $24.00 per share by the end of 2013.
The $22.50 valuation is derived by assuming that the firm only pays off $500M in debt instead of $1B, only generates $1.50 in EPS in 2013 instead of industry estimates of $2.20 while reporting $2B in 2013 EBITDA. I have used 2013 EBITDAx of 5.15x, 2013 EV/REVx of 1.39x and 2013 P/Ex of 9.5x.
Breaking the firm down and performing SOTP analysis yields $24.15. This assumes a 2013 P/REVx of 1.39 and 2013 P/EBITx of 7.2 for Drillers while 0.95x and 2.78x respectively for Completion & Production services. Moreover, if NBR becomes a takeover targets due to above mentioned catalysts, a modest 15% takeover premium for NBR yields an average price of $26 per share.
Assuming that Pressure pumping decreases by another 10% and U.S. lower 48 by 5% in 2013 while all other segments increase by a modest 3%, I still come up with a 2013 EPS of $1.9. Assuming an industry estimated forward P/Ex of 9.5x, that still yields a price of approximately $18.00.
With current share price trading at $13.90, the shares still offers a 30% margin of safety to investors who are pessimistic about a major NBR turnaround.
"My well came in big, so big, Bick and there's more down there and there's bigger wells. I'm rich, Bick. I'm a rich 'un. I'm a rich boy." - Jett Rink
Don't believe anything I say. Do your own DD. Insert huge disclaimer here ____________.
