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The following segment was excerpted from this fund letter.
Nabors Industries (NYSE:NBR)
During the quarter, one of our two largest detractors was Nabors Industries; share prices in the market were down more than 20%. Nabors’s share price was negatively impacted by the recent pullback in energy prices as the shares fell more than 50% from its 52-week high. We viewed the recent pullback as an opportunity, increasing our position size during the quarter. Nabors remains significantly mispriced in our opinion and is well-positioned to benefit from strong ongoing demand in their global high spec rig fleet.
We believe the marketplace is overlooking the ongoing improvement in industry utilization rates, as larger players have favored profit improvements of their current fleets versus undergoing a new build rig cycle. In addition, the Nabors heavily discounted share price appears to us to offer investors a wonderful opportunity to obtain their NDS (Nabors Drilling Solutions) segment at a fraction of its fundamental value.
The segment’s proprietary technology offerings are growing revenues more than 30%, with greater than 50% gross margins and given its capital light model, converting 90% of segment EBITDA (Earnings Before Income, Taxes, Depreciation, and Amortization) to free cash flow!! As the company’s NDS segment and International Joint Venture continue to scale, we believe the marketplace will recognize the reduced free cash flow cyclicality and free cash flow conversion improvement to greater than 50% of EBITDA over the long term.
Nabors management recently highlighted how ongoing profit improvement in their U.S. land business would support higher operating results in 2023. The company raised guidance, expecting $1B in EBITDA (versus $800M) and significant ongoing debt reduction, improving debt leverage to 1.7x at the end of next year.
In our opinion, Nabors’s shares remain at a significant valuation discount to its peers (50-70% on various valuation measures), with a normalized Enterprise Value (EV)-to-EBITDA multiple that is approaching two times and free cash flow yield greater than 40%. We continue to see upside share price potential over the next couple of years of more than three times from current levels.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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