This week, Nabors Industries (NBR) joined the list of gas drillers looking for more and more exposure into pressure pumping, also known as hydraulic-fracturing.
The sector has become literally overheated with industry stalwarts convinced of the inevitability of natural gas growth, natural gas prices and shale. We've seen multi-billion-dollar deals from drilling majors Schlumberger (SLB) and Baker Hughes (BHI) last year, followed by similar smaller deals from Patterson-UTI (PTEN)and now Nabors.
I'm a big believer in the inevitability of natural gas from shale, but I make money from finding and betting on stocks, not from pipedreams of our energy future. I see the sector as far too crowded right now, in light of current gas prices and drilling headwinds. There'll be far more opportune prices to find value in shale plays, and this deal convinces me that now is the time to be on the sidelines.
Nabors was a recommendation I made several weeks ago, precisely because of its singular, land-based drilling exposure. I had been leery of involvement in off-shore names, considering the blown well in the Gulf of Mexico and tried to find a driller with concentrated assets in traditional land operations. Nabors shares had been closely aligned with the price of natural gas and made for a great derivative play on what I thought was a price that could do nothing but go up. But the recent buy of Superior Well Services (SWSI) has changed my view on the stock. The all-cash $900 million deal will force Nabors to sell lucrative Columbia assets to finance, while focusing them much more exclusively on shale plays that require the pressure pumping ability that Superior Well Services will bring. Never mind that Nabors spent an estimated 10.5 times EBITDA for the company, significantly more than Patterson-UTI did for their buy of similar pressure pumping services from Key Energy (KEG). Also ignore that Nabors will probably need a secondary stock offering to pay for the deal. Because of this deal, Nabors is now entering a very crowded space of players relying upon the quick growth in shale gas production from the Haynesville, Barnett and particularly the environmentally-charged Marcellus. It's just too tough a space to succeed right now. Other, larger and better connected drilling companies have already made their bets in that space and have a huge leg up on the business there, particularly heavyweights Schlumberger with its 2009 buy of Smith international (SII) and Baker Hughes with its purchase of BJ services.
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