NEW YORK (
) -- Cleaning up the balance sheet and paying down debt is a major focus of new
CEO Anthony Petrello.
The plan has resulted in
some new fans for the underperforming oil service stock. There wasn't much patience for this plan exhibited on Monday though as Nabors shares tanked while the energy sector and equities market moved up.
For investors looking to play the turnaround story in this oil service company, the share decline should not be a cause for too much trepidation.
Nabors provided details on Monday for a strategic asset sale initiative that it first laid out on its last quarterly conference call. There were few surprises in the announcement, with a focus on divesting Canadian operations the company had already highlighted as being less of a priority, as well as exploration and production assets.
Nabors targeted $600 million to $800 million in proceeds from a majority of the sales. The company didn't place a price tag on Gulf of Mexico rig sales or sale of some Canadian natural gas E&P assets. Dahlman Rose analyst James Crandell expects that in all "comfortably over" $1 billion will be raised by the end of 2012.
Total debt stood at $4.6 billion at year-end 2011 versus total assets of $12.9 billion and $550 million in cash. Net debt to capitalization is 42%.
Analysts expect that if the proceeds from the sales, which will continue into next year, are applied to the debt reduction plan, Nabors will reach its goal of a debt-to-capitalization ratio of less than 25% by the end of 2013.
A streamlined company with a better balance sheet should merit a better valuation.
Yet Nabors shares were down 3% on Monday on elevated volume as the energy sector rose by 1% after Federal Reserve Chairman Ben Bernanke gave a speech interpreted as foretelling a third round of quantitative easing. Nabors was one of the worst performers in the energy sector on Monday.
So much for doing what investors have been asking for.
Phil Weiss, analyst at Argus Research and a critic of former Nabors CEO
Gene Isenberg's management, recently moved to a buy on the oil service company. Weiss sees a company moving from being a bad allocator of capital to a good allocator and that often results in share appreciation.
Weiss said the Nabors announcement more or less made good on the initial announcement from Petrello on his first conference call as CEO.
Crandell wrote on Monday that he thought the company might also sell its U.S. well services business (a 500 rig business), which didn't turn out to be on the sale list. However, the analyst still sees a company moving in the right direction and deserving of a $29 price target.
Nabors shares ended trading on Monday at $18.78.
Looking for any reason for the selloff, other analysts referred to a Nabors comment given at an industry conference on Monday that overall rig count will be flat to down in the second half of the year as a potential reason. A flat rig count has been expected, as drilling in the dry gas basins dries up, but the expectation has been for the overall rig count to be no worse than flat, due to the move to the liquids rich basins.
The truth may be that some investors were simply looking for a convenient profit taking point in a stock that has rallied since the CEO change and still has a long way to go to make good on its promises.
Any new Nabors shareholders betting that the company would go beyond the debt reduction plan and also reward shareholders with a special dividend or buyback program likely headed for the exits on Monday with low risk gains already embedded in the shares.
Nabors made it clear that the total capital to be raised by the sales is earmarked for the debt reduction plan.
That's probably a good idea for Nabors, too: Even at under 25% debt to assets the company would merely be moving to in line with peers as opposed to being a standard bearer of fiscal discipline.
-- Written by Eric Rosenbaum from New York.
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