A Form 4 filed with the SEC has disclosed that Howard Wolf, a member of the Board of Directors at Nabors Industries Ltd. (NYSE:NBR), directly purchased 11,000 shares of stock on July 25th at an average price of about $14.90 per share. Nabors Industries Ltd. (NYSE:NBR) is a $4.4 billion market cap contract driller primarily operating in onshore North America, with some international and offshore activity as well. Studies generally show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading). This can be attributed to the fact that it is generally irrational for insiders to increase company-specific risk as opposed to diversifying their wealth- unless they happen to be particularly confident in the stock’s prospects.
Nabors Industries Ltd. (NYSE:NBR) has released its results for the second quarter of 2013. The company’s operating revenues were 14% lower versus a year earlier and down on a q/q basis as well. However, management was able to cut costs to the point that after adding back adjustments for sales and disposal of long lived assets pretax income from continuing operations was higher than in the prior year period. This was offset by losses from discontinued operations, but in theory going forward this would not drag down the bottom line any further. Wall Street analysts project $1.23 in earnings per share for 2014 (against 41 cents in earnings from continuing operations year to date) for a forward earnings multiple of 12. Investors should note that Nabors Industries Ltd. (NYSE:NBR) is highly dependent on the overall economy (which makes sense, as drilling activity tends to be tied to oil prices and therefore to macro growth) with a beta of 2.9.
Another major market player in drilling, and focused on onshore operations, is Helmerich & Payne, Inc. (NYSE:HP). Its stock recently dropped 3% on reporting only slightly higher revenue and operating income in its most recent quarter compared to the same period in the previous fiscal year. Interestingly, sales growth was concentrated in offshore and in international operations- U.S. onshore, which composed over 80% of revenue, experienced a small decline in business.
This reversed the trend from earlier in the fiscal year, and it would be somewhat concerning if Helmerich & Payne was not able to benefit from the increase in onshore U.S. activity in the current environment of high oil prices. The stock’s forward P/E of 12 is even with that of Nabors Industries Ltd. (NYSE:NBR).
Investors can also compare Nabors to Patterson-UTI Energy, Inc. (NASDAQ:PTEN). Recent reports have shown a decline in revenue at the company, and last quarter its net income was less than half of what it had been in the second quarter of 2012. Investors seem to be expecting earnings to continue to decline but at a slower rate. The market appears more optimistic, and in fact values Patterson-UTI at a small premium to the other two companies we’ve discussed here at 13 times consensus EPS forecasts for 2014. It doesn’t seem like a good idea to buy the stock given that even if it does halt its decline it would then need to become more profitable going forward to justify the current valuation.
The insider purchase at Nabors is interesting, but it seems best for investors to hold off on buying for now. The forward P/E is low but results in the first half of this year have been tracking considerably below expectations for next year implying that analysts are looking for much stronger EPS numbers in 2014. If the company continues to struggle in its core onshore U.S. market it should prove difficult to hit analyst targets, therefore making Nabors less appealing as a potential value play.
Disclosure: I own no shares of any stocks mentioned in this article.
