Shale Exposure And Renewable Shifts Will Squeeze Profits

Key Takeaways

• Transition to renewables and stricter carbon regulations threaten Nabors Industries' revenue growth and profit margins by reducing demand for traditional drilling services.
  
• Dependence on volatile shale markets and growing competition, technology disruption, and talent shortages further increase earnings risk and challenge future cash generation.
  
• Expanding global operations, technological innovation, and disciplined financial management position Nabors to sustain revenue growth, improve margins, and reduce earnings risk amid stable energy demand.

Catalysts

Provides drilling and drilling-related services for land-based and offshore oil and natural gas wells in the United States and internationally.

• The accelerating global transition to renewable energy and enhanced decarbonization targets are expected to structurally lower long-term demand for hydrocarbon drilling services, directly constraining Nabors Industries' revenue growth as their core oil and gas customer base contracts.
  
• Heightened worldwide regulation and the introduction of more aggressive carbon pricing on fossil fuel extraction will significantly increase operational costs for oilfield service providers, eroding Nabors' net margins and compressing profitability over time.
  
• Nabors' ongoing reliance on highly cyclical North American shale markets exposes the company to amplified earnings volatility and heightened risk of revenue contraction in downturns, especially as major oil companies reduce upstream investment and shift capital toward lower-carbon businesses.
  
• Advancements in alternative energy technologies such as wind, solar, and batteries are projected to outpace improvements in conventional drilling technologies, accelerating the displacement of hydrocarbons and reducing the addressable market for Nabors' services, with negative long-term implications for top-line growth.
  
• Industry-wide challenges, including intensifying global competition, talent shortages due to declining sector attractiveness, and increasing labor costs, are poised to drive margin compression and operational disruptions, undermining Nabors' earnings power and cash generation over the long term.

Nabors Industries Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Nabors Industries compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Nabors Industries's revenue will grow by 1.6% annually over the next 3 years.
• The bearish analysts are not forecasting that Nabors Industries will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Nabors Industries's profit margin will increase from -4.5% to the average US Energy Services industry of 7.0% in 3 years.
• If Nabors Industries's profit margin were to converge on the industry average, you could expect earnings to reach $223.6 million (and earnings per share of $13.15) by about September 2028, up from $-137.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 2.7x on those 2028 earnings, up from -3.8x today. This future PE is lower than the current PE for the US Energy Services industry at 14.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.29%, as per the Simply Wall St company report.

Nabors Industries Future Earnings Per Share Growth

Risks

• The continued global demand for energy, especially in natural gas, and the resilience of LNG exports are supporting stable and even growing drilling activity, which could underpin Nabors' utilization rates and sustain or grow its revenue in the long term.
  
• Strategic investments and acquisitions, such as the integration of Parker Wellbore, are enhancing Nabors' technological capabilities and operational footprint in key growth regions like the Middle East and international offshore, positioning the company to capture higher-margin contracts and boost net margins.
  
• The long-term SANAD newbuild program in Saudi Arabia, with multi-year contracts and high utilization visibility, gives Nabors an embedded growth trajectory and provides a stable earnings base, reducing downside risks to earnings over the next decade.
  
• Expanding presence in markets like the Middle East, Alaska, and offshore, as well as increasing exposure to advanced drilling solutions and technology-driven offerings, differentiates Nabors from competitors and is likely to support ongoing revenue growth and margin expansion.
  
• Ongoing deleveraging, strong free cash flow generation, and disciplined capital allocation are improving Nabors' financial health, lowering interest costs, and increasing the company's ability to return capital to shareholders, which can support long-term earnings growth and share price appreciation.

Valuation

• The assumed bearish price target for Nabors Industries is $28.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Nabors Industries's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $50.0, and the most bearish reporting a price target of just $28.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.2 billion, earnings will come to $223.6 million, and it would be trading on a PE ratio of 2.7x, assuming you use a discount rate of 8.3%.
• Given the current share price of $35.33, the bearish analyst price target of $28.0 is 26.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.