Nabors Industries Ltd. has gotten so cheap that traders in the options market are betting the world's largest land-drilling contractor may be a takeover candidate after the departure of its 81-year-old chief executive officer.
Nabors, which lost $2.4 billion in value in the past six months as delays in equipment deliveries and upgrades of rigs in Saudi Arabia cut profitability, is now cheaper than 97 percent of oil and gas services companies versus sales, according to data compiled by Bloomberg. In the past two weeks, calls priced 10 percent above Nabors' stock rose the most in 18 months versus puts on one-month contracts, signaling traders are anticipating an acquisition, said JonesTrading Institutional Services LLC.
Gene Isenberg, who led Nabors since 1987 when it emerged from bankruptcy, was replaced in October as the board appointed his deputy the company's CEO. While Isenberg remains chairman, the change in leadership may have opened the door for a takeover of Nabors that could be worth 39 percent more than its market value of $5.2 billion, according to Penn Capital Management. A potential suitor such as Baker Hughes Inc. or Schlumberger Ltd. would gain more than 1,200 rigs from the Americas to Africa and the Middle East, Greenwood Capital said.
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"The valuation is very cheap and it's an opportunity to buy a company with very good assets," Eric Green, a Philadelphia-based manager at Penn Capital, which oversees $6 billion and owned about 1.7 million Nabors shares as of Sept. 30, said in a telephone interview. "With the CEO leaving it does give the potential for the company to be in play."
Green said Nabors could command a takeover in the "mid- twenties range" on a per-share basis, or about $7.2 billion at $25 apiece. The stock ended at $17.93 a share last week.
Dennis Smith, a spokesman for Hamilton, Bermuda-based Nabors, declined to comment on whether it has been approached by potential acquirers or would consider a sale.
Pamela Easton, a spokeswoman at Baker Hughes of Houston, declined to comment on whether it was considering an acquisition of Nabors. Mary Jo Caliandro, a spokeswoman for Houston- and Paris-based Schlumberger, didn't immediately respond to a telephone call or e-mail seeking comment.
Globally, Nabors actively markets 491 land drilling rigs as well as 749 land workover rigs, which are more heavy duty machinery used to repair and boost wells that are producing. The company also sells hydraulic fracturing services, owns stakes in oil and gas fields from Canada to Colombia, operates offshore rigs in the U.S. Gulf of Mexico and drives trucks in Alaska.
Hydraulic fracturing, or fracking, is used to free gas and oil trapped in shale rock by injecting water mixed with sand and chemicals to keep the cracks open and petroleum flowing.
CEO Succession
Shares of Nabors tumbled 30 percent in the second half of 2011, four times the 6.9 percent decline for the average energy company in the Standard & Poor's 500 Index, according to data compiled by Bloomberg.
The stock retreated as second-quarter earnings fell short of analysts' estimates. The company lost income after failing to deliver fracking equipment on time and from flooding in North Dakota and rain in the Marcellus Shale region. Recertification and upgrades needed for some of its rigs in Saudi Arabia also reduced profit, it said July 27.
On Oct. 28, Nabors announced that Anthony Petrello, its president and chief operating officer since 1992, would replace Isenberg, who turned 82 in December. While the company didn't give a reason for the change at the time, it said that Isenberg, who spent the last 24 years building Nabors from an Alaska-based driller with 38 rigs into a global operator with more than 1,200 rigs, recruited Petrello to be his successor.
Nabors now trades at a 10 percent discount to sales of $5.7 billion for the past 12 months, data compiled by Bloomberg show.
That's the lowest among U.S. oil and gas service companies with a market capitalization of more than $1 billion and cheaper than 60 of 62 rivals globally. Nabors is also valued at 8 times this year's estimated earnings, about 40 percent less than the industry average, the data show.
A chance to acquire Nabors on the cheap may entice Baker Hughes, the world's third-largest provider of services, tools and technology to oil and natural gas producers, according to Penn Capital's Green. The company could bundle some of Nabors' services with its own, he said.
Andy O'Donnell, Baker Hughes' president for the western hemisphere, said at a Nov. 15 conference that it is "always going to look at opportunities and have things we buy."
Nabors is also a "natural fit" for Schlumberger, the biggest oilfield-services provider, if it wants to boost its land-drilling presence, Greenwood Capital's Walter Todd said.
'Liquidation Value'
Buyout firms could consider taking Nabors private as well, said Todd Lowenstein, who helps oversee $16 billion for Highmark Capital Management Inc. in Los Angeles.
"It's trading almost at liquidation value," Lowenstein said. "People get interested when that happens. Either a private equity or a strategic buyer could be interested."
Petrello, Nabors' new CEO, may resist an outright sale and be more inclined to consider unloading some of its units to boost its stock price, according to Mark Demos, who helps oversee $14.6 billion for Fifth Third Asset Management.
"The most likely scenario is the new CEO is going to have a lot of pressure to create value for shareholders and he'll be selling businesses to focus more on probably the drilling businesses," Demos said in a telephone interview from Minneapolis. "They have OK assets. If the CEO truly believes in the cycle, he doesn't want to sell right now."
The company could divest its exploration and production assets, as well as businesses such as its workover rigs or its Alaska or Gulf of Mexico operations, according to Luke Lemoine, an analyst at Capital One Southcoast Inc. in New Orleans.
Traders in the options market are more bullish on the possibility of a takeover. After falling to a five-month low on Jan. 20, the implied volatility, the key gauge of options prices, for calls that pay off if Nabors rises 10 percent have jumped 15 percent versus comparable puts on one-month contracts, data compiled by Bloomberg show.
The surge in prices of bullish contracts relative to bearish bets was the steepest since July 2010, the data show.
"That is indicative of a bet on a takeout," Chris Rich, head options strategist at JonesTrading in Chicago, said in a telephone interview. "The options players are definitely looking at this as having a probability of a takeover."
Bloomberg News
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