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Explaining Nabors Industries’ Historical Valuation

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Nabors Industries’ PE trend

Nabors Industries’ (NBR) price-to-earnings (or PE) multiple fluctuated between fiscal 2009 and fiscal 2014. In fiscal 2014, NBR’s earnings fell sharply compared to fiscal 2013. On an average, its share price fell 24% from fiscal 2013 to fiscal 2014. A steeper earnings fall, which more than offset the share price fall, caused a PE multiple expansion in fiscal 2014 over fiscal 2013.

In fiscal 2015, NBR’s share price fell sharply. However, in fiscal 3Q15 and fiscal 2Q15 NBR recorded net losses, as the energy sector was gripped by energy price weakness and the US rig count crashed. So, NBR’s PE multiple was not meaningful.

Forward PE considers sell-side analysts’ consensus estimate of earnings for the next four quarters. NBR’s forward PE multiple is not meaningful either, implying that analysts expect it to either continue to record a net loss or to post very low net profits in the coming four quarters.

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Price to cash flow multiple

NBR’s price-to-cash-flow was range-bound for the six years leading up to fiscal 2014. In the first three quarters of fiscal 2015, price-to-cash-flow was steady compared to what it was at the beginning of the year, because both NBR’s cash from operations and its share price fell.

Going forward, analysts expect price-to-cash-flow to rise, which reflects expectations of lower cash flow in the next four quarters.

Nabors Industries’ EV/EBITDA trend

Nabors Industries’ historical valuation, expressed as an EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, fell from fiscal 2009 until fiscal 2012, then kept rising until fiscal 2014.

From fiscal 2012 to fiscal 2014, NBR’s net debt rose marginally while its share price fell. In effect, EV, which is approximately the summation of equity value and net debt, fell marginally. However, NBR’s EBITDA fell significantly in fiscal 2014 over fiscal 2012, causing its EV/EBITDA ratio to rise.

In the first three quarters of fiscal 2015, NBR’s net debt fell while its share price also fell. In effect, NBR’s EV fell. NBR’s EBITDA fell even further, offsetting EV’s fall. This led the EV/EBITDA ratio to rise further until fiscal 3Q15.

RPC’s (RES) EV/EBITDA currently stands at 8.7x, lower than NBR’s 18.2x. NBR forms 3.2% of the VanEck Vectors Oil Services ETF (OIH), an ETF tracking an index of 25 oilfield services companies.

Forward EV/EBITDA considers sell-side analysts’ consensus estimate of EBITDA for the fiscal year. NBR’s forward EV/EBITDA multiple for fiscal 2016 is lower than its current EV/EBITDA multiple. This implies analysts’ expectation of an increase in NBR’s EBITDA in fiscal 2016.

The expected rise in operating earnings also reflects NBR’s high current EV/EBITDA multiple compared to its seven-year average.

Next, let’s discuss NBR’s valuation compared to those of its industry peers.

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