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Why Nabors’s Free Cash Flow Turned Negative in 2017

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Mar. 29 2018, Updated 5:15 p.m. ET

NBR’s operating cash flows

Nabors Industries’ (NBR) cash from operating activities (or CFO) crashed 88% in 2017 versus 2016. NBR generated $62.8 million CFO in 2017. Despite 15% higher revenues in 2017 versus 2016, adverse changes in working capital led to the fall in CFO in 2017.

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NBR’s free cash flow

Nabors Industries’ capital expenditure (or capex) increased 45% in 2017 over the previous year. NBR’s capex increased primarily due to rig-related enhancements, new construction and equipment, and higher sustaining capital expenditures. In 2017, NBR’s capex exceeded its CFO. So NBR’s free cash flow (or FCF) switched to -$511 million in 2017, compared to $136.5 million a year ago. NBR’s FCF was negative in three of the past six years.

NBR’s oilfield services peer U.S. Silica Holdings’ (SLCA) FCF was -$146.6 million in 2017. In 2016, SLCA’s FCF was -$46.1 million. Although SLCA’s CFO increased in 2017 over 2016, the rise in its capex was sharper, which led to FCF deterioration in 2017.

Will NBR’s capex increase in 2018?

In 2018, NBR expects capex to be ~$0.5 billion, or ~13% lower compared to 2017. NBR’s management believes the planned capex for 2018 will result in the enhancement of a significant number of rigs in NBR’s existing onshore rig fleet. NBR is 3.2% of the SPDR S&P Oil & Gas Equipment & Services ETF (XES). XES provides exposure to the oil and gas equipment and services segment. XES decreased 21% in the past year, compared to a 42% fall in NBR’s stock price during the period.

Next in this series, we’ll discuss Patterson-UTI Energy’s (PTEN) cash flow and capex.

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