The Rig Market Is Looking Up, but These Rig Stocks Dropped in February

By Tyler Crowe Markets Fool.com

What happened

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Even though there does appear to be a recovery in oil and gas drilling in the United States, shares of land rig companies Precision Drilling (NYSE: PDS), Nabors Industries (NYSE: NBR), and Parker Drilling (NYSE: PKD) all ended February down double digits, with Parker dropping 24% after the company announced it was issuing shares and convertible debt.

Image source: Getty Images.

So what

Let's start with the easy explanation, and that's Parker's share and debt issuances. The company announced that it would issue 12 million shares, which was enough to dilute shares by 10%. Also, Parker announced it would raise another $50 million through Series A 7.25% mandatory convertible debt. Management said it was raising capital for general and corporate purposes such as working capital or refinancing debt. With shares trading at multidecade lows, it would seem that this is the least opportune time to raise capital through equity, and suggests that the company isn't in great financial shape.

For the other two companies, it's a little harder to connect the dots. Both Nabors and Precision released earnings in February, and both companies reported lower net income results, but both also said that they have seen an uptick in rig demand in their North American segments that would suggest things are going to get better from here. As part of Precision's statements following its press release, it said that demand was increasing enough that it could start commanding higher day rates for its rigs.

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Also, in the beginning of February, Nabors announced it had signed a memorandum of understanding with Weatherford International for the two companies to collaborate on providing a more full-service drilling offering to producers by combining some of Nabors' fleet with some of Weatherford's well design, engineering, and pressure-pumping services. This is on top of the joint venture it signed recently with Saudi Aramco to combine its fleet in Saudi Arabia with that of Saudi Aramco's as well as add rigs to the JV's fleet. This will give Nabors a big toehold in the kingdom and will help diversify its income stream away from the U.S. a bit.

Now what

Excluding Parker's issues, these things seem to be positives for the industry in general, and there are signs every day that things will get better for rig owners. Just this past week, ExxonMobil announced it was increasing its capital budget to $22 billion, and 25% of it would be dedicated to drilling its shale holdings in the Permian Basin and Bakken formation. Money is flowing back into the oil patch, and that bodes well for these companies.

Parker, Nabors, and Precision aren't what you would call leaders in the oil and gas drilling industry. Nabors has a pretty large fleet of legacy rigs that aren't up to meeting the needs of modern shale drilling (though to be fair to Nabors, it is making strides to modernize its fleet). Also, all three of the companies are carrying pretty heavy debt loads. The tide may be rising for the rig industry, but these three companies still aren't the most seaworthy of the bunch.

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Tyler Crowe owns shares of XOM. The Motley Fool owns shares of XOM. The Motley Fool has a disclosure policy.