What: Shares of Nabors Industries dropped close to 18% in December as the number of active drilling rigs in the U.S. starts to decline.
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So what: Ever since oil and gas prices started to decline in the U.S. about 18 months ago, total active rigs have been declining pretty quick. The most recent rig count from Baker Hughes puts total active rotary rigs at 698, almost two-thirds fewer than the number of active rigs before oil prices started on its hard slide. With so few rigs in the field, Nabors and most of its peers have been suffering immensely and December was hard on all of the major land rig owners.
Last quarter, Nabors reported that its utilization rate had fallen to 45%. This is the result of both weakness in total rig demand and because Nabors is trying to turn over its fleet from older legacy rigs to newer, higher-specification rigs. The utilization rate on those legacy rigs is particularly low, and it would not be surprising if many of them were eventually scrapped to make way for new rigs in the fleet. On top of that, Nabors has a higher debt load than most of its peers, so there are some fears that the company is at greater credit risk than others.
Now what: One of the things that Nabors and other land rig owners can be thankful for is that the speed of shale drilling means that a recovery could come quick when oil prices do rebound. The short amount of time it takes to go from a drilling prospect to flowing well can be measured in days instead of months for offshore projects. In the meantime, though, Nabors will still be grappling with its large fleet of legacy rigs and a debt overhang that brings up more question marks than some of its peers.
This recent dip might make Nabors look cheap -- shares are trading at 0.6 times tangible book-- but until we start to see some more definitive action on those old rigs and debt, it may be worth sitting this one out.
The article Here's What Sent Shares of Nabors Industries Down 18% in December originally appeared on Fool.com.
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