Executive Summary / Key Takeaways

• Nabors Industries is strategically leveraging its advanced drilling technology and expanding international footprint, particularly through the high-potential SANAD joint venture in Saudi Arabia, to drive long-term value and offset volatility in the U.S. market.
• The recent acquisition of Parker Wellbore significantly accelerates Nabors' strategy by doubling the size of its CapEx-light Drilling Solutions (NDS) segment, expanding its international presence, and adding accretive tubular rental capabilities, with targeted synergies of $40 million in 2025.
• Despite near-term consolidated free cash flow being impacted by substantial investment in the SANAD newbuild program ($360 million CapEx in 2025), the company's operations outside SANAD are expected to generate approximately $150 million in free cash flow in 2025, which is prioritized for debt reduction.
• Nabors' differentiated technology suite, including AI-driven automation and energy transition solutions, provides a competitive moat by enhancing operational efficiency, reducing costs, and enabling complex drilling projects like extended laterals, positioning the company favorably against peers.
• While the U.S. Lower 48 market faces challenges from stable activity, high churn, and slight pricing pressure, Nabors is focused on cost reduction, operational excellence, and targeting high-spec, technology-demanding work, expecting margins to stabilize near current levels into 2025.

Reshaping the Drilling Landscape Through Technology and Global Reach

Nabors Industries Ltd. stands as a global provider of drilling and drilling-related services, operating a fleet of land-based and offshore rigs across more than 20 countries. In an industry characterized by cyclical demand and technological evolution, Nabors has strategically positioned itself by focusing on high-performance assets, advanced technology, and expanding its presence in key international markets. This strategy aims to build a more resilient and profitable enterprise capable of navigating market fluctuations while capturing long-term growth opportunities.

A cornerstone of Nabors' strategic evolution is its commitment to technological differentiation. The company has developed a suite of proprietary technologies under its Drilling Solutions (NDS) segment, designed to enhance drilling efficiency, safety, and performance for both its own fleet and third-party rigs. These include advanced automation systems like SmartSLIDE, SmartNAV, and SmartDRILL for directional control and process automation, as well as the RigCLOUD platform for real-time data integration and analysis. The REVit stick-slip mitigation technology and ROCKit drill pipe oscillation software address specific operational challenges. These tools offer tangible benefits; for instance, the Predictive Drilling system, utilizing AI, aims to optimize Rate-of-Penetration (ROP) by 20-30% and reduce drilling dysfunctions, contributing to significant time and cost savings for operators. The AI-based engine management system predicts power needs with a 10-minute look-ahead, potentially reducing operating costs by 10-15% per rig. This technological edge provides Nabors with a competitive moat, allowing it to command premium pricing and secure contracts for more complex wells, such as those with increasingly long laterals, where its high-spec rigs and automation capabilities are particularly valuable. While competitors like Helmerich & Payne (HP) and Patterson-UTI (PTEN) also offer advanced rig technologies, Nabors emphasizes its integrated automation suite and AI-driven analytics as key differentiators. The company also invests in R&D for new technologies, including its Energy Transition portfolio featuring the PowerTAP module, which connects rigs to the grid to reduce fuel consumption and emissions, with initial international deployments underway.

Complementing its technological focus is Nabors' deliberate expansion in international markets, which management describes as the strongest seen in a decade. This growth is anchored by the SANAD joint venture with Saudi Aramco, established in 2016 to build and operate a fleet of 50 newbuild onshore rigs over ten years. This program represents a unique, large-scale opportunity with rigs working under long-term contracts designed for a five-year return on investment and a minimum ten-year term. As of Q1 2025, SANAD had 10 newbuilds working, with the 11th starting in early Q2 and the 12th expected later in the quarter. Three more are scheduled for 2025 and one for early 2026, bringing the total to 15. Discussions are ongoing for the next tranche of five newbuilds, expected to be awarded in the first half of 2025. This program is strategically aligned with Saudi Aramco's focus on increasing natural gas production, a segment where approximately 80% of SANAD's existing rigs are already deployed and all are gas-capable. While the substantial capital expenditure required for the newbuilds ($360 million in 2025) impacts consolidated free cash flow in the near term, management views this as a compelling investment in a high-return, lower-risk opportunity backed by a major global operator. The existing SANAD operations, even excluding the newbuilds, are generating significant cash flow, estimated at over $200 million annually and growing.

Beyond Saudi Arabia, Nabors is securing new work in other international regions. In Q1 2025, the company reactivated a rig in Colombia and secured new contracts in Kuwait, with the first of three rigs spudding in April and the others expected in Q2 2025. Deployments are also planned in Argentina and India in the second half of 2025. These international additions are expected to drive average international rig count to 85-86 in Q2 2025 and 88-89 for the full year 2025, with average daily gross margins projected to increase to $17,700 in Q2 2025 and remain sustainable around $17,000 in 2025. This international growth is also fueling the expansion of the NDS business, with international revenue comprising half of the segment's total in Q1 2025 (excluding Parker), compensating for softness in the U.S. market.

The U.S. Lower 48 market, while remaining a significant part of Nabors' business, presents a more challenging near-term picture. The market has remained relatively stable in terms of overall rig count but has experienced high churn, leading to operational inefficiencies and increased costs in Q1 2025. Nabors' average Lower 48 rig count decreased to 61 in Q1 2025 from 66 in Q4 2024, though it recovered to 63 by early Q2 2025. Daily margins in the Lower 48 declined to $14,276 in Q1 2025 from $15,000 in Q4 2024, and are forecast to be around $14,100 in Q2 2025. Management acknowledges a slight downward trend in leading-edge pricing due to industry utilization levels (around two-thirds for high-spec rigs) but emphasizes that pricing discipline remains relatively intact. The company is focused on mitigating margin pressure through cost reductions and aligning its support structure. Despite a survey of large operators indicating a potential 4% reduction in rig count by the end of 2025, Nabors is actively working to replace activity and expects its rig count to remain between 63-64 for the full year 2025, with margins stabilizing around $14,600. The trend towards longer laterals continues to favor Nabors' high-spec fleet and technology.

A transformative event for Nabors was the completion of the Parker Wellbore acquisition on March 11, 2025. This all-equity transaction, valued at approximately $180.6 million, resulted in a $113.0 million bargain purchase gain primarily due to the decrease in Nabors' share price between signing and closing. Strategically, the acquisition significantly accelerates Nabors' objective of growing its CapEx-light segments by essentially doubling the size of the NDS business. Parker brings complementary tubular running services, a high-performance tubular rental business (Quail Tools), and expands Nabors' international footprint. The acquisition is expected to generate approximately $150 million in EBITDA for the full year 2025, with about $130 million included in Nabors' consolidated results post-closing. Nabors is targeting $40 million in cost synergies from the integration in 2025, increasing to at least $60 million in 2026. The acquisition is expected to be immediately accretive to free cash flow per share and improve overall financial metrics, potentially contributing to a re-rating of the stock.

Financially, Nabors reported Q1 2025 operating revenues of $736.2 million, a slight decrease from $733.7 million in Q1 2024. Net income attributable to Nabors was $33.0 million ($2.18 per diluted share) in Q1 2025, a significant improvement from a net loss of $34.3 million ($4.54 per diluted share) in Q1 2024, largely driven by the Parker bargain purchase gain. Adjusted EBITDA was $206.3 million in Q1 2025. General and administrative expenses increased by 11% in Q1 2025, partly due to the Parker acquisition. Interest expense rose 8% due to higher effective rates. Operating cash flow was $87.7 million in Q1 2025, down from $107.2 million in Q1 2024, primarily due to lower operating results before working capital changes. Investing cash flow used decreased to $74.9 million from $106.6 million, benefiting from cash acquired in the Parker deal ($84.4 million) despite higher CapEx ($165.0 million vs. $104.6 million). Financing cash flow used was minimal ($2.0 million) in Q1 2025, compared to $635.1 million used in Q1 2024 (which included significant debt repayment).

As of March 31, 2025, Nabors had $404.1 million in cash and short-term investments and $531.2 million in working capital. Borrowings under its 2024 Credit Agreement were $178.0 million, with $183.4 million in remaining letter of credit availability. The company was in compliance with its credit facility covenants (interest coverage ratio of 4.00:1.00 vs. 2.75:1.00 required). Debt reduction remains the highest priority. While the SANAD newbuild investment creates a drag on consolidated free cash flow (estimated negative $150 million for SANAD in 2025), the company expects to generate approximately $150 million in free cash flow from its other operations in 2025, which will be used to reduce gross debt. The Parker term loan ($177.8 million) was repaid in Q1 2025 using the credit facility, and the company is pursuing a new term loan to refinance this.

Key risks include the volatility of oil and gas prices and demand, which directly impacts customer spending. Customer consolidation in the U.S. could affect rig demand. Geopolitical risks, such as the impact of sanctions on operations in Russia (leading to asset impairment and suspension), and political/economic instability in other operating regions (like payment delays in Mexico and potential rig count reductions in Colombia), pose challenges. Changes in trade policies, including tariffs, could increase supply chain costs. The company also faces litigation risks, such as the ongoing case in Algeria, which could result in a loss of up to $13.1 million in excess of accruals. Maintaining compliance with debt covenants is crucial, although management expects to remain in compliance.

In the competitive landscape, Nabors competes with players like HP, PTEN, PD (PD), and RIG (RIG). While some peers may have advantages in specific areas like U.S. scale (HP) or cost structure (PTEN), Nabors differentiates itself through its advanced technology suite, which enhances operational efficiency and performance, particularly for complex wells. Its global diversification, especially the unique SANAD partnership, provides exposure to growing international markets that are less volatile than the U.S. The Parker acquisition further strengthens its position in the NDS segment and tubular services, areas with higher free cash flow conversion compared to traditional drilling.

Conclusion

Nabors Industries is executing a clear strategy centered on leveraging its technological leadership and capitalizing on robust international growth opportunities, most notably through the transformative SANAD joint venture and the accretive Parker Wellbore acquisition. While the U.S. market presents near-term headwinds characterized by stable activity and cost pressures, Nabors' focus on high-spec rigs, automation, and operational efficiency, coupled with its efforts to reduce costs, positions it to maintain profitability in this environment. The significant investment in the SANAD newbuild program, while impacting consolidated free cash flow, represents a unique, long-term value creation opportunity backed by a committed partner and favorable contract economics. The cash flow generated by the rest of the business is strategically directed towards debt reduction, the company's top financial priority. By expanding its CapEx-light NDS segment, diversifying its geographic footprint, and maintaining technological superiority, Nabors is building a more resilient and higher-margin business capable of driving significant value for shareholders in the years ahead, despite the inherent volatility of the energy sector.