An Insider at This Drilling Company Added 11,000 Shares

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A Form 4 filed with the SEC has disclosed that Howard Wolf, a member of the Board of Directors at Nabors Industries (NYSE: NBR), directly purchased 11,000 shares of stock on July 25 at an average price of about $14.90 per share. Nabors is a $4.4 billion market cap contract driller, primarily operating in onshore North America, with some international and offshore activity as well.

Studies generally show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider transactions). This can be attributed to the fact that it is generally irrational for insiders to increase company-specific risk as opposed to diversifying their wealth -- unless they happen to be particularly confident in the stock’s prospects.

A closer look at the company

Nabors has released its results for the second quarter of 2013. The company’s operating revenue was 14% lower versus a year earlier, and down on a q/q basis as well. However, management was able to cut costs to the point that after adding back adjustments for sales and disposal of long lived assets, pre-tax income from continuing operations was higher than in the prior year period. This was offset by losses from discontinued operations, but in theory, going forward, this would not drag down the bottom line any further.

Wall Street analysts project $1.23 in earnings per share for 2014 (against $0.41 in earnings from continuing operations year to date) for a forward earnings multiple of 12. Investors should note that Nabors is highly dependent on the overall economy (which makes sense, as drilling activity tends to be tied to oil prices and therefore to macro growth) with a beta of 2.9.

In addition to insider activity, Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds and other notable investors. We’ve found that the information in these filings is useful in developing investment strategies (for example, the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) and in tracking interest in individual stocks over time. During the end of the first quarter of 2013, Cliff Asness’ AQR Capital Management initiated a position of 3.9 million shares in Nabors (see Asness's stock picks).

Comparing Nabors to its peers

Another major market player in drilling, and focused on onshore operations, is Helmerich & Payne (NYSE: HP). Its stock recently dropped 3% on reporting only slightly higher revenue and operating income in its most recent quarter compared to the same period in the previous fiscal year. Interestingly, sales growth was concentrated in offshore and in international operations -- U.S. onshore, which comprised over 80% of revenue, experienced a small decline in business.

This reversed the trend from earlier in the fiscal year, and it would be somewhat concerning if Helmerich & Payne was not able to benefit from the increase in onshore U.S. activity in the current environment of high oil prices. The stock’s forward P/E of 12 is even with that of Nabors.

Investors can also compare Nabors to Patterson-UTI Energy (NASDAQ: PTEN). Recent reports have shown a decline in revenue at the company, and last quarter, its net income was less than half of what it had been in the second quarter of 2012. Investors seem to be expecting earnings to continue to decline, but at a slower rate. The market appears more optimistic, and in fact, values Patterson-UTI at a small premium to the other two companies discussed here at 13 times consensus EPS forecasts for 2014. It doesn’t seem like a good idea to buy the stock given that even if it does halt its decline, it would then need to become more profitable going forward to justify the current valuation.

Conclusion

The insider purchase at Nabors is interesting, but it seems best for investors to hold off on buying for now. The forward P/E is low, but results in the first half of this year have been considerably below expectations for next year, implying that analysts are looking for much stronger EPS numbers in 2014. If the company continues to struggle in its core onshore U.S. market, it should prove difficult to hit analyst targets, therefore making Nabors less appealing as a potential value play.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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