Salomon: Nabors 0% convertible due 2020 alternative to the common

By Ronda Fears

Nashville, Tenn., Oct. 29 - Nabors Industries' convertible is a good, conservative alternative to the underlying common stock, and of the oil driller's two outstanding converts the best is the 0% issue maturing in 2020 rather than the 0% issue maturing in 2021, said Salomon Smith Barney convertible analyst Stuart Novick. Nabors Industries just posted its best ever quarterly results in third quarter with net income of $108 million, or 68c per share, was almost three times the year ago bottom line of $38.7 million, or 25c per share. The stock price has been halved by declining energy prices, and Novick said the convert is a safe way to play the name.

"The Nabors zeros of 2020 now carry a positive yield to their mid-2003 put date. Given the relatively short time until this issue's put date - 19 months - we'd prefer it over the other Nabors convert due 2021 in spite of the latter's richer yield," Novick said in a report Monday

The 2020 issue also trades cheaply relative to Nabors' 6.8% straight bonds due 2004. The 6.8s, a $325 million issue, presently trades at a spread of about 125 basis points over Treasuries, compared to the 200 basis point spread on the zeros of 2020, which is senior paper and is putable 10 months ahead of the 6.80s' maturity date. Nabors' strong underlying credit has enabled the converts to hold their ground in spite of the sharp pullback in the common shares, Novick said, enhancing their attractiveness as a conservative alternative to the common.

"The zeros of '20 have slipped by only 18% from their peak with the stock down approximately 54%. Meanwhile, the issue's premium has widened to about 100% from just about 9% in March. The '21s show a similar pattern: With the stock off the same 54%, the bonds have declined by only 9%. The premium, accordingly, ballooned to a recent 169% from about 35% when the common peaked back in March," Novick said in the report. "We'd expect the bonds to keep their footing should industry conditions stay choppy. Our quantitative model indicates that both issues should fall less than one third as fast as the common, if the shares were to retreat by another 25% in the coming year.

"For those slightly more aggressive minded investors, the zeros of 2021 are not callable until early 2006 and they possess a yield to put - also 4.25 years away - of a healthy 5.7%. Not bad for four year, A- rated paper, in our opinion."

Salomon Smith Barney estimates Nabors net income per share of $2.35 this year, well ahead of 2000's 89c EPS figure. For next year, however, Salomon expects the bottom line to sag based on a drop-off in the North American land drilling market. Currently, Salomon puts the 2002 EPS estimate at $1.60, which is below the consensus estimate of $2.23. Yet, Salomon recently raised its 12-month price target on the stock from $28 to $35.

Nabors Industries 0.00% due 6/20/20 (A3/A-)

Conversion price: $56.6595

Conversion ratio: 10.7380

Convertible price: 61.75

Common price: $28.50

Call: 6/20/03 at 65.55

Put: 6/20/03 at 65.55

Current yield:0.00%

Conversion premium: 101.80%

Breakeven: Not Meaningful

Years of call protection remaining: 1.70

Fair value: 61.724

Delta: 13.4%

Spread: 200 basis points

Parity: 30.603

Point Premium: 31.15

Common yield: 0.00%

Investment value: 60.828

Rho: 0.009

Volatility: 40.0%

Yield-to-Maturity: 2.60%

Yield-to-Put: 3.60%

Yield-to-Call: 3.60%

Option value: 0.85

Gamma: 0.43

Issue Size: $825 million

Nabors Industries 0.00% due 2/5/21 (A3/A-)

Conversion price: $86.0004

Conversion ratio: 7.0745

Convertible price: 54.250

Common price: $28.500

Call: 2/5/06 at 68.889

Put: 2/ 5/06 at 68.889

Current yield: 0.00%

Conversion premium: 169.10%

Breakeven: not meaningful

Years of call protection remaining: 4.25

Fair value: 54.666

Delta: 14.0%

Spread: 240 basis points

Parity: 20.1623

Point premium: 34.09

Common yield: 0.00%

Investment value: 53.478

Rho: 0.021

Volatility: 40.0%

Yield-to-Maturity: 3.20%

Yield-to-Put: 5.66%

Yield-to-Call: 5.70%

Option value: 1.23

Gamma: 0.31

Issue Size: $1.38 billion

End

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