NBR

Nabors Industries Ltd. - 10-Q Summary (Period Ended June 30, 2003)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, for Nabors Industries Ltd., the world's largest land drilling contractor. The company operates through two primary segments: Contract Drilling (land and offshore drilling, workover, and well-servicing) and Manufacturing and Logistics (marine transportation, top drive manufacturing, and directional drilling). As of July 31, 2003, there were 146,470,489 common shares outstanding.

Key Financial Metrics

Note: Gross margin percentage decreased to 31% for the quarter and 32% for the six-month period compared to 32% and 34% in the prior year periods, respectively.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 22% ($77.4 million) for the quarter and 20% ($146.3 million) for the six-month period compared to the prior year. Growth was driven by higher activity in Canada (up 138% QoQ), International operations (up 25% QoQ), and U.S. Lower 48 Land Drilling (up 20% QoQ).
• Profitability: Net income increased 14% for both the quarter and six-month period. However, Adjusted Income derived from operating activities decreased 5% for the six-month period ($94.0 million vs. $98.6 million) due to a 21% increase in depreciation and amortization expenses related to recent acquisitions (Enserco and Ryan Energy Technologies).
• Cash Flow: Net cash provided by operating activities decreased 38% to $120.8 million for the six months ended June 30, 2003, compared to $194.7 million in the prior year, primarily due to changes in working capital accounts and deferred tax benefits.
• Debt Restructuring: The company issued $700 million in zero-coupon senior exchangeable notes due 2023. Proceeds were used to redeem $825 million of zero-coupon convertible senior debentures due 2020 and $45.2 million of 8.625% senior subordinated notes due 2008.

Guidance, Outlook, and Risks

• Outlook: Management expects third-quarter 2003 results to increase from current quarter levels due to continued recovery in U.S. Lower 48 Land Drilling and seasonal improvements in Canadian drilling activity. U.S. Offshore operations are expected to continue recovering, while Alaska operations are expected to remain flat.
• Market Drivers: Results remain highly dependent on natural gas and oil prices. Average natural gas prices were $6.00/mcf and oil prices were $31.45/barrel for the six months ended June 30, 2003, compared to $2.98/mcf and $24.01/barrel in the prior year.
• Risks: Key risks include fluctuations in commodity prices, demand for exploration and development activities, political instability in international markets, and the potential that tax savings from the 2002 corporate reorganization may not be realized if U.S. legislation changes.
• Unusual Items: The company recorded a $1.9 million gain from a casualty insurance settlement in the first quarter. A loss of $0.9 million was recognized on the early extinguishment of debt in April 2003.

Investor Verification Checklist

• Debt Maturities: Verify the company's ability to service $295.3 million in 6.8% senior notes due April 15, 2004, which are classified as current liabilities.
• Acquisition Integration: Assess the long-term profitability impact of the Enserco and Ryan Energy Technologies acquisitions, which have significantly increased depreciation expenses.
• Commodity Sensitivity: Monitor natural gas and oil price trends, as these are the primary drivers for the U.S. Lower 48, Canadian, and U.S. Offshore segments.
• Tax Position: Review the status of the tax benefits recorded from the 2002 Bermuda reorganization, as future legislative changes could impact their realization.
• Derivative Exposure: Note the $7.5 million fair value loss on the range cap and floor transaction recorded as of June 30, 2003.