NABORS INDUSTRIES LTD annual report, FY2020

Nabors Industries Ltd. — FY2020 Form 10-K Summary

Business context and reporting period

Nabors is a Bermuda-based global drilling contractor and provider of drilling-related technologies and services. Its five reportable segments are U.S. Drilling, Canada Drilling, International Drilling, Drilling Solutions and Rig Technologies. The filing covers the fiscal year ended December 31, 2020, with comparisons to 2019 and 2018.

At December 31, 2020, Nabors actively marketed 354 land-based rigs and 29 offshore platform rigs in approximately 20 countries.
Average rigs working declined to 152.6 in 2020 from 214.5 in 2019, including a 41% decline in U.S. Drilling activity.
Saudi Aramco represented approximately 29% of consolidated operating revenue, compared with 22% in 2019.

Financial performance and key metrics

Metric	2020	2019	Change
Operating revenue	$2.134 billion	$3.043 billion	Down 30%
Loss from continuing operations attributable to common shareholders	$820.3 million	$720.1 million	Loss increased $100.1 million
Diluted loss per share	$118.69	$105.39	Higher loss
Net cash provided by operating activities	$349.8 million	$684.6 million	Down $334.8 million
Capital expenditures	$195.5 million	$427.7 million	Down 54%
Impairments and other charges	$410.6 million	$301.9 million	Up $108.7 million
Cash, cash equivalents and short-term investments	$481.7 million	$452.5 million	Up $29.3 million
Long-term debt	$2.969 billion	$3.333 billion	Down $364.5 million

Net loss attributable to Nabors common shareholders was $820.3 million, producing an approximate revenue-based net loss margin of 38.4%. Loss from continuing operations before tax was $705.6 million, or approximately 33.1% of revenue.
Operating cash flow remained positive but fell sharply because of lower activity and margins, particularly in U.S. Drilling.
Working capital was $616.0 million at year-end, compared with $592.1 million in 2019.
U.S. Drilling revenue fell 43% to $713.1 million and adjusted operating loss was $96.2 million. International Drilling revenue fell 15% to $1.132 billion and adjusted operating loss was $56.2 million.
Canada Drilling revenue declined 20% to $54.8 million, while adjusted operating loss improved to $11.8 million. Drilling Solutions revenue declined 41% to $149.8 million, and Rig Technologies revenue declined 49% to $131.6 million.
Depreciation and amortization was $853.7 million. Property, plant and equipment, net, declined to $4.0 billion from $4.9 billion, primarily reflecting depreciation, retirements and impairments.

Material changes versus the prior comparable period

COVID-19, oil-market oversupply and demand weakness caused substantial declines in customer capital spending, rig utilization, dayrates and revenue.
Impairments and other charges increased to $410.6 million, including $260.5 million related primarily to underutilized or retired rigs and drilling equipment, $111.4 million of goodwill and intangible-asset impairments, and $19.1 million of severance and transaction-related costs.
Nabors wrote off all remaining goodwill in Drilling Solutions and Rig Technologies and all remaining intangible assets in those segments. The company also impaired or retired significant assets in U.S. Drilling and several international markets, including Venezuela, Iraq and Algeria.
Cost-reduction efforts reduced general and administrative expense by 21% to $203.5 million and research and engineering expense by 33% to $33.6 million.
In January 2020, Nabors issued $600.0 million of 7.25% notes due 2026 and $400.0 million of 7.50% notes due 2028, using proceeds primarily to repurchase $952.9 million of existing notes.
During the fourth quarter, the company exchanged $526.8 million of existing debt for $242.5 million of new 6.5% and 9.0% priority guaranteed notes, recognizing a $161.8 million gain. Total gains on debt buybacks and exchanges were $228.3 million.
Nabors completed a 1-for-50 reverse stock split in April 2020. All share and per-share data in the filing reflect the split retrospectively.

Liquidity, debt and cash requirements

Total consolidated outstanding indebtedness was approximately $3.0 billion at December 31, 2020, including $672.5 million drawn under the $1.014 billion 2018 Revolving Credit Facility.
The revolving facility requires minimum liquidity of $160.0 million and, while the company lacks investment-grade ratings, an asset-to-debt coverage ratio of at least 4.25:1. Nabors reported compliance with these requirements at year-end and expected compliance for the following 12 months based on its projections.
Letters of credit outstanding under the revolving facility were $57.6 million. Separate letter-of-credit facilities had $515.6 million of remaining availability after $115.0 million of outstanding instruments.
Debt principal maturities included $86.5 million due in 2021, $822.4 million in 2023, $324.3 million in 2024, $853.3 million in 2025 and $949.6 million thereafter.
The company had $110.1 million of purchase commitments, primarily for rig enhancements, sustaining capital, operating expenses and inventory purchases.
An accounts receivable sales facility had a $250.0 million maximum commitment; $54.0 million of receivables had been sold and $67.0 million was eligible for sale at year-end.

Guidance, outlook, commentary and risks

Management expected measured but steady increases in Lower-48 activity during 2021 and modest improvement in international activity, while acknowledging substantial uncertainty from COVID-19, oil and gas prices and customer spending.
The filing does not provide formal revenue, earnings or cash-flow guidance.
Key risks include continued commodity-price weakness, excess drilling capacity, lower dayrates and utilization, contract renegotiations or cancellations, customer concentration, fixed operating costs, and limited access to capital.
Three largest contract drilling customers accounted for approximately 49% of 2020 revenue. Saudi Aramco alone accounted for approximately 29%.
Nabors reported non-investment-grade senior unsecured debt ratings; further downgrades could increase borrowing costs, restrict financing access and affect covenant compliance.
Potential additional impairments remain a material risk because asset recoverability depends on utilization, dayrates, operating margins, commodity prices and market values.
The company reported approximately $670.3 million of U.S. federal net operating loss carryforwards, but their use may be limited by ownership changes or insufficient future taxable income. A valuation allowance of approximately $3.6 billion covered deferred tax assets.
Environmental, climate-related, political, currency, sanctions, cybersecurity, litigation and insurance risks are significant due to the company’s international and offshore operations.
Under its Saudi joint venture agreement, Nabors may be required to backstop its share of the purchase obligations for the first 25 drilling rigs if SANAD lacks sufficient cash or third-party financing.
The company’s auditor issued an unqualified opinion and concluded that internal control over financial reporting was effective as of December 31, 2020. The principal critical audit matter involved impairment assessments of drilling property and equipment.

Most important facts for investors to verify

Whether Lower-48 and international rig activity recovered as projected and whether utilization and dayrates improved sufficiently to restore segment profitability.
The company’s ability to refinance or repay the 2021–2025 debt maturities while maintaining required liquidity and asset-coverage ratios.
Actual availability under the revolving credit facility and accounts receivable sales facility, including covenant headroom and collateral requirements.
Whether additional impairment charges or asset retirements are required if commodity prices, utilization or dayrates remain weak.
Customer concentration, particularly the financial condition and contract commitments of Saudi Aramco and other major customers.
The cash-flow effects of preferred-share dividends, mandatory preferred-share conversion, debt exchanges and any future equity issuance or dilution.
Exposure to unresolved tax matters, including $26.7 million of uncertain tax positions and the approximately $13.4 million potential excess loss in the Algeria proceeding.