Nabors Industries Ltd. 2019 Form 10-K Summary
Business Context and Reporting Period
Nabors Industries Ltd., a Bermuda-based drilling contractor, filed its Form 10-K for the fiscal year ended December 31, 2019. The company operates land-based and offshore drilling rigs and provides directional drilling, measurement-while-drilling, tubular running, drilling software, automation, equipment manufacturing and related technologies in approximately 24 countries. Reportable segments are U.S. Drilling, Canada Drilling, International Drilling, Drilling Solutions and Rig Technologies.
At December 31, 2019, Nabors actively marketed 366 land rigs and 33 offshore rigs. Average rigs working declined to 214.5 from 223.0 in 2018, reflecting lower activity in Canada and international markets.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $3.043 billion | $3.058 billion | Down $14.2 million |
| Net loss attributable to common shareholders | $720.1 million | $653.3 million | Loss increased $66.9 million |
| Diluted loss per share | $2.11 | $1.99 | Loss increased $0.12 |
| Adjusted segment operating income | $89.1 million | $58.6 million | Improved $30.5 million |
| Net cash from operating activities | $684.6 million | $325.8 million | Improved $358.8 million |
| Capital expenditures | $427.7 million | $458.9 million | Down $31.2 million |
| Interest expense | $204.3 million | $227.1 million | Down $22.8 million |
| Impairments and other charges | $290.5 million | $144.4 million | Increased $146.0 million |
Reported net loss was driven heavily by impairment and other charges, including $156.0 million of goodwill impairments, a $47.7 million intangible-asset impairment, $43.6 million of tangible-asset and equipment charges, and $43.2 million of provisions associated with international activities. Depreciation and amortization was $876.1 million, or approximately 29% of operating revenue.
Cash and short-term investments totaled $452.5 million at year-end, compared with $481.8 million in 2018. Working capital was $592.1 million, down from $761.5 million. Total debt was approximately $3.3 billion, and the net debt-to-capital ratio was 0.59:1 versus 0.53:1 in 2018.
Segment Performance and Material Changes
- U.S. Drilling: Revenue increased 15% to $1.241 billion, while adjusted operating income improved to $64.3 million from a $21.3 million loss. Higher dayrates and a 2% increase in average rigs working supported the improvement.
- Canada Drilling: Revenue declined 35% to $68.3 million and adjusted operating loss widened to $14.5 million. Average rigs working fell 36% to 10.9 due to unfavorable market conditions and customer cancellations or delays.
- International Drilling: Revenue declined 10% to $1.324 billion, and adjusted operating income fell to an $8.9 million loss from income of $74.2 million. Results reflected lower activity, a reduction in pre-funded amortizing revenue and fewer rigs operating in several countries.
- Drilling Solutions: Revenue was broadly stable at $252.8 million, while adjusted operating income increased 58% to $59.5 million due to improved profitability in wellbore placement and tubular running services.
- Rig Technologies: Revenue declined 4% to $260.2 million, but the adjusted operating loss narrowed to $11.2 million from $25.8 million because of improved margins and cost reductions.
General and administrative expense declined 3% to $258.7 million, and research and engineering expense declined 10% to $50.4 million, reflecting workforce reductions and cost-control initiatives. Accounts receivable declined substantially, partly reflecting the company’s new receivables-sale program.
Liquidity, Debt and Cash Flow
- Operating cash flow of $684.6 million exceeded capital expenditures of $427.7 million, producing positive pre-financing cash generation before other investing and financing items.
- Net cash used in financing activities was $331.6 million, including $455.4 million of senior-note repayments and $49.6 million of dividends.
- Borrowings under revolving credit facilities were $355.0 million at year-end. The company reported approximately $1.0 billion of available capacity under its 2018 Revolving Credit Facility and $744.1 million of remaining availability under letter-of-credit facilities.
- The 2018 Revolving Credit Facility required a net leverage ratio of no more than 5.50:1 and an asset-to-debt coverage ratio of at least 2.50:1. Reported ratios were 3.55:1 and 4.28:1, respectively. The company stated that it was in compliance with its covenants.
- The 2012 Revolving Credit Facility, with $355.0 million outstanding, was scheduled to expire in July 2020. Management expected to refinance that balance using the 2018 facility.
- In September 2019, Nabors entered into a $250.0 million accounts receivable sales agreement. At year-end, $140.0 million of receivables had been sold and $171.7 million was eligible for sale.
Guidance, Outlook, Risks and Unusual Items
Management reported that U.S. Drilling activity and pricing improved during much of 2019, but these gains were offset by declines in Canada and International Drilling. Management expected the market to stabilize in the first half of 2020, with marginal activity increases later in the year and an increase in international rig count.
In January 2020, Nabors issued $600.0 million of 7.25% senior guaranteed notes due 2026 and $400.0 million of 7.50% senior guaranteed notes due 2028. Proceeds were used primarily to repurchase $952.9 million of existing senior notes, with additional open-market repurchases of approximately $21.2 million.
Principal risks include oil and natural-gas price volatility, excess drilling capacity and pricing pressure, customer contract cancellations or renegotiations, concentration in major customers, high leverage and refinancing needs, non-investment-grade debt ratings, international political and currency risks, sanctions and customer credit exposure, environmental and operational hazards, cybersecurity risks, tax disputes and potential additional asset impairments. Saudi Aramco accounted for approximately 22% of 2019 operating revenue, while the three largest contract drilling customers accounted for approximately 41%.
Material contingencies include a potential loss of up to approximately $15.7 million above accrued amounts in an Algerian foreign-exchange-control matter, potential Kazakhstan environmental penalties estimated at up to approximately $4.0 million, and a backstop obligation related to SANAD’s purchase of its first 25 drilling rigs. Management stated that pending litigation was not expected to materially affect consolidated financial position or cash flows, although individual periods could be affected.
The company adopted the new lease standard in 2019, recognizing approximately $42.8 million of right-of-use assets and lease liabilities at adoption. The independent auditor issued an unqualified opinion and concluded that internal control over financial reporting was effective.
Facts Investors Should Verify
- Whether the expected 2020 stabilization and international activity recovery occurred and translated into higher utilization and dayrates.
- The maturity and refinancing profile of debt, including the effects of the January 2020 note issuance and subsequent debt tender offers.
- Compliance with revolving-credit covenants and the company’s ability to refinance or repay the 2012 facility.
- The sustainability of $684.6 million of operating cash flow given the company’s continuing net losses and capital intensity.
- Future impairment risk for rigs, goodwill and intangible assets if oil prices, rig counts, utilization or dayrates weaken further.
- Customer concentration, particularly exposure to Saudi Aramco and the SANAD joint venture.
- International receivable collectibility, sanctions exposure, political risks and the status of the Algerian and Kazakhstan contingencies.
- The effect of potential dilution from mandatory convertible preferred shares and exchangeable notes.