Nabors Industries Ltd. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2016. Nabors operates land-based and offshore drilling rigs and provides drilling technology, equipment manufacturing, directional drilling and related well-site services. At quarter-end, the company had 427 actively marketed land rigs and 43 actively marketed offshore rigs.
The March 2016 period is not directly comparable with March 2015 because Nabors completed the merger of its Completion & Production Services business with C&J Energy Services on March 24, 2015. That business was no longer consolidated after the merger and is reflected through Nabors’s equity-method investment in CJES. Nabors also acquired the remaining 49% of Nabors Arabia in May 2015, after which its results were consolidated in the International segment.
Financial and operating metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenues | $597.6 million | $1.4147 billion | Down 58% |
| Adjusted EBITDA | $162.1 million | $368.0 million | Down 56% |
| Adjusted operating income (loss) | $(53.8) million | $86.9 million | Declined $140.7 million |
| Loss from continuing operations | $(396.6) million | $124.4 million income | Down $521.0 million |
| Net loss attributable to Nabors | $(398.3) million | $123.6 million income | Down $521.9 million |
| Diluted EPS | $(1.41) | $0.42 | Declined from profit to loss |
| Net cash provided by operating activities | $161.5 million | $307.2 million | Down 47% |
| Capital expenditures | $129.9 million | $364.2 million | Down 64% |
Adjusted EBITDA margin was approximately 27.1% of operating revenue, compared with approximately 26.0% in the prior-year period. Adjusted operating margin was approximately negative 9.0%, compared with positive 6.1% in Q1 2015. The filing presents these adjusted measures as non-GAAP metrics.
| Balance-sheet and liquidity item | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Cash and cash equivalents | $200.7 million | $254.5 million |
| Cash and short-term investments | $221.5 million | $274.6 million |
| Total debt | $3.590 billion | $3.662 billion |
| Long-term debt | $3.584 billion | $3.655 billion |
| Total equity | $3.916 billion | $4.294 billion |
| Total assets | $8.950 billion | $9.538 billion |
Working capital was approximately $0.4 billion, compared with approximately $0.5 billion at December 31, 2015. Nabors reported $2.16 billion of remaining availability under its $2.25 billion revolving credit facility and commercial paper program, and $528.0 million of remaining availability under letter-of-credit facilities. The company was in compliance with its revolving-credit covenants at March 31, 2016.
Gross debt to capital was 0.48:1 and net debt to capital was 0.46:1, compared with 0.46:1 and 0.44:1, respectively, at year-end 2015. Trailing twelve-month interest coverage was 5.1:1, compared with 6.2:1 at December 31, 2015.
Material changes versus the prior comparable period
- Drilling & Rig Services revenue fell 43% to $621.1 million. U.S. revenue declined 67%, Canada declined 70%, International declined 9% and Rig Services declined 63%.
- Total rig years declined 42% to 187.9, including decreases of 61% in the U.S., 51% in Canada and 15% internationally.
- Drilling & Rig Services adjusted operating loss was $18.6 million versus income of $195.1 million in Q1 2015. The U.S., Canada and Rig Services segments each moved to operating losses; International remained profitable but declined.
- Losses from unconsolidated affiliates were $167.2 million versus earnings of $6.5 million. The Q1 2016 amount primarily reflected Nabors’s one-quarter-lagged share of CJES’s losses, including its share of CJES fixed-asset impairment charges.
- Other expense, net, was $182.4 million versus income of $55.8 million in Q1 2015. Q1 2016 included $177.2 million of charges related to CJES holdings, partly offset by a $6.0 million gain on debt buybacks. Q1 2015 included a $52.6 million net merger-related gain.
- Nabors recorded a $153.4 million impairment of its CJES investment and an additional $23.8 million reserve for other amounts associated with its CJES holdings, including affiliate receivables.
- Debt declined primarily because Nabors repurchased $154.1 million of senior-note principal for approximately $150.4 million in cash, including accrued interest.
- Cash flow from operations declined by $145.7 million, while capital expenditures declined by $234.4 million. Financing cash usage was $87.5 million, including $148.0 million of long-term debt reduction, partly offset by $80.0 million of net revolving-credit borrowings.
- General and administrative expense declined 46% to $62.3 million, reflecting the merger-related change in consolidation, workforce reductions and cost-cutting measures. As a percentage of revenue, however, it increased to 10.4% from 8.2%.
Guidance, outlook, risks and unusual items
Management attributed the deterioration primarily to oil prices below $30 during the quarter, reduced customer spending, lower rig activity, pricing pressure and unfavorable market conditions. Management expected continued erosion in industry rig counts, utilization and pricing through at least the first half of 2016.
Capital expenditures over the following 12 months were expected to be less than $500 million unless oil prices improved. Purchase commitments outstanding at March 31, 2016 were approximately $141.1 million. Management stated that cash, projected operating cash flow, potential asset dispositions, credit facilities and commercial paper capacity were expected to fund anticipated requirements for the next 12 months.
Key risks include continued volatility in oil and natural-gas prices, lower exploration and production activity, reduced demand and pricing for drilling services, CJES operating and valuation deterioration, foreign exchange exposure, political and economic instability, operating and self-insurance risks, tax disputes, litigation, covenant compliance and access to capital markets.
Material contingencies include a Mexico tax assessment and expected assessments of approximately $25 million to $30 million, an Algeria foreign-currency matter with potential additional exposure of up to $17.8 million beyond accrued amounts, and other litigation. Management did not expect pending litigation to materially affect consolidated financial position or cash flows, but noted that particular periods could be materially affected.
Assets held for sale totaled $80.1 million, including $78.0 million of oil-and-gas assets. Pipeline commitments had undiscounted contractual commitments of approximately $23.0 million and recorded liabilities of $16.1 million; lower production or natural-gas prices could cause additional charges.
The board declared a $0.06-per-share dividend on April 29, 2016, payable July 1, 2016. The company’s disclosure controls and procedures were effective at quarter-end, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether oil prices, customer spending, rig counts, utilization and dayrates stabilized or continued to decline after March 31, 2016.
- The sustainability of operating cash flow relative to capital expenditures, debt maturities, dividends and share repurchases.
- Available borrowing capacity, covenant headroom and refinancing plans for the $338.5 million of senior notes due September 2016.
- The valuation, financial performance and impairment risk of the CJES equity-method investment, including the one-quarter reporting lag.
- Whether the company’s planned capital expenditures remained below $500 million and whether the $141.1 million of purchase commitments changed.
- The resolution and potential cash impact of the Mexico tax assessment, Algeria proceedings, other litigation and guarantees totaling $242.5 million.
- The comparability of future results with 2015, given the CJES merger and the consolidation of Nabors Arabia.