Nabors Industries Ltd. — 2015 Third-Quarter Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2015, with comparisons to the corresponding 2014 periods. Nabors operates land-based and offshore drilling rigs and related drilling technology and services. At quarter-end, the fleet included 476 actively marketed land rigs and 42 offshore rigs.
On March 24, 2015, Nabors merged its Completion & Production Services business with C&J Energy Services. Nabors received approximately $650.0 million in cash after working-capital adjustments and a 53% equity interest in the combined company, now accounted for under the equity method. On May 24, 2015, Nabors acquired the remaining 49% of Nabors Arabia for $106.0 million and began consolidating it.
Financial performance and key metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Operating revenues | $847.6 million | $1,813.8 million | $3,125.6 million | $5,020.4 million |
| Adjusted EBITDA | $247.6 million | $490.0 million | $910.3 million | $1,297.4 million |
| Adjusted income from operating activities | $7.5 million | $203.4 million | $171.0 million | $445.9 million |
| Loss from continuing operations | $250.9 million | Income of $102.4 million | Loss of $168.4 million | Income of $217.1 million |
| Net loss attributable to Nabors | $295.8 million | Net income of $106.0 million | Net loss of $209.0 million | Net income of $220.4 million |
| Diluted EPS | $(1.02) | $0.35 | $(0.72) | $0.73 |
| Cash flow from operations | Not separately provided | Not separately provided | $605.0 million | $1,244.3 million |
Adjusted EBITDA declined 49% year over year in the quarter and 30% year to date. Approximate adjusted EBITDA margin was 29.2% in Q3 2015 versus 27.0% in Q3 2014. Adjusted income from operating activities margin was approximately 0.9% versus 11.2% in the comparable quarter.
As of September 30, 2015, cash and cash equivalents were $251.4 million and short-term investments were $25.2 million. Working capital was approximately $0.7 billion. Total debt was $3.75 billion, including $370.6 million of commercial paper; long-term debt was $3.74 billion. Gross debt to capital was 0.45:1 and net debt to capital was 0.44:1.
Nine-month capital expenditures were $744.0 million, compared with $1.34 billion in 2014. Net cash used in investing activities was $119.6 million, including $650.1 million of merger proceeds. Net cash used in financing activities was $713.2 million, primarily reflecting debt repayments, dividends and share repurchases.
Material changes versus the prior comparable period
- Operating revenue and revenue plus unconsolidated-affiliate earnings decreased 53% and 55%, respectively, in Q3; the nine-month decreases were 38%.
- U.S. drilling revenue declined 55% in Q3 and 36% year to date; Canada declined 63% and 56%, respectively. International revenue increased 21% in Q3 and 19% year to date, aided by Nabors Arabia and newly constructed rigs.
- Q3 rig years declined 37% overall, including decreases of 52% in the U.S. and 50% in Canada. International rig years declined 7%.
- Completion & Production Services revenue is no longer consolidated after the C&J transaction, materially reducing reported revenue and expenses. Nabors recorded a $35.1 million Q3 equity-method loss from CJES, reported on a one-quarter lag.
- General and administrative expense decreased 41% in Q3 and 27% year to date, but rose as a percentage of revenue because of the substantial revenue decline.
- Cash declined from $501.1 million at December 31, 2014 to $251.4 million at September 30, 2015, while total debt declined from $4.36 billion to $3.75 billion.
Guidance, outlook, risks and unusual items
Management expected full-year 2015 results to decline from 2014 and expected utilization, rig counts and pricing pressure to remain challenging through year-end. Management also expected continued declines in international rig counts and pricing. The outlook was driven by lower oil and natural-gas prices, reduced customer spending, excess high-specification rig supply and competitive dayrate pressure. Planned capital expenditures for the next 12 months were approximately $700 million to $900 million, with purchase commitments of approximately $258.6 million at quarter-end.
- Q3 included a $180.6 million other-than-temporary impairment of the CJES investment.
- International provisions totaled $48.3 million, including $25.4 million related to Venezuela assets and receivables and $22.9 million associated with exiting a non-core business line.
- Discontinued operations produced a $45.3 million Q3 loss and a $41.1 million nine-month loss, primarily from a $51.0 million impairment of oil and gas assets and a $4.0 million note-receivable impairment.
- On September 29, 2015, Nabors entered into a new $325.0 million unsecured term loan facility; it drew the full amount on October 5, 2015. The revolving credit facility was amended to provide $2.25 billion of capacity, maturing in July 2020. Nabors reported no borrowings under these facilities at September 30 and compliance with debt covenants.
- Nabors authorized a $400.0 million share-repurchase program and repurchased 8.3 million shares for $78.4 million through September 30. An additional 1.8 million shares were repurchased for approximately $16.7 million after quarter-end.
- Key risks include oil and gas price volatility, lower customer spending, contract renegotiations or terminations, rig idling, geopolitical and economic instability, foreign-exchange exposure, tax disputes, litigation, self-insurance claims and access to capital markets.
- Significant contingencies include a Mexico tax assessment of approximately $30 million to $35 million, potential additional exposure of up to $18.7 million in an Algeria matter, and financial guarantees with a reported maximum amount of $234.1 million. Management stated that the ultimate litigation exposure was not expected to materially affect consolidated financial position or cash flows, but could materially affect a particular period’s results.
Management concluded that disclosure controls and procedures were effective as of September 30, 2015, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sustained low commodity prices and lower rig utilization further reduce dayrates, revenue and EBITDA.
- The valuation, operating performance and future earnings contribution of the 53% CJES investment, including the impact of the $180.6 million impairment.
- The liquidity impact of the October 2015 $325.0 million term-loan draw, upcoming debt maturities and planned capital expenditures.
- Progress and final costs associated with the Nabors Arabia acquisition and the strategic exit from the non-core international business line.
- Potential additional losses from Venezuela, discontinued oil and gas assets, pipeline commitments, tax assessments, litigation and guarantees.
- Whether the $700 million to $900 million capital-expenditure plan and the share-repurchase program remain appropriate under continuing market weakness.