Nabors Industries Ltd. — Form 10-Q Summary
Business context and reporting period
Nabors is a global oilfield-services company operating through Drilling & Rig Services and Completion & Production Services. Its fleet and services support land and offshore drilling, well servicing, completion, stimulation, coiled tubing, cementing, wireline, equipment manufacturing and related technology. This unaudited filing covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Operating revenues | $1.551 billion, down 10% | $4.544 billion, down 14% |
| Total revenues and other income | $1.549 billion | $4.641 billion |
| Adjusted income from operating activities | $165.9 million, down 27% | $398.6 million, down 47% |
| Approximate adjusted operating margin | 10.7% | 8.8% |
| Income from continuing operations | $(90.5) million; $(0.30) diluted EPS | $29.8 million; $0.08 diluted EPS |
| Net income attributable to Nabors | $(105.4) million; $(0.35) diluted EPS | $(10.6) million; $(0.03) diluted EPS |
| Operating cash flow | Not separately provided | $974.7 million |
| Capital expenditures | Not separately provided | $780.7 million |
- September 30, 2013 cash and short-term investments totaled $491.9 million, versus $778.2 million at December 31, 2012. Working capital was approximately $1.8 billion, compared with $2.0 billion at year-end.
- Total debt was $4.047 billion, including $300.0 million drawn on the revolving facility and $332.3 million of commercial paper. The company reported $1.2 billion of remaining availability under its $1.5 billion revolving credit facility and compliance with debt covenants.
- Gross debt to capital was 0.41:1 and net debt to capital was 0.38:1. Interest coverage was 6.9:1.
- Operating cash flow exceeded capital expenditures by approximately $194.0 million before financing, acquisitions and other investing items. Net cash decreased $129.0 million during the nine months to $395.9 million.
Material changes versus the prior comparable period
- Results weakened materially because of depressed natural-gas markets, lower customer spending, declining dayrates, rig oversupply and pricing pressure in completion services.
- Drilling & Rig Services revenue declined 12% in the U.S., 13% in Canada and 28% in Rig Services for the nine-month period; international revenue increased 12%.
- Completion & Production Services revenue declined 21% for the nine-month period. Completion Services revenue fell 33% and adjusted income fell 76%; Production Services revenue declined 1% and adjusted income declined 14%.
- Total rig years declined 9% for the nine-month period, driven by lower U.S. and Canadian activity, while international rig years increased 4%.
- The company recorded $287.2 million of impairments and other charges in the first nine months, including a $208.2 million debt-extinguishment loss, $20.0 million of coil-tubing impairments and $14.0 million of asset-retirement charges. A further $45.0 million related to the CEO employment-contract termination was recorded earlier in the year.
- Interest expense decreased 7% year over year, while investment income increased to $95.5 million, primarily from $88.2 million of realized investment gains. These items are not necessarily representative of recurring operating performance.
- The company issued $700 million of new senior notes at 2.35% due 2016 and 5.10% due 2023 and used the proceeds, commercial paper and cash to redeem approximately $991.3 million of 9.25% notes, including premiums and related costs.
- Assets held for sale totaled $396.2 million at September 30, including $264.7 million of oil-and-gas assets and $131.5 million related to Peak. Discontinued operations produced a $34.3 million net loss for the nine-month period.
Guidance, outlook, risks and unusual items
- Management expected gas and liquids prices to remain weak through the end of 2013 and expected 2014 oil and natural-gas prices to remain in a similar range. It anticipated continued rig oversupply, customer budget pressure and possible year-end activity reductions.
- International results were expected to remain challenged through the first half of 2014 by contract expirations and scheduled shipyard projects. New awards for 11 rigs in Saudi Arabia and two rigs in Mexico were expected to begin affecting results in the second half of 2014.
- The company suspended or planned to suspend certain stimulation and U.S. coil-tubing operations because of oversupply, low utilization and weak margins.
- Management expected capital expenditures of approximately $1.8 billion to $1.9 billion over the next 12 months and identified approximately $566.3 million of purchase commitments at September 30, 2013.
- Management believed cash, operating cash flow, potential asset dispositions and available credit would fund expected requirements for the next 12 months. The filing states that interim results may not be indicative of full-year results.
- Key risks include oil and natural-gas price volatility, customer spending, competition and technological change, operating and self-insurance risks, foreign-exchange and political risks, tax-law changes, credit-market access and potential future impairment charges.
- Pipeline commitments had undiscounted obligations of approximately $279.9 million and recorded liabilities of $170.5 million. Lower production or natural-gas prices could result in additional charges.
- Pending matters include tax contingencies, Algerian litigation with potential exposure of up to $13.3 million and $26.8 million above accrued amounts in two cases, and an ERG lawsuit seeking damages of up to $100 million. Management did not expect ordinary litigation to materially affect consolidated financial position or cash flows, but results for a particular period could be affected.
- Subsequent events included the $154.5 million acquisition of KVS Transportation, the $135.5 million sale of Peak, and declaration of a $0.04-per-share dividend payable December 31, 2013.
Important facts for investors to verify
- Reconcile reported earnings with the $208.2 million debt-extinguishment charge, other impairments and discontinued operations to assess underlying earnings power.
- Evaluate whether lower utilization, dayrates, completion-service pricing and rig oversupply could cause additional impairments or reduce operating cash flow.
- Review the $1.8 billion to $1.9 billion capital-spending expectation against forecast cash generation, debt maturities and the KVS acquisition obligations.
- Monitor liquidity after the reduction in cash and investments, the addition of commercial paper and the refinancing of 9.25% notes.
- Assess the sustainability of the $95.5 million of investment income and the effect of asset sales and discontinued operations on future results.
- Review tax, Algerian litigation, pipeline commitments, guarantees and other contingencies for potential cash requirements beyond recorded liabilities.