Nabors Industries Ltd. — Form 10-Q Summary
Business Context and Reporting Period
Nabors is a global land drilling contractor and provider of well-servicing, workover, pressure-pumping, offshore drilling, drilling technology and related oilfield services. The company also maintains an Oil and Gas operating segment and businesses classified as discontinued operations. This unaudited filing covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. The interim financial statements were reviewed by PricewaterhouseCoopers LLP, not audited.
Key Financial Metrics
| Metric | Three Months 2012 | Three Months 2011 | Nine Months 2012 | Nine Months 2011 |
|---|---|---|---|---|
| Operating revenues | $1.766 billion | $1.609 billion | $5.394 billion | $4.326 billion |
| Total revenues and other income | $1.674 billion | $1.643 billion | $5.124 billion | $4.397 billion |
| Income from continuing operations, net of tax | $65.8 million | $87.2 million | $109.8 million | $252.6 million |
| Net income attributable to Nabors | $75.7 million | $74.3 million | $137.0 million | $349.5 million |
| Diluted EPS | $0.26 | $0.25 | $0.47 | $1.19 |
| Adjusted income from operating activities | $225.5 million | $269.3 million | $777.1 million | $654.4 million |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $1.094 billion | $1.108 billion |
| Capital expenditures | Not provided for the quarter | Not provided for the quarter | $1.222 billion | $1.533 billion |
Approximate margins based on reported operating revenues were 4.3% for nine-month income from continuing operations and 2.5% for nine-month net income attributable to Nabors. The filing does not present a single consolidated operating margin.
- Cash and cash equivalents were $471.6 million at September 30, 2012; short-term investments were $148.0 million, for total cash and short-term investments of $619.6 million.
- Working capital was approximately $2.0 billion, compared with $1.3 billion at December 31, 2011.
- Total debt was approximately $4.679 billion, excluding subsidiary preferred stock. Revolving credit borrowings were $1.190 billion, with $310 million of remaining availability under $1.5 billion of combined facilities.
- Total assets were $12.925 billion and total equity was $5.856 billion at September 30, 2012.
- The company generated $1.094 billion of operating cash flow but invested $1.222 billion in capital expenditures, resulting in negative pre-financing free cash flow before asset-sale proceeds and other investing items.
Material Changes Versus the Prior Comparable Period
- Nine-month operating revenues increased 25% and segment operating revenues plus earnings from unconsolidated affiliates increased 16% to $5.091 billion. Growth reflected higher activity in oil- and liquids-rich shale plays, international deployments, well-servicing and pressure pumping.
- Nine-month income from continuing operations declined 57%, and net income attributable to Nabors declined 61%, primarily because of $310.0 million of Nabors’ share of full-cost ceiling-test writedowns by its U.S. oil and gas joint venture and $147.5 million of other impairments and charges.
- The U.S. oil and gas joint venture recorded a $649.9 million net loss for the nine months, including the ceiling-test writedowns. Nabors’ equity investment in that venture was written down to zero at September 30, 2012.
- Adjusted income from operating activities increased 19% for the nine months but declined 16% in the third quarter. Pressure Pumping adjusted income declined 27% in the quarter because of lower margins, while U.S. Land Well-servicing adjusted income increased 43%.
- Operating cash flow was broadly stable year over year, while capital expenditures decreased from $1.533 billion to $1.222 billion.
- In August 2012, Nabors repaid the $275 million principal amount of its 5.375% senior notes using cash on hand and approximately $270 million drawn from revolving facilities. Long-term debt increased from $4.348 billion at year-end 2011 to $4.679 billion at September 30, 2012.
- During 2012, Nabors sold its remaining wholly owned Colombian oil and gas business and additional U.S. oil and gas assets for cumulative cash receipts of approximately $79.2 million, including a pre-tax gain of approximately $48.5 million on the Colombian sale.
Guidance, Outlook, Risks and Unusual Items
- Management expected a protracted weak spot market in pressure pumping and flat to slightly lower industry rig activity through 2012. It expected healthier performance in most other segments, supported by international contracts, Lower 48 term contracts and improving U.S. Offshore activity.
- Management expected capital expenditures of approximately $0.9 billion to $1.1 billion over the following 12 months and stated that spending was intended to remain below operating cash flow. Outstanding purchase commitments were approximately $0.6 billion at September 30, 2012.
- Lower natural gas prices reduced demand in gas-driven markets and contributed to pressure-pumping equipment oversupply. The filing states that Henry Hub natural gas averaged $2.74 per mcf during the preceding 12 months, while West Texas Intermediate crude averaged $95.59 per barrel.
- Unusual charges included $75.0 million for impairment of the Superior trade name, $46.2 million for retirement of long-lived assets, and $26.3 million of goodwill impairment. Management warned that additional asset impairments or retirement charges could arise from weak commodity prices, lower utilization or continued business streamlining.
- Pipeline transmission commitments related to discontinued Horn River Basin operations resulted in recorded liabilities of $92.2 million. Commitments beyond December 31, 2013 could approximate $274.8 million if related properties are not sold or developed.
- Potential contingencies include uncertain tax assessments in Mexico, ongoing SEC inquiry regarding executive perquisites, Department of Justice inquiry related to a vendor and Foreign Corrupt Practices Act compliance, and litigation associated with the terminated Ramshorn sale. The filing does not provide a clear ultimate loss value for these matters.
- Management identified commodity prices, customer exploration spending, service demand, competition, operating hazards, regulatory and tax changes, political instability, foreign exchange and capital-market conditions as principal risks.
- The company was in compliance with its revolving-credit covenants at September 30, 2012. Management expected cash, investments, operating cash flow, asset dispositions and credit facilities to fund expected requirements for the next 12 months.
Important Facts for Investors to Verify
- Whether the $310.0 million 2012 ceiling-test writedowns and zero carrying value of the U.S. oil and gas joint-venture investment represent a durable reduction in earnings power or primarily a non-cash accounting effect.
- The sustainability of pressure-pumping margins and utilization amid weak natural gas activity and equipment oversupply.
- Actual capital expenditures, purchase commitments and free cash flow relative to management’s $0.9 billion to $1.1 billion outlook.
- Debt maturities, revolving-credit availability, interest rates and compliance with leverage covenants.
- Future impairment, asset-retirement, pipeline-commitment and discontinued-operation charges.
- Resolution and potential financial exposure from the Mexico tax matters, Algeria claims, SEC and DOJ inquiries, and ERG litigation.
- The effect of oil and natural gas prices, customer spending, international contract execution and U.S. Offshore permit activity on utilization and dayrates.