Nabors Industries Ltd. — 2011 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Nabors, incorporated in Bermuda, is a global land and offshore drilling contractor with well-servicing, pressure pumping, drilling technology, logistics, and oil and gas activities. The filing covers the unaudited quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Operating revenues | $1.625 billion | $1.069 billion | $4.361 billion | $2.857 billion |
| Revenues and earnings from unconsolidated affiliates | $1.659 billion | $1.080 billion | $4.432 billion | $2.884 billion |
| Adjusted income from operating activities | $259.3 million | $164.4 million | $625.2 million | $433.0 million |
| Income from continuing operations, net | $82.2 million | $(31.6) million | $234.7 million | $55.9 million |
| Net income attributable to Nabors | $74.3 million | $(39.6) million | $349.5 million | $44.2 million |
| Diluted EPS from continuing operations | $0.28 | $(0.11) | $0.80 | $0.19 |
| Total diluted EPS | $0.25 | $(0.14) | $1.19 | $0.15 |
- Adjusted operating margin was approximately 15.6% in Q3 and 14.1% for nine months, based on operating revenues and affiliate earnings.
- Continuing-operations net margin was approximately 5.0% in Q3 and 5.3% for nine months.
- Operating cash flow was $1.108 billion for the nine months, versus $682.1 million in 2010.
- Capital expenditures were $1.533 billion, versus $641.0 million in the prior-year period, producing negative operating cash flow less capital expenditures of approximately $424.5 million.
- Cash and cash equivalents declined to $275.5 million from $641.7 million at December 31, 2010. Cash, short-term investments, and long-term investments or receivables totaled approximately $435.7 million.
- Working capital was approximately $1.1 billion, compared with $458.6 million at December 31, 2010.
- Total debt, including current and long-term debt, was approximately $4.363 billion; debt fair value was $4.882 billion. Gross funded debt to capital was 0.41:1 and net funded debt to capital was 0.38:1.
- Revolving facilities totaled $1.4 billion, with $800 million of remaining availability and a weighted-average borrowing rate of 1.8%. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Operating revenues and affiliate earnings increased 53% in both the quarter and nine-month period. Adjusted operating income increased 58% in Q3 and 44% for nine months.
- Contract Drilling revenue increased 22% in Q3 and 23% for nine months. U.S. Lower 48 Land Drilling benefited from higher dayrates and oil- and liquids-rich shale activity; U.S. and Canadian well-servicing also improved.
- Pressure Pumping contributed $343.7 million of Q3 revenue and $867.5 million for nine months. Comparisons are affected by the Superior acquisition, which contributed only from September 10, 2010 in the prior-year period.
- International adjusted operating income declined 55% in Q3 and 45% for nine months, primarily because of lower dayrates and utilization in Saudi Arabia, Qatar, and Australia. Alaska also declined because of reduced customer spending.
- U.S. Offshore revenue increased, but nine-month adjusted operating income declined to a $2.6 million loss from $14.4 million of income, reflecting permitting delays and regulatory uncertainty following the Gulf of Mexico blowout.
- Income from continuing operations improved substantially despite a $98.1 million provision for retirement of long-lived assets. The charge related to one jackup rig, 116 land rigs, and other well-servicing rigs and trucks deemed noncompetitive.
- Discontinued operations generated $114.5 million of net income for nine months, versus a $12.9 million loss in 2010, primarily from Colombian asset sales and distributions from the Remora joint venture.
- Debt structure changed materially: the remaining $1.4 billion of 0.94% senior exchangeable notes matured and were redeemed in May 2011, while $700 million of 4.625% senior notes due 2021 was issued in August 2011. Revolving borrowings were $600 million at September 30, 2011.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected 2011 operating results to increase significantly from 2010, driven by sustained higher oil prices, increased activity in oil- and liquids-rich plays, improved well-servicing demand, new and upgraded rigs, and a full-year contribution from Pressure Pumping.
- Management expected capital expenditures of approximately $1.7 billion to $1.9 billion over the following 12 months and reported approximately $1.1 billion of outstanding purchase commitments, primarily for rigs, equipment, and sustaining capital.
- The principal business risks are oil and natural gas price volatility, customer spending, lower utilization or dayrates, regulatory uncertainty, hydraulic-fracturing regulation, global economic and credit-market conditions, foreign exchange, political instability, and operating hazards.
- At September 30, 2011, the company had $113.6 million of maximum financial standby letters-of-credit and surety obligations. Total letter-of-credit facilities had $141.8 million of remaining availability.
- Tax authorities in Mexico have proposed assessments related to depreciation and labor deductions. Potential assessments for various years were estimated at approximately $90 million to $95 million in aggregate; the company believes the claims lack merit but has recorded a reserve.
- The company faced an Algeria foreign-exchange-control judgment of approximately $39.1 million, with potential loss of up to $31.1 million in excess of accrued amounts, and a separate customs judgment ranging from approximately $140,000 to $19.7 million. Both matters were being appealed.
- The SEC informally inquired into officer and director perquisites and personal benefits, including non-commercial aircraft use. The outcome could not be determined.
- On October 28, 2011, Anthony Petrello was appointed President and Chief Executive Officer. Eugene Isenberg could elect constructive termination, potentially requiring an approximately $100 million severance payment. Management considered the obligation probable and intended to record the charge in the fourth quarter.
- Management stated that current liquidity, operating cash flow, asset-sale proceeds, and revolving facilities were expected to fund purchase commitments, debt service, and other requirements for the next 12 months.
Most Important Facts for Investors to Verify
- Whether the anticipated 2011 growth and $1.7 billion to $1.9 billion capital-spending plan were achieved without materially increasing leverage.
- The sustainability of Pressure Pumping results, given the limited comparable period in 2010 and exposure to hydraulic-fracturing regulation.
- Utilization and dayrate recovery in International, Alaska, and U.S. Offshore operations.
- The cash-flow impact of high capital expenditures, scheduled debt maturities, and the $100 million potential Isenberg severance charge.
- Final outcomes and accrued amounts relating to the Mexico tax matters, Algeria proceedings, SEC inquiry, and other litigation.
- Whether discontinued oil and gas assets were fully monetized and whether the expected final Remora distribution was received.
- The effect of oil and natural gas prices, customer spending, permitting, and regulatory changes on future utilization, margins, impairments, and liquidity.