Nabors Industries Ltd. — FY2011 Form 10-K Summary
Business context and reporting period
Nabors is a global land drilling contractor and a major U.S. and Canadian well-servicing and workover provider. Its businesses include contract drilling, pressure pumping, oil and gas investments, drilling technology, directional drilling, instrumentation, logistics and construction. The filing covers the fiscal year ended December 31, 2011, with quarterly information indicating fourth-quarter 2011 results.
- Actively marketed approximately 499 land drilling rigs, 755 U.S. and Canadian land well-servicing/workover rigs, and offshore platform, jackup and barge rigs.
- Pressure Pumping included hydraulic fracturing and related services with more than 730,000 hydraulic horsepower.
- Approximately 26,080 employees were reported at year-end, including personnel employed by unconsolidated affiliates.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Operating revenues | $6.060 billion | $4.134 billion | +47% |
| Total revenues and other income | $6.137 billion | $4.175 billion | +47% |
| Adjusted income from operating activities | $927.0 million | $667.5 million | +39% |
| Income from continuing operations, net of tax | $342.2 million | $255.9 million | +34% |
| Net income attributable to Nabors | $243.7 million | $94.7 million | +157% |
| Diluted EPS from continuing operations | $1.17 | $0.88 | +33% |
| Total diluted EPS | $0.83 | $0.33 | +152% |
| Net cash provided by operating activities | $1.456 billion | $1.107 billion | +32% |
| Capital expenditures | $2.043 billion | $930.3 million | +120% |
Adjusted income from operating activities is a non-GAAP measure used by management and is not a substitute for GAAP operating income. Continuing-operations pre-tax income was $487.8 million, compared with $293.6 million in 2010. The effective tax rate increased to 29.2% from 12.6%, primarily because a greater proportion of earnings arose in higher-tax U.S. jurisdictions.
Operating margin based on operating revenues and adjusted income from operating activities was approximately 15.3% in 2011 versus 16.1% in 2010. Continuing-operations net margin was approximately 5.6% versus 6.2%. The filing does not provide a directly comparable GAAP operating-income margin.
Segment performance and material changes
- Contract Drilling: Revenue increased 24% to $4.380 billion and adjusted operating income increased 14% to $736.0 million. U.S. Lower 48 Land Drilling revenue rose 31% and adjusted operating income rose 51%, supported by higher dayrates and deployment into oil- and liquids-rich shale plays.
- U.S. Land Well-servicing: Revenue increased 58% to $701.2 million and adjusted operating income increased 136% to $74.7 million, reflecting higher utilization, equipment additions and stronger oil-related activity.
- Canada: Revenue increased 48% to $574.8 million and adjusted operating income increased 312% to $94.6 million as oil exploration and well-servicing activity improved.
- Pressure Pumping: Revenue increased to $1.237 billion from $321.3 million, and adjusted operating income increased to $229.1 million from $66.7 million. The 2011 period included a full year of Superior Well Services, acquired in September 2010.
- International: Revenue was broadly flat at $1.104 billion, but adjusted operating income declined 51% to $123.8 million because of lower dayrates and utilization, particularly for Saudi Arabian jackups and operations in Qatar and Australia.
- Alaska: Revenue declined 28% to $129.9 million and adjusted operating income declined 47% to $27.7 million due to customer spending constraints and lower dayrates and activity.
- U.S. Offshore: Revenue increased 38% to $170.7 million, but adjusted operating income declined 91% to $0.8 million because of weak utilization and continuing permitting and regulatory uncertainty in the Gulf of Mexico.
- Oil and Gas: Earnings from unconsolidated affiliates increased to $59.7 million from $18.7 million, including acquisition-related gains, partly offset by a $15.6 million share of a full-cost ceiling-test writedown.
Cash flow, debt and liquidity
- Operating cash flow was $1.456 billion. Investing activities used $1.859 billion, primarily due to $2.043 billion of capital expenditures.
- Financing activities provided $163.2 million. Nabors issued $700 million of 4.625% senior notes due 2021 and used revolving-credit borrowings and cash to redeem the remaining approximately $1.4 billion of 0.94% senior exchangeable notes in May 2011.
- Cash and short-term investments totaled $539.5 million at December 31, 2011, compared with $801.2 million in 2010. Working capital increased to $1.286 billion from $458.6 million.
- Total long-term debt was $4.349 billion, with approximately $4.624 billion of primary debt before the current portion. Current maturities were $275.3 million. Fair value of debt and subsidiary preferred stock was approximately $5.188 billion.
- Revolving credit facilities totaled $1.4 billion, of which $540 million remained available. The facilities mature in September 2014, and the company reported compliance with all covenants.
- Gross funded debt to capital was 0.43:1, net funded debt to capital was 0.40:1, and the reported interest coverage ratio was 8.1:1.
- Management expected existing cash, operating cash flow, asset dispositions and revolving facilities to fund the next 12 months of requirements. Planned capital expenditures for the next 12 months were approximately $1.5 billion to $1.7 billion, with purchase commitments of approximately $1.0 billion at year-end.
Guidance, outlook, risks and unusual items
Management expected 2012 operating results to increase from 2011 levels, driven by sustained higher oil prices, increased activity and dayrates in oil- and liquids-rich areas, continued Pressure Pumping contributions, term contracts and newer rigs and equipment. Management also expected weak natural gas prices to pressure dry-gas activity, although term contracts were expected to mitigate some of the effect.
- 2011 included $198.1 million of impairments and other charges: a $100 million provision for a potential termination payment to former CEO Eugene Isenberg and $98.1 million for retirement of noncompetitive assets, including one jackup rig, 116 land rigs, well-servicing rigs and trucks. Isenberg subsequently waived the potential payment; the related accounting effect and charitable share contribution were expected to be recorded in the first quarter of 2012.
- The company announced an intention to dispose of a significant portion of its oil and gas portfolio. Oil and gas assets were classified as held for sale, and 2011 included sales of Colombian assets and California interests, generating approximately $160.8 million of proceeds and reported gains.
- Discontinued operations produced a $97.4 million net loss in 2011, including $255.0 million of impairments on wholly owned oil and gas-centered assets and a $7.9 million impairment on Canadian logistics assets.
- Material risks include oil and natural gas price volatility, customer spending reductions, excess rig capacity and pricing competition, Gulf of Mexico permitting and regulatory delays, operational and environmental hazards, political and currency risk, debt refinancing and capital-market access, and potential future asset or goodwill impairments.
- Legal and regulatory matters included a Department of Justice and SEC investigation involving a freight-forwarding vendor and possible Foreign Corrupt Practices Act issues, SEC inquiries regarding executive perquisites, Algerian judgments under appeal, shareholder derivative litigation and tax disputes in Mexico.
- Contractual obligations totaled approximately $7.906 billion, including $4.635 billion of debt principal, $1.824 billion of debt interest, $962.2 million of purchase commitments and $388.7 million of pipeline transportation and processing commitments.
- The company has not paid cash dividends on common shares since 1982 and stated that it did not currently intend to pay dividends.
Most important facts for investors to verify
- Whether 2012 activity and margins met management’s expected improvement, particularly in U.S. Lower 48 drilling, Pressure Pumping, Canada and International operations.
- The pace and proceeds of oil and gas asset dispositions and whether remaining held-for-sale assets require additional impairments.
- Debt refinancing and repayment capacity, including the August 2012 maturity, September 2014 revolving-credit maturities and available borrowing capacity.
- Capital-expenditure discipline relative to the $1.5 billion to $1.7 billion 2012 plan and approximately $1.0 billion of purchase commitments.
- Exposure to weak natural gas prices, customer contract cancellations, dayrate compression and excess drilling capacity.
- Developments in the Algeria matters, Mexico tax assessments, FCPA-related investigation, SEC perquisites inquiry and shareholder litigation.
- The effect of the former CEO’s waived termination payment and related charitable contribution on 2012 equity and cash flows.
- Whether cash conversion remains strong as accounts receivable, inventory, debt and capital expenditures expand.