Nabors Industries Ltd. — Form 10-Q Summary
Business context and reporting period
Nabors is a Bermuda-based oilfield services company and a major land drilling, well-servicing, workover, offshore drilling, drilling technology, logistics, and oil and gas investment provider. This unaudited Form 10-Q covers the three and six months ended June 30, 2010, compared with the corresponding 2009 periods.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenues | $905.1 million | $867.9 million | $1.807 billion | $2.066 billion |
| Total revenues and other income | $917.8 million | $878.0 million | $1.821 billion | $2.021 billion |
| Net income attributable to Nabors | $43.6 million | $(193.0) million | $83.8 million | $(67.8) million |
| Diluted EPS | $0.15 | $(0.68) | $0.29 | $(0.24) |
| Adjusted income from operating activities | $124.9 million | $73.4 million | $263.4 million | $272.5 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $469.9 million | $1.007 billion |
- Q2 net margin was approximately 4.7% of total revenues; six-month net margin was approximately 4.6%. Adjusted operating-activity margins were approximately 13.6% in Q2 and 14.5% for the six-month period.
- Q2 total operating revenues and unconsolidated-affiliate earnings increased 6% year over year, while the six-month amount decreased 9%.
- June 30, 2010 cash and cash equivalents were $747.6 million, short-term investments were $145.3 million, and long-term investments and other receivables were $94.0 million, for total cash and investments of $986.8 million.
- Total assets were $10.50 billion and total equity was $5.23 billion at June 30, 2010.
- Total debt was $3.71 billion, including $1.35 billion classified as current. Gross funded debt-to-capital was 0.39:1 and net funded debt-to-capital was 0.32:1.
- Working capital was $37.3 million, compared with $1.6 billion at December 31, 2009, primarily because the $1.35 billion of exchangeable notes due May 2011 was reclassified as current.
- Credit facilities had $162.3 million of remaining availability after $82.5 million of outstanding letters of credit and guarantees. No short-term borrowings were outstanding.
- Capital expenditures were $369.5 million in the first six months, down from $710.8 million in the prior-year period. Net cash used in investing activities was $362.8 million, and net cash used in financing activities was $280.5 million.
Material changes versus the prior comparable period
- Profitability improved substantially because 2009 included $227.1 million of impairments and other charges, including goodwill, inactive-rig, oil and gas financing-receivable, and investment impairments. No comparable charges were recorded in 2010.
- General and administrative expense declined 51% in Q2 and 42% for the six months, largely because 2009 included $72.1 million of accelerated stock-compensation expense related to executive awards. Share-based compensation expense was $3.6 million in Q2 2010 versus $76.3 million in Q2 2009.
- Six-month Contract Drilling revenue declined 15% and adjusted operating income declined 40%, reflecting lower activity, utilization, and dayrates in several markets. International revenue declined 24% and adjusted operating income declined 42%; U.S. Lower 48 adjusted operating income declined 41%.
- Canada improved, with six-month revenue up 11% and adjusted operating income up 93%, supported by higher activity, cost reductions, and a stronger Canadian dollar.
- Oil and Gas results improved because 2009 included significant full-cost ceiling-test and other impairments at unconsolidated joint ventures. The 2010 period also benefited from a $4.6 million proportionate gain on Colombian property sales.
- Investment income fell to $0.2 million for the six months from $27.4 million, reflecting lower gains and income from investments. Six-month other expense was $31.3 million, including foreign-currency losses, losses on exchangeable-note purchases, litigation expense, and asset-retirement losses.
- Operating cash flow fell 53% year over year, partly because working-capital changes used $31.9 million of cash in 2010 versus providing $297.9 million in 2009.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2010 operating results, excluding 2009 impairments, to approximate 2009 levels because of continued lower commodity prices and depressed drilling and well-servicing activity. International results were expected to decline, while long-term contracts and new rig deployments were expected to provide partial support.
- Management expected continued pressure on U.S. Lower 48 and Alaska activity and dayrates. Gulf of Mexico operations were affected by customer suspensions and difficulty obtaining government permits.
- Capital expenditures, including outstanding commitments, were expected to approximate $1.0 billion over the following 12 months. Outstanding purchase commitments at June 30, 2010 were approximately $283.3 million.
- Management believed available cash, operating cash flow, possible non-core asset sales, and potential capital-market access would provide sufficient liquidity to address the approximately $1.4 billion par value of exchangeable notes due May 2011. However, refinancing and liquidity remained sensitive to commodity prices, demand, market access, and credit ratings.
- On August 6, 2010, Nabors agreed to acquire Superior Well Services for $22.12 per share, or approximately $700 million in equity value and approximately $900 million including debt and preferred stock. Closing was expected in the third or fourth quarter of 2010.
- Material contingencies include tax audits and disputed Mexican tax assessments, a U.S. Department of Justice and SEC-related Foreign Corrupt Practices Act inquiry involving Panalpina, and an Algerian customs judgment of approximately $19.7 million that Nabors was appealing and had not accrued.
- Potential executive employment-termination obligations included payments of up to $100 million for the Chairman and approximately $45 million to $50 million for the President and COO, depending on the triggering event. No insurance coverage or liability accrual was recorded for these obligations.
- Key operating risks include oil and gas price volatility, demand and utilization changes, drilling hazards, environmental and safety incidents, political and currency risk, regulatory uncertainty, tax-law changes, litigation, and restricted access to capital markets.
Most important facts for an investor to verify
- Verify the refinancing, repayment, or cash-versus-equity settlement of the $1.4 billion par value of exchangeable notes due May 2011.
- Assess whether operating cash flow can support the planned approximately $1.0 billion of next-12-month capital expenditures while funding the Superior acquisition.
- Track rig utilization, dayrates, and customer activity in the U.S. Lower 48, Gulf of Mexico, Alaska, and international markets.
- Separate recurring earnings from the unusually low 2009 comparison caused by $227.1 million of impairments and $72.1 million of accelerated executive stock compensation.
- Monitor tax audits, Mexican tax assessments, the Panalpina-related investigation, the Algerian judgment, self-insurance exposure, and other guarantees totaling up to $91.6 million.
- Confirm the terms, financing, regulatory approvals, and closing status of the Superior Well Services transaction.